Blockchain Transaction: How Value Moves When Using a Cryptocurrency
This guide will explain how transactions happen on the blockchain, and how different coins may offer a choice on how to send value.
On the surface, sending and receiving Bitcoin, Altcoin or other tokens looks like a bank transaction. But a lot of different things are happening to your information. This guide will show what types of transactions are available for cryptocoins, starting with the Bitcoin network and exploring other cases and networks that have a slightly- or radically different model.
Where does your Bitcoin, or Litecoin go, when you hit send from your wallet? It needs to be bundled up in a block of transactions. You broadcast the transaction, attach the default fee, or a bigger fee if you wish. And then it's up to miners to bundle up your transaction into a block.
A block is built on the Goldilocks principle- not too small, not too big. Some miners prefer to take up only high-fee transactions. As transaction levels pick up, so do fees to be included in the next block.
Catching the next block, which in the case of Bitcoin takes 10 minutes to discover, is a bit like catching the bus. It is not guaranteed- if blocks get filled up too fast, there may be hours of waiting before a transaction clears. It is possible that a block overfills and becomes an "orphaned" block. In that case, a transaction may wait for a long time before a miner picks it up. Otherwise, a user may have to go back and recover the transaction manually, then resend the funds.
The dispute that split Bitcoin on August 1 was about block size. The supporters of Bitcoin Cash claimed that a block size larger than 1 MB would deal automatically with orphaned blocks, rising transaction fees and will improve the speed of the network. But a double-decker bus can get stuck in traffic just like a regular bus- so the Bitcoin Cash network currently has to deal with other speed-related problems, mainly when it comes to securing enough miners.
You can explore blocks if you know their hash value. Some blocks include just one transaction- such as this block, used only to carry the miner's reward of 25 BTC.
What is the Mempool?
Each complete node holds a series of unconfirmed transactions in a storage space known as the mempool. Mempools can hold up to 50,000 transactions. This is a waiting area, as transactions are removed from the mempool when they are added to a block. The process works just like passengers waiting for a bus. There are rush hours when mempools expand, and transaction fees soar.
How Other Blockchains Work
There are many tokens, but several are based on the Bitcoin protocol. Their blockchains work in a similar way, though with the key parameters changed. Litecoin has smaller blocks, 2.5 minutes block size and four times as many coins to be created.
Ethereum does not have a fixed block size, but it does have a gas limit. Each transaction requires a small amount of gas, similar to a miner's fee. If there are too many transactions, miners increase gas price or gas limit and thus curb the influx and protect against spam transactions. Sometimes, ICO transactions will slow down the network and cause problems. When miners increase their gas fee, a lot of transactions may have to wait to be accepted.
Sending and receiving transactions is just one part of the story. Then there is the task of achieving consensus and verifying the one valid version of the distributed layer.
Bitcoin achieves consensus by proof-of-work. Miners use energy-intensive computation tasks to discover a number that cannot happen by chance.
Other blockchains verify transactions by other means. Dash uses a model known as "delegated proof of stake", in which holders of at least 1,000 DASH serve as master nodes. Master nodes verify the valid version of the distributed ledger.
Ethereum currently uses proof-of-work, with the aim of moving to proof-of-stake in the future. Steem is a token that uses a system of "witnesses" to verify transactions. The network has a more flexible policy, since only witnesses, and not the whole network, need to agree on issues such as block size.
And some cryptocoins do not use a blockchain at all, but use other methods to solve the double-spend problem and verify transactions. Ripple uses a series of servers constantly communicating and comparing transactions. IOTA is a system that uses a network of nodes in the structure of an acyclic directed graph.
What is SegWit?
SegWit is a system of rearranging the data in a transaction block. In each transaction, the signature would be removed and only the sender and receiver would be counted toward the block size. This splitting of the transaction information means that currencies that have accepted SegWit can move on to use the Lightning Network and achieve a much higher level of transactions.
Litecoin activated SegWit with easy consensus, and Bitcoin has scheduled the activation for the end of August, with August 24th a probable date.
It is possible that transactions are lost for many reasons. Generating new wallets sometimes carries risk, so it is best to test new accounts with a small sum, to see if the transaction goes through. For coins such as IOTA, the full record of transactions may not be easily discoverable and depends on IP address and connection to a server. The Ethereum network may have trouble with some tokens. It is best to always check token and wallet compatibility.