How does a Bitcoin transaction work?

Your wallet shows a balance of 0.55 BTC. The Bitcoin network has no record of that number.

It records separate pieces, say one of 0.30 BTC and one of 0.25 BTC, each locked to a key you hold. Your wallet adds them up.

Every Bitcoin transaction spends pieces like these and creates new ones, and that one idea explains how fees and change work.

Coins are unspent outputs

Each piece is an unspent transaction output, or UTXO. It is an output of an earlier transaction that nobody has spent yet. Your balance is the total of the UTXOs your keys can spend.

A UTXO is spent whole. You cannot spend half of the 0.30 piece and leave the rest behind. You spend all of it and send what you do not need back to yourself as change.

Worked example: paying 0.40 BTC

Suppose you pay someone 0.40 BTC. The numbers are round figures for illustration.

1. Inputs: neither piece covers 0.40 alone, so the wallet uses both: 0.30 + 0.25 = 0.55 BTC.
2. Output 1: 0.40 BTC to the recipient's address.
3. Output 2: 0.1498 BTC back to a new address of yours, as change.
4. Fee: 0.55 minus 0.40 minus 0.1498 = 0.0002 BTC.

No line in the transaction states the fee. The fee is the gap between what goes in and what comes out, and the miner who includes the transaction collects it.

Bitcoin amounts are often counted in satoshis, the smallest unit: 1 BTC is 100,000,000 satoshis. The 0.0002 BTC fee is 20,000 satoshis.

This design has a sharp edge. If the change output were left out, the whole 0.15 BTC gap would become the fee. Normal wallets add change automatically, but tools that build transactions by hand will not stop you.

Why the fee depends on transaction size

Blocks have limited space, so miners rank transactions by fee per unit of size. The unit is the virtual byte, or vbyte, and fee rates are quoted in satoshis per vbyte.

Continuing the example with an illustrative fee rate: a transaction with two inputs and two outputs, using a common modern address type, is roughly 200 vbytes.

At 100 satoshis per vbyte, the fee is 200 × 100 = 20,000 satoshis, the same 0.0002 BTC as above.

At a given fee rate, sending 0.001 BTC or 100 BTC in the same shape of transaction costs the same. More inputs make a bigger transaction, so paying from many small UTXOs costs more than paying from one large one.

Fee rates rise when many transactions are waiting. They wait in the mempool, and miners usually pick the highest fee rates first.

What a transaction contains

Strip away the wallet screen and a transaction holds two lists.

Each input points to an earlier output, by that transaction's ID and the output's number. It also carries a digital signature and, for most address types, a public key, which together prove you may spend it.

Each output holds an amount and a locking condition. Usually the condition says the output can be spent by whoever can sign for a given address.

The transaction data is then hashed twice with SHA-256 to give its transaction ID, the code you paste into a block explorer to track it. How hashing works covers that step.

Transactions that spend from addresses starting with bc1 use a format called SegWit. It moves the signatures into a separate witness section, which the ID leaves out, so nobody can change the ID by tweaking a signature.

From your wallet to a block

1. Your wallet builds and signs the transaction on your device.
2. It broadcasts the transaction to nodes. Each node checks the signatures, that the inputs exist and are unspent, and that the outputs do not add up to more than the inputs.
3. Valid transactions wait in the mempool.
4. A miner includes the transaction in a block. Blocks arrive about every 10 minutes on average, as Bitcoin mining explains.
5. Every block added after that one counts as another confirmation.

Confirmations protect against a double spend, where someone tries to spend the same UTXO twice. Nodes accept only one of the two.

Many services wait for several confirmations before treating a large payment as final, and six is a common rule of thumb.

What a transaction cannot undo

Bitcoin has no chargeback. Once a transaction is confirmed, only the recipient can send the coins back, and coins sent to a wrong address are usually lost.

Check the first and last few characters of an address before you send. Some malware swaps a copied address for the attacker's when you paste it. How to send and receive crypto sets out a safe routine.

Not every crypto trade is a Bitcoin transaction. A transfer between two users of one exchange is often just an entry in its records, and a crypto CFD never touches the blockchain because you never own the coin.