How A Bitcoin Transaction Works

Similar to a bank account used in traditional markets, when a bitcoin transaction is sent there is not a physical item that’s being sent across the network. A database is updated to show a change in balances from one address to another.

When sending a bitcoin transaction, one party specifies that they would like to send money from their address (deducting their available balance on the ledger) to another party’s address (increasing the other party’s available balance on the ledger).

Once the first party has broadcast this transaction to the network, the transaction gets put into a pool of all of the other transactions trying to be sent at that time. This pool is called the “mempool”. After a transaction is sent into the mempool, it is then a competition between the bitcoin miners to add this transaction to the ledger.

(maybe combine these two images in a way to show the bitcoin miner in the middle of the transaction between you and your friend)

Miners grab transactions from the mempool and bundle them into a new block that they would like to append to the ledger. The process of getting this new block added to the ledger is a resource intensive math problem, analogous to a simple game of Sudoku. In Sudoku, finding the answer to a puzzle can be difficult, while determining whether or not an answer is valid is a simple task.

In Bitcoin mining, the miners are responsible for finding an answer that satisfies the network rules. If they are successful in doing so, their block can then be added to the ledger. After an answer has been found, it is broadcast to the network, which is then able to easily determine whether or not the answer is valid.

The new block that is added to the ledger includes transactions that were previously in the mempool. In providing the computational work to add this new block, miners receive bitcoin as compensation.

In addition to receiving bitcoin as payment, miners also collect a bitcoin mining fee from individual transactions. Whenever a user sends a payment on the bitcoin network, they include a transaction fee, also known as a mining fee.

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