How Cryptocurrency Transactions Are Processed

1. Transaction Initiation

   • A user decides to send cryptocurrency (e.g., Bitcoin) to another person.

   • They enter the recipient’s wallet address and the amount in their crypto wallet app, then sign the transaction with their private key (a secure digital signature unique to the sender).

   • The transaction is broadcast to the cryptocurrency network.

2. Transaction Propagation

   • The transaction is sent to a network of computers called nodes, which validate the transaction.

   • Nodes check that:

     • The sender has enough funds in their wallet.

     • The digital signature is valid.

   • Once validated, the transaction enters the mempool (a waiting area for unconfirmed transactions).

3. Mining and Block Creation (For Bitcoin and other Proof-of-Work blockchains)

   • Miners pick up transactions from the mempool and bundle them into a "block."

   • To add the block to the blockchain, miners must solve a complex mathematical puzzle (a process called Proof of Work). This requires significant computational power.

   • The first miner to solve the puzzle gets to add the block to the blockchain and earns a reward (newly minted Bitcoin plus transaction fees).

4. Block Confirmation

   • Once the block is added to the blockchain, the transactions in it are confirmed.

   • Other nodes in the network verify the new block to ensure everything is correct.

   • Each new block that is added after the first one increases the number of confirmations for the transactions, making them more secure.

5. Transaction Completion

   • The recipient's wallet is updated to reflect the incoming funds.

   • Depending on the blockchain, it may take several confirmations (e.g., 6 confirmations for Bitcoin) before the transaction is considered fully secure.

Key Features of This Process

• Decentralization: No central authority is needed to validate or process transactions.

• Security: The blockchain is immutable (unchangeable) because altering a confirmed block would require immense computational power.

• Transparency: All transactions are recorded on the public ledger, viewable by anyone.