Category: blockchain

A Bitcoin Transaction Example

Let’s step through a typical bitcoin transaction to see how things work.

Jane wants to buy a cup of coffee at Bert’s Coffee using bitcoin. The transaction will look like this:

A cup of coffee is $2.95 and the price of bitcoin is $650.

$2.95/$650 is 0.00453846 bitcoin.

But we can express fractions of a bitcoin in a different and better way.  A satoshi is 1/100,000,000 of a bitcoin so 0.00453846 would be 453,846 satoshi.

To encourage miners to include this sale in the next block (takes about 10 minutes to settle), you will need to spend ~7 cents or 10,615 satoshis. This is called the transaction fee.

The transaction fee isn’t actually part of the transaction. It is found by subtracting the price of the coffee (or the output) from the total paid(or the input). The transaction will look like this:

Total paid = coffee fee + transaction fee = 453,846 + 10,615 = 464,461 satoshi

So the transaction will look like this

INPUT                                       ->   OUTPUT
464,461 satoshi from Jane     ->   453,846 satoshi to Bert’s Coffee

Which is pretty straightforward. In fact, this is too simple. In reality, Jane probably doesn’t have exactly 464,461 satoshi so she’ll need some change. This is similar to having a $5 bill and buying a $2.95 coffee and getting the change back (except for the transaction fee).

Granted, cash doesn’t have a transaction fee, but then let’s look at this as being similar to a credit card transaction fee.

Let’s assume Jane has a number of partial bitcoins such as shown below. I’m truncating the hashes for space reasons. In reality these are

  • 1/4 bitcoin = 25,000,000 satoshi (Hash = 6a45764f)
  • 1/8 bitcoin = 12,500,000 satoshi  (Hash = 23d5fd56)
  • 1/100 bitcoin = 1,000,000 satoshi (Hash = 43ed2dac)

Jane’s wallet will probably select the 1/100 bitcoin to spend.

so the transaction will look like this:
INPUT                                         ->  OUTPUT
1,000,000 satoshi (43ed2dac) ->  453,846 satoshi to Bert’s Coffee(2bc4545b)
535,539 satoshi change to Jane(3ce69d26)

Note that in this case the transaction fee is staying the same.

Jane’s original amount = Jane’s change + Bert’s coffee + transaction fee
1,000,000 = 453,846 + 545,539 + 10,615

When all is finished, the wallets will look like this:

Jane:

  • 1/4 bitcoin = 25,000,000 satoshi (Hash = 6a45764f)
  • 1/8 bitcoin = 12,500,000 satoshi  (Hash = 23d5fd56)
  • 535,539 satoshi (Hash = 3ce69d26)

And Joe’s Coffee:

  • other sales & other hashes
  • 453,846 satoshi (2bc4545b)

 

Bitcoin Core vs Bitcoin Classic – The Civil War


Bitcoin, this seemingly revolutionary crypto currency that’s been around for a significant amount of time now, is currently on the verge of a civil war. This is fueled by the fact that one of the leading and prominent developers – Mike Hearn, who used to be a Google engineer, openly stated that he truly believes that Bitcoin was, in fact, a failed experiment.

With this in mind, it’s worth noting that there are two separate fronts starting to form – the bitcoin core which is consisted of the core members of the initial development team and the bitcoin classic. The latter contains an enthusiastic group of miners with influence, startups as well as exchanges that are proposing the exact opposite of the core. This difference seems to have paralyzed the system with the infighting that has occurred throughout the last few months. Although Bitcoin Core and Bitcoin Classic are using the same  source code base, they are essentially two entirely different groups advocating completely different roadmaps.

Whichever group wins will have an impact on the particular implementation and resilience of the blockchain technology which is an underlying part of Bitcoin. Some believe that the revolutionary bitcoin idea which is currently valued at around $5 billion could just as well turn to dust. I’m not one of those people.

To understand the context, it’s essential to understand that the system works as miners are using complex processing power to go through math problems on an openly distributed ledger (meaning everyone with an internet connection can access and download it) which is referred to as the blockchain. For this work, they are rewarded with bitcoins in blocks and up until this moment, each block in the blockchain has been limited to be no more than 1 mb in size. This particular limit becomes troubling for people who want the system to thrive, a.k.a the Bitcoin classic as the volume becomes incapable of satisfying the needs of suppliers and providers, and hence – the bitcoin is becoming unreliable.

The opposite fraction – the Bitcoin core, comes from the fact that if they increase the volume of the blocks in the chain this would lead to a huge requirement for larger computing power which is going to significantly limit the ability of the majority to mine bitcoins in the first place because they would simply be unable to.

It’s currently unclear how this metaphorical civil war is going to end but one thing is clear – the nature of bitcoin as we know it so far is much likely to change entirely and this is likely to have an impact on a lot of associated startups and miners and even exchanges that trade with the crypto currency.