Unlike traditional electronic fiat transactions made through e-banking platforms or using payment cards, digital currency transactions take place on the blockchain.
Bitcoin (BTC) was the first successful attempt at setting up a peer-to-peer network that uses a decentralized operational model and a digital currency independent of the banking system instead of fiat currency like US dollars.
But how exactly does the blockchain work and what are Bitcoin addresses? Keep reading to find out.
The BTC Blockchain
Every digital currency runs on some type of blockchain network and has its consensus mechanism for approving and processing transactions. Bitcoin is the pioneer of blockchains, and it was the first project to successfully implement the idea of a decentralized network of validators that process data in batches, commonly known as blocks.
The BTC blockchain is a virtual, distributed public ledger of Bitcoin transactions. It’s distributed across thousands of computers, which act as network validator nodes and process traffic through the blockchain.
The validators all have copies of the whole BTC blockchain on their computers. These copies are updated in real-time, and validators are usually operational 24/7 because the blockchain never sleeps. Furthermore, the validators are eligible to receive transaction processing rewards as an incentive to always stay operational.
The blockchain looks like a string of blocks containing BTC transaction data. The blockchain begins with the first BTC data block, the genesis block, which was created, or more precisely, mined by Satoshi Nakamoto.
The contents of these blocks are immutable and can’t be altered unless at least 51% of all network nodes agree to change a data block or get hijacked by hackers. However, something like this is highly unlikely because Bitcoin has thousands of independent validators that guard its network.
The blockchain’s immutability is one of its vital safety features, and it relies on the Bitcoin consensus mechanism, which ensures that every transaction is legitimate. Instead of using a centralized validator mechanism like payment processing services, such as Visa or Mastercard, the BTC blockchain decentralizes the validation process and distributes it between autonomous network nodes.
Bitcoin Public Addresses
Before diving into the details of the BTC consensus mechanism, we need to look at the core cryptographic elements for facilitating blockchain transactions.
To initiate a cryptocurrency transaction, you must have a public address to store your crypto. A Bitcoin address is a BTC public address, which is a virtual location on the blockchain. You can store your BTC in this location and accept transactions from other parties.
Since the blockchain is a public ledger, anyone can view BTC transactions with a specialized blockchain explorer platform that monitors all transfers between Bitcoin addresses. However, the blockchain doesn’t require anyone to provide personal details for their address, so they can stay relatively anonymous unless they publicly disclose their address details.
Your BTC address can’t accept any other cryptocurrency besides Bitcoin because it’s hosted on the BTC blockchain and isn’t compatible with other networks. If you want to accept Ethereum (ETH), for example, you’ll need an Ethereum public address.
When transferring Bitcoin to another user, you’re sending BTC through the blockchain from your BTC address to another one, and you can’t send BTC outside of its blockchain. Also, you can always view your transaction’s progress via a block explorer, thanks to the unique transaction ID you’ll get when starting a transfer.
Also, you can search the blockchain by inputting your BTC address in a block explorer and viewing the entire transaction history of your address.
Regarding security, there’s no risk in sharing your BTC address with other people. You’ll need to provide your address to third parties to receive BTC from them. Likewise, you’ll have to enter your address if you want to transfer Bitcoin from an exchange platform to your crypto wallet.
No one can steal your assets just by knowing your BTC address. However, if cyberattackers manage to connect your address with your identity and, for example, find a way to connect to your phone through a phishing scam or other malware, they might steal your BTC from your crypto wallet app.
Private keys are the key safety barrier that protects your BTC public address from unauthorized access, even if hackers somehow link your address to your phone and crypto wallet. Without your private keys, they can’t steal the crypto from your Bitcoin address.
Private keys are cryptographic alphanumeric codes that authorize users to access the crypto in a public address and initiate transactions to other addresses. This means that a private key is a sort of password that lets you send or exchange your crypto assets.
Every public address has its private key, and there’s no way to initiate a transfer from that address without the key. That’s why it’s extremely important to ensure the safety of your private keys and never share them with anybody.
Non-custodial crypto wallets that let users store their private keys on their mobile phones or desktop computers always provide 12 or 24-word seed phrases, which are randomly generated words that encrypt your private keys.
Instead of storing a complex alphanumeric code, users just need to write down their seed phrase and store it in a safe spot either on a piece of paper or in a text document on a USB device that isn’t connected to the internet. If hackers can’t get hold of your private keys, then your crypto is definitely safe.
Now that we’ve explained what Bitcoin addresses and private keys are let’s move on to the details of blockchain transactions to understand what happens during the journey between two BTC addresses.
Bitcoin transactions use encryption to send messages between two blockchain addresses that effectively change the balance of BTC for the sender and receiver. This means that Bitcoin isn’t really traveling through the blockchain. Instead, users send encrypted messages regarding the change of ownership of a certain amount of BTC.
One address renounces ownership over a specific number of BTC, and the other address becomes the owner of that BTC. That’s why blockchain data blocks don’t carry Bitcoin. Instead, they carry transaction data regarding the transfers of BTC between addresses.
Transactions have several elements that help users track them, and validators process them. A transaction ID (TXID) is a unique identification code for a specific transfer, which lets you track the transaction’s process through the BTC blockchain. Since Bitcoin transfers take between five and ten minutes on average but can sometimes take much longer, TXIDs are very useful for monitoring a transaction’s progress.
Timestamps are another identification method that shows the exact time at which a transaction was processed and added to the blockchain. Also, each transfer carries details about the two Bitcoin addresses involved in the transaction, along with how much BTC is shifting ownership.
The BTC Consensus Mechanism
When one user sends some BTC to another party, the transaction data goes through the blockchain, and a validator node needs to pick it up for processing. In the Bitcoin network, validators are called miners because they mine BTC by searching for 64-digit cryptographic hashes for each transaction to prove its validity. The miners either use powerful computers with multiple GPUs or ASIC machines to mine BTC efficiently.
The first destination of a BTC transaction is a virtual location on the blockchain called memory pool (mempool). This is a pool of pending transactions from which miners select transfers for validation. Usually, the transactions with higher transactions fee get processed first. That’s why users in a hurry often attach transaction fees higher than the network’s average to ensure their transfers get to their destinations within the five to ten-minute processing time.
When a miner selects a transaction, they begin the repetitive process of trying out millions or even billions of 64-digit hash combinations that might fit the transaction at hand. Miners usually team up into mining pools that connect miners from different parts of the world into single mining entities with huge mining power to efficiently validate transactions and divide mining rewards between themselves.
After finding the correct transaction hash, miners need several additional approvals from the BTC network before adding a transaction to the next Bitcoin data block. That’s because random miners need to double-check the transaction to ensure the hash is valid.
The hash is commonly referred to as proof of work because it proves the legitimacy of a transaction. That’s why the Bitcoin consensus mechanism is called the Proof-of-Work mechanism, and it’s one of the most secure blockchain algorithms since it’s never been hacked.
Besides making processing traffic, the PoW mechanism prevents double-spending scams in which malicious individuals attempt to send the same BTC twice and scam other users.
How to Get a BTC Address?
Getting a Bitcoin address is quite simple. You just need to download and install a software crypto wallet like Trust Wallet or Coinbase Wallet. Alternatively, you can create an account on a centralized crypto exchange platform such as Binance, Coinbase, or KuCoin.
Whichever service you choose, you’ll get a Bitcoin address that you can use to accept transactions or from which you can send BTC to other addresses.
Non-Custodial vs Custodial Bitcoin Address Providers
All Bitcoin addresses are the same in terms of how they work, but there’s a huge difference between BTC address providers.
Non-custodial services don’t take control of your private keys. You get to store your keys on your device, and you have full access to the keys at any time. Also, the service providers don’t have access to your keys. Non-custodial wallets provide users with a Bitcoin address and private keys, but users need to take care of those keys by keeping their recovery seed phrase out of the reach of any third parties.
These wallets enable users to protect their private keys with passwords or passcodes so that even if a hacker breaches their device, they won’t be able to access the private keys without the right password. When you’re using a non-custodial wallet as a Bitcoin address provider, you’re responsible for the safety of your assets.
On the other hand, there are custodial Bitcoin address providers, also called custodial wallets or crypto custodians. These are mainly centralized crypto exchanges like Binance and other popular trading platforms. Custodians provide users with a Bitcoin address, but they don’t give them control of the private keys.
In fact, when you’re using a custodial solution, you never get access to the private keys. The custodian is in full control of the private keys, which basically means that they are controlling your BTC, similarly to how money stored in a bank is controlled by the bank.
The safety of Bitcoin stored in a custodial Bitcoin address depends entirely on the custodian’s security measures. If a hack happens and the custodian’s system gets breached, hackers might steal your private keys and drain your Bitcoin address. Because of this, experienced crypto enthusiasts tend to keep the majority of their portfolio in non-custodial addresses.
As you can see, your Bitcoin address is a key tool for storing, managing, and transferring BTC through the blockchain. The underlying mechanics are fairly complex, but you don’t need to worry about them because BTC transactions are automated procedures that rely entirely on validator nodes.
However, it’s crucial for users to understand how BTC addresses and transactions work to protect their assets from unauthorized access and stay safe on the crypto market.