Exploring Transactions

What you'll learn

• The transparency of cryptocurrency
• How to access the information within a transaction
• The anatomy of a Bitcoin transaction - bit by bit
• What this information can tell us

An essential aspect of cryptocurrency’s value proposition is  transparency. 

All Bitcoin transactions, for example, are public, traceable, and permanently stored on a public ledger - the bitcoin blockchain - and can be seen by anyone with an internet connection.

Though Bitcoin requires no personal information, the ability to follow each and every transaction - of which there are over 400,000 every day - is in stark contrast to how existing payment systems work. 

We only know what Visa or Mastercard tell us about their networks, whereas anyone with a reasonable grounding in data science can query every aspect of Bitcoin's permissionless blockchain, look at specific trandaction detail, overall usage and health.

The continued increase in cryptocurrency usage has meant that the ability to mine blockchain usage has become commercially valuable. 

An entire blockchain analysis industry now provides tools for businesses and governments to monitor and enforce AML and other criminal activities, counter to the arguments that crypto somehow operates outside the law.

Empowering Financial Freedom

The transparency of crypto transactions brings a completely new level of empowerment to individual users. If you want to send money internationally using existing payment methods - such as Western Union, Monegram or your domestic bank - not only will it will be costly and likely take days, you'll have very limited visibility on the process.

When you send cryptocurrencies such as BTC or ETH you can see exactly when the transaction has been confirmed, what fees have been spent to do it and a copy of the transaction output to confirm where the crypto you have sent has gone. 

All of this happens within minutes, not days, without the need to rely upon a central entity. It can be accessed universally from anywhere in the world with an internet connection.

Let's zoom in and look at the detail of cryptocurrency transactions. We'll first explain how to access the information within a transaction and contrast this to more traditional banking transactions. 

We can then analyse the anatomy of a specific real-life bitcoin transaction added to the blockchain illustrating the value it provides to the sender and recipient as well as those organisations seeking an overall view of blockchain usage 

How to access the information within a bitcoin transaction

Block explorers offer the best way to access information within cryptocurrency transactions.  Think of them like  Google or Firefox  but instead of providing results for websites, block explorers are used to browse crypto transactions, stored within a blockchain (you can learn more about that process from our article about bitcoin mining).

Blockchain.com launched their block explorer in 2011. Like a search query your start point is either a transaction ID, address or a specific block

For our example lets concentrate on a specific transaction. Let's assume you have sent some Bitcoin and within your wallet you can see the confirmed transaction including the Transaction ID.

If you copy that information - a bit like copying a url - you can then paste it into the blockchain explorer.

If you are technical enough to run your own Node (see this article on How to Run a Node) you won't need to rely on a third-party service and can access this information directly.

Transaction information is hierarchical, which is why there are three potential entry points for your search:

• A Block - This is a batch of transactions, including the associated addresses, grouped together. Each new block references the previous, so are sequentially numbered.
• An Address - An address is the destination of funds, think of it as the equivalent of bank account. All transactions are associated with addresses.
• A Transaction - A single instance of funds being sent to a specific Address

You can work down from blocks to explore the addresses that transactions were sent to, and the individual transactions themselves, or the other way around, working up from a transaction to see the address it was sent to and ultimately the block it was included in.

As well as understanding that hierarchy, you'll need to understand the specific logic of the flow of funds within the Bitcoin blockchain.

Understanding Bitcoin transaction flow

Before we dig into the specifics of a bitcoin transaction it is worth explaining a little bit about the logic of Bitcoin transactions, and try to draw analogies to something you should be familiar with, banking transactions.

Your bank account has a running Balance, which is the aggregate of Debits and Credits, it shows you how much many you have to spend.

Debits are transactions that spend against your Balance, and Credits are transactions that increase your Balance.

Bitcoin works in a similar way but with slightly different language and logic:

• Unspent Funds - These are funds are available to spend. Your Bitcoin wallet will total all unspent funds associated with addresses that it holds to create a Balance. You'll see these described as UTXOs. Essentially transactions that have been received and not moved on.
• Spent Funds - When you make a transaction you access Unspent Funds, sending them on to a new address, at which point they become Spent.

So the Bitcoin blockchain is a record of forward movement of funds. Unspent funds associated with addresses, specific locations on the blockchain, which are Spent in order to fund a transaction which moves them somewhere else on the blockchain, That movement being facilitated by Miners.

The spending of funds is described within a transaction, showing the destinations and the fees. This movement is described by Inputs and Outputs.

• Inputs - The source of the Unspent funds, which are moved in the transaction and become Spent
• Outputs - The destination of Spent funds which become Unspent at a new address.

It isn't the most intuitive system but a Bitcoin transaction is all about the forward flow of funds. If you send BTC you need Inputs - to fund the transaction - which are themselves the end product (Output) of a previous transaction. 

Once sent the transaction is processed (minus fee) the funds are spent from the Input and become an Unspent transaction at a new address - the Output.

The anatomy of a bitcoin transaction

Hopefully you are a bit clearer about the logic and terminology of Bitcoin transactions, but to really get to grips with them let's look at the anatomy of a bitcoin transaction. We're using a random example from 2016:

• Time/Date - This transaction occurred at 17:41 17th June 2016
• Status - Whether the transaction is Confirmed (Green) or Unconfirmed (Red). Confirmed status means that the transaction has been included in at least six blocks. 
• Transaction Hash - All the data within the transaction is hashed cryptographically so it can be referenced within a block in a uniform alphanumeric string.

• Received time - The time and date the funds were received.

• Size - The amount of data the transaction represents, measured in bytes. A bitcoin block has a maximum size of 1mb.

• Weight - This is a unit of measurement used to compare the sizes of different transactions. Weight measurements are relative to the maximum size of a block. As of 2016, each weight unit represents 1 / 4,000,000 of a block. So in this particular transaction, it's taking up 900 of the 4,000,000 capacity of the block it has been added to. 

• Included in block - the block number in the chain that the transaction has been added to. 

• Confirmations - the number of blocks  the transaction has been added and therefore considered as valid.  Since this transaction happened in 2010, and a new block is confirmed every 10 minutes, there are a lot of confirmations.

• Total input - the total funds sent including fees.

• Total output - the total funds received .

• Fees - the amount of fees that were paid to the miner to include this transaction in a new block and add that to the Bitcoin blockchain.

• Fee per Byte - The fee relative to the size of the transaction

• Fee per weight unit - The fee relative to the weight of the transaction

• Value when transacted - value (at the time of the transaction) of the transacted BTC represented in USD.

Below the summary information you can see the source of funds addresses that provided the Input (as described above). and the destination addresses - the Outputs

Bitcoin is just a record of unspent funds, so when funds are moved, an unspent transaction becomes an Input in a new transaction and ultimately an Output somewhere else in the blockchain.

Inputs 

The input into a transaction has to cover the value of the BTC being sent and the relevant fees needed to confirm the transaction as valid. The details in this section include the sender's address and the amounts of BTC sent and fees paid.  

Outputs

This section details the addresses of those receiving the transacted BTC. It also includes the value of the BTC they have received (which amounts to the input minus the fees). 

You'll notice across from 'details' the 'spent' written in red. This indicates that this particular BTC has been spent in a subsequent transaction, illustrating the point about forward movement of funds.

Ethereum's blockchain works in a very similar way, though with a slightly different fee system known as Gas. Gas fees are similar to Bitcoin transaction fees in that they are paid to Miners, but the calculation is based on the complexity of the transaction.

This is more complicated with Ethereum because a transaction could simply be the movement of ETH (the native currency) or to facilitate the execution of a Smart Contract, which takes more computing power.

Ethereum fees are measured in Gas but paid for in Ether. The conversion to Gas is to provide a more user friendly unit, but is quite confusing. Gas itself is denominated in Gwei, one Gwei being equal to 0.000000001 ETH (10-9 ETH) so instead of a Gas Fee being 0.000000001 Ether it would be written as 1 Gwei.

We'll explain Ethereum fees in a completely separate article.

Bitcoin's history at your fingertips

As you become more familiar with how Bitcoin transactions work, it can help make the abstract functions of mining, confirmations and the movement of value become more tangible. It can also put the history of Bitcoin at your fingertips.

A cross-section of a tree trunk includes rings that not only show the tree's age, but key events throughout the tree's life, such as environmental events that hindered or boosted its growth.

When you learn how to query a blockchain, you have the same ability to dip into its history. Here, for example, is the TxID of the first ever commercial bitcoin transaction. The famous purchase of a pizza on May 22, 2010 for 10,000 bitcoin by Laszlo Hanyecz.

You can see the Inputs into the transaction and the single Output. The value at the time is recorded as €0.00 because there were no exchanges and therefore no price history. 

The fee was 0.99 BTC which is the equivalent of €47,000.

How transparency  is being leveraged

The radical transparency of crypto transactions is powering an entire industry of blockchain analysis. Companies such as Chainalysis and Elliptic are employing advanced data science techniques to provide custom tools for  customers who range from governments to hedge funds with tools to either ensure their own transactions are compliant with rules around of the movement of money, or to track those who are moving funds illegally or with illegal intent. 

These services divide opinion among the crypto community. The ability to trace transactions and tie to a real identity at the point when funds reach a regulated entity - such as exchange - is a powerful tool against crime. 

This was precisely how the perpetrators of the well-publicised Twitter hack/bitcoin scam (July 2020) were caught within two weeks.

Though admittedly the Twitter hackers were relative amateurs  government agencies use blockchain analsysis to track criminal funds that range from terrorism to human trafficking, and in shutting down darknet markets.

By comparison, the work within  the traditional financial system  Can be more challenging given the levels of permission that are generally required to get to the truth. This is why data leaks like the Panama Papers (2016) or FinCEN (2020) are so controversial, as they shine a lot on the hidden world of offshore finance.

On the other side of the coin are those that feel strongly that transparency shouldn’t be at the expense of privacy. Just as corporations are weaponising block exploration, libertarians are fighting back through so-called privacy coins - like Monero and Zcash - designed to obfuscate information; privacy wallets and mixing/tumbling services designed to break the chain of fund traceability and the use of Decentralised exchanges where personal information (KYC) isn’t required, meaning transactions cannot be tied to individuals.

Whichever side of the argument you favour, it seems clear that cryptocurrencies offer a monetary system that is harder to cheat, clearer to understand, and reliably less risky.

By committing to radical transparency, cryptocurrencies are a new way of doing finance for the 21st century. The battle for privacy will go on but understanding how to explore a bitcoin transaction and the logic of value flow behind it puts these much bigger questions into context.

Next we'll look at how and where to spend cryptocurrency.