Bitcoin transactions are the core of how the network functions and include several features that determine their effectiveness and security. Understanding how these transactions are constructed and how Bitcoin moves within the network is essential to fully appreciate this innovative technology.
Bitcoin transactions are based on UTXO (Unspent Transaction Outputs), which represent the unspent outputs of previous transactions. We can think of UTXOs as digital “bills” of any denomination available in our wallet to be spent. Each transaction consumes one or more UTXOs as inputs and produces new UTXOs as outputs. It’s important to note that UTXOs must be spent 100% in a transaction, just like a bill. If the amount of the UTXO is greater than what you want to transfer, the remainder is returned as a new UTXO to the sender’s address, known as “change.”
The unit of measure for UTXOs is the Satoshi, the smallest unit into which Bitcoin can be divided, equivalent to 0.00000001 Bitcoin. This division allows for microtransactions and greater flexibility in transactions. There is no specific maximum amount of Bitcoin that can be included in a single transaction, although it must comply with block size limits and other Bitcoin protocol rules. Obviously, there can never be a transaction exceeding 21 million Bitcoin.
Bitcoin transaction fees are calculated based on the size of the transaction in bytes and the network congestion. Similar to the supply and demand mechanism that determines the price in dollars of each Bitcoin, fees are managed by a free market mechanism. During periods of high congestion, users can use Replace-By-Fee (RBF), which allows an unconfirmed transaction to be replaced with a new transaction with a higher fee, ensuring faster confirmation.
One technique used to accelerate transaction confirmations is Child Pays For Parent (CPFP). If a transaction has too low a fee to be confirmed quickly, a child transaction can be created that spends the output of the parent transaction but with a higher fee. Miners will be incentivized to include both transactions in the block due to the total sum of the fees, thus increasing the likelihood that the parent transaction will be confirmed.
The term “Dust” refers to very small amounts of Bitcoin that are too small to be spent economically due to transaction fees exceeding the value of the transaction itself. Managing these small amounts is part of optimal transaction management in the Bitcoin network.
Although major mobile wallets automatically select which UTXOs to use, it is possible to manage them manually through specific software to optimize your set of UTXOs. This maneuver is known as coin control.
Understanding these dynamics is essential for anyone who wants to operate on the Bitcoin network, highlighting how transactions are not simple movements of currency but complex and well-structured processes that ensure security, efficiency, and scalability to the Bitcoin blockchain.