Now that we understand what blockchain and Bitcoin are, let's examine how blockchain technology works in the context of an online transaction, using Bitcoin as the example. Since Bitcoin is the most widely used cryptocurrency, it provides a clear and practical illustration of how blockchain operates in real-world scenarios.

Step 1: Creating and Sending a Transaction

Imagine you want to buy a new laptop from an online store using Bitcoin. The process begins when you open your Bitcoin wallet app and create a transaction message.

This message includes the amount of Bitcoin you want to send and the store's public key, which serves as the recipient address. To authorize the transaction, you digitally sign it using your private key. This signature is based on public-key cryptography, which plays a critical role in ensuring the security and authenticity of the transaction - something we will explore in detail later in the course.

Step 2: Broadcasting to the Network

After reviewing the details carefully - because Bitcoin transactions are irreversible - you then broadcast the transaction message to the Bitcoin network. This network consists of numerous nodes, each maintaining a full copy of the Bitcoin blockchain.

Step 3: Verifying the Transaction

Nodes in the Bitcoin network generally fall into two groups: miners and verifiers. While miners concentrate on creating new blocks, the other nodes are responsible for verifying the data that flows through the network. In this step, they confirm that you have enough Bitcoin to complete the transaction and that it was legitimately authorized by you.

Step 4: The Mining Process

Mining is a computational competition in which miners use their processing power to solve a complex mathematical puzzle required to create a new block of transactions.

As discussed earlier, each block has a unique identifier known as a hash. This hash is generated from the block's contents and must satisfy a specific condition - such as containing a certain number of leading zeros in Bitcoin.

To achieve this, miners search for a number called a nonce. When the nonce is combined with the rest of the block's data and hashed, it must produce a hash that meets the required criteria.

Step 5: Adding to the Blockchain

When a miner successfully creates a new block, it is broadcast to the entire network. Other nodes verify the block and, once validated, add it to their own copy of the blockchain. Because each block includes the hash of the previous one, this process forms an unalterable chain of blocks. The miner who found the correct nonce first receives newly minted bitcoins as a reward.

Step 6: Transaction Confirmation

Your transaction, along with many others, is now included in a block on the Bitcoin blockchain. Within roughly 10 minutes of creating the transaction, both you and the online store receive confirmation that the payment has been successfully processed.

Transparency and Pseudonymity

The blockchain functions as a public ledger, meaning all transactions are transparent and visible to anyone. However, participants remain pseudonymous, since only their wallet addresses appear on the network. While all transfers can be viewed, connecting these addresses to real-world identities requires additional external information.

Here is an example of a real Bitcoin transaction (you can view it here):

As you can see, the transaction displays both the sender and recipient addresses. There is also likely a change address, which usually belongs to the same user if it represents returned change. Most modern wallet applications follow best practices by generating a new address for the change to improve privacy.

But why isn't it possible to send the exact amount of Bitcoin without returning change? We will explore this question and several related concepts later in the course.