How Bitcoin Transactions Work

When you send Bitcoin, you're broadcasting a cryptographically signed message to a global network of computers. That message says: here's some Bitcoin that was previously sent to me — I can prove it with a digital signature — and I'm redirecting it to this new address. The network checks whether the math is valid and whether the Bitcoin exists and hasn't already been spent. Eventually, a miner packages your message into a block. Once it's in a block, and more blocks build on top of it, your transaction becomes practically permanent.

That's the high-level view. The mechanism underneath is a bit more precise, and worth understanding — because it explains most of Bitcoin's behavior. Why fees exist. Why transactions can be slow during congestion. Why there's no customer support line if you make a mistake. And why the same system has worked for sixteen years without a central operator.

How the Mechanism Actually Works

Bitcoin doesn't track balances the way a bank does. There's no internal ledger saying "Address X has 0.5 BTC." Instead, Bitcoin tracks unspent transaction outputs — UTXOs. Every piece of Bitcoin is a discrete output from a prior transaction that hasn't been spent yet. Your "balance" is just the sum of all UTXOs associated with your addresses.

When you send Bitcoin, you're constructing a transaction with four core components:

Inputs: References to specific UTXOs you own. Each input points to a previous transaction output by its transaction hash and index position — essentially saying "I'm spending this specific output."

Proof of ownership: Each input includes your digital signature (generated using your private key) and your public key. The network verifies the signature is valid without ever seeing your private key. The cryptographic separation between what you use to prove ownership and what you want kept secret is the core security mechanism.

Outputs: Where the Bitcoin is going. An output is a new UTXO — an amount paired with a locking script that only the recipient's private key can unlock. If your inputs total more than what you're sending, you add a second output directing change back to yourself.

Fee: The difference between total input value and total output value. Miners collect this as compensation for including your transaction in a block. There's no separate fee field — it's implicit in the arithmetic.

Once signed, the transaction is broadcast to the network. Nodes relay it to each other. It lands in the mempool — a holding area where unconfirmed transactions wait. Miners select transactions from the mempool, typically prioritizing higher-fee transactions when block space is constrained. Your transaction gets one confirmation when included in a block. Each subsequent block adds another. Most services treat six confirmations as settled for large amounts, though one or two is often sufficient for smaller ones.

The signature scheme Bitcoin originally used is ECDSA on the secp256k1 elliptic curve. Taproot, activated in November 2021, introduced Schnorr signatures as a more efficient alternative — they're smaller, enable better privacy for complex transactions, and allow multiple parties to produce a single signature indistinguishable from a standard one-party signature.

Where Constraints Live

The binding constraint is block space. Bitcoin blocks are capped at roughly 4 million weight units — somewhere between 1 and 4 MB depending on transaction complexity. On average, a new block appears every ten minutes. That works out to roughly 3–7 transactions per second. When demand exceeds capacity, the mempool fills and fees spike. Price is the only rationing mechanism — there's no priority queue, no appeals process, no relationship that gets your transaction through faster.

And there's no reversibility. A confirmed transaction is final. No support ticket undoes a send to the wrong address. The cryptographic finality is exactly what makes the system trustworthy; it's also what makes errors permanent.

Dust limits — minimum viable output amounts — exist to prevent the network from accumulating economically meaningless outputs that cost more in fees to spend than they're worth. Some outputs can become permanently uneconomical to move if fees rise substantially and they're never consolidated.

What's Changing

Two meaningful shifts are underway at the transaction layer.

Taproot adoption has been gradual since its 2021 activation. The improvement it enables — more efficient multi-signature transactions, better privacy, reduced fee overhead for complex scripts — is real, but network participants have to explicitly choose to use Taproot-compatible wallets and address formats. Adoption is visible on-chain and trending upward, though it hasn't yet become the default for most transactions.

The fee market is structurally different post-2024 halving. Bitcoin's block subsidy — the newly minted BTC miners receive per block — halves roughly every four years. With each halving, transaction fees need to fill a larger share of miner revenue to sustain the same security budget. Whether fee pressure will be sufficient long-term, particularly after subsidies eventually approach zero, is a genuine open question. It won't be answered definitively for decades.

The Lightning Network sits above the base layer, enabling fast and cheap payments without touching the blockchain for every transaction. It uses payment channels that settle on-chain only when opened or closed. Lightning adoption is growing, but none of this changes how base-layer transactions work.

What Would Confirm This Direction

Taproot adoption reaching majority share of transaction types would signal the network is genuinely migrating toward more efficient and private multi-party transaction infrastructure. Sustained fee revenue — fees meaningfully approaching block subsidy in dollar terms without pushing toward mining centralization — would support the thesis that Bitcoin's long-run security model is economically viable.

What Would Break or Invalidate It

A viable attack on ECDSA or Schnorr signatures via quantum computing would compromise the ownership verification mechanism at the foundation of every transaction. Current quantum hardware is nowhere near the required threshold, but it's not a permanent dismissal — it's a tail risk worth monitoring. More near-term: if fee revenue fails to generate sufficient miner incentives during low-demand periods as subsidies decline, mining centralization becomes a security concern. That's a variable to track across each halving cycle.

Timing Perspective

The base-layer transaction mechanism is stable and has been for sixteen years. The relevant near-term variables are Taproot adoption rates and the evolving fee market following the 2024 halving. The long-run question about whether fees alone sustain security as subsidies approach zero is a 2030s and beyond discussion — real, but not yet the forcing function. For now, the mechanism operates as designed.

Boundary Statement

This post explains the mechanism. It's not a recommendation to use, hold, or transact in Bitcoin, and it's not a prediction about Bitcoin's price or long-term viability. Understanding how transactions work tells you what the system does — not what it's worth, what price does next, or whether it belongs in your portfolio. Those are different questions, outside the scope of this piece.