What is a Blockchain Transaction in Crypto?
In this section, I’m going to tell you what is a blockchain transaction, in crypto!
Blockchain transactions are something that every single cryptocurrency holder has performed, or rather, does perform, very often. If you deal with cryptocurrencies in any way, shape, or form, you’ve definitely “transacted” before.
That being said, while the term might seem very self-explanatory, I wouldn’t be writing a dedicated section on the topic, now would I? A “transaction” is actually a very broad term, as far as crypto is concerned - that’s why it’s important to understand it, from all sides of the deal.
In this section, we’re going to cover what is a transaction. To be a bit more specific, I’ll tell you about the most common types of transactions, as well as cover the broader meaning behind the term, as far as cryptocurrencies and blockchain tech are concerned.
Now, let’s get to it!
Video Explainer
Video Explainer: What is a Blockchain Transaction in Crypto?
Reading is not your thing? Watch the "What is a Blockchain Transaction in Crypto?" video explainer
Blockchain Transaction Easily Explained! (Animated)
What is a Transaction?
So, let’s start off from the very beginning, and answer the most obvious question - what is a transaction?
Well, there are multiple examples that could be used to illustrate transactions - allow me to give two, though.
First, imagine that you and your friend decided to trade two items - you’ll give your friend a chocolate bar for his banana. Once you trade the two items, both of you just participated in a transaction!
Another example would be you buying milk and bread at the shop. You purchase these groceries for money - USD, EUR, or any other currency that’s present in your country. Once you walk away from the cashier, once again, you’ve just participated in a transaction - you’ve traded your money for physical goods!
Now, these examples are very, well… Obvious! However, what is a blockchain transaction in crypto?
Well, whenever you send or receive cryptocurrency, this is called a transaction. Even if, say, you receive crypto, and don’t send or pay anything for it (in other words, you don’t perform a trade), this is still considered a transaction, nonetheless.
Once again, up to this point, things are pretty obvious. With that out of the way, though, let’s get down to some of the more-interesting aspects of transactions, when it comes to crypto.
Everything is a Transaction in Crypto
Probably one of the most important things to know about blockchain-based crypto transactions is that everything you do on the blockchain can be considered (or, called) a “transaction”.
So, allow me to give you an example.
Imagine that you’ve just found the coolest cryptocurrency game ever - it’s action-packed, allows you to earn passive cryptocurrency tokens as you play, and is super-fun, in general.
Now, the game allows you to create a custom character of your own. As you play, you will have the opportunity to upgrade your character with high-level armor and weapons. Cool stuff!
All of these assets, though - the armor, the weapons, and all other equipable items in the game - come in the form of NFTs, or non-fungible tokens. If you’re not familiar with what these are, I highly recommend you go and check a dedicated section on the topic, and then come back to this one - it’s a whole, huge topic!
So, you can earn all of that equipment simply by playing the game, or you can purchase it on the in-game marketplace, for some cryptocurrency coins or tokens. For the sake of this example, let’s assume that you’ve chosen to earn the NFTs - say, perhaps you’ve gotten lucky, and received a rare piece of armor from a boss fight.
Well, even though you’ve received the armor in-game, as soon as it goes into your inventory, this will be considered a crypto transaction - specifically, the game will transfer the armor, in the form of an NFT, into your cryptocurrency wallet, so that it will be 100% provable that you’re now the owner of the item!
I know, I’ve gotten ahead of myself there - it’s a complex topic, when you start breaking it down! If all of that sounded like a foreign language to you, I highly advise going through the whole Crypto 101 Handbook, where you’ll find dedicated and in-depth sections on all of the terms we’ve just ran through!
That being said, though, I do hope that the core idea is clear - in the world of crypto, a “blockchain transaction” is any form of interaction between an individual (or an organization) and the blockchain. Buying, selling, and sending cryptocurrencies ARE NOT the only “transactions” that you can perform!
Now, if we were to get a bit more technical and specific, I’d like to say - a transaction happens anytime that you interact with a smart contract. Smart contracts are special, automated agreements that are based on the blockchain - they allow users to trust blockchain-powered projects, since everything happens automatically, without the intervention of a middleman (or, simply - a human).
To make it even clearer, allow me to give you another example.
Imagine that you’ve come across a gambling application - one that’s based on the blockchain, and is powered by smart contracts. Meaning, you are able to check how the rules are enforced for each game on the platform, and whether or not everything is provably fair.
As you gamble your cryptocurrency on the application, each time you place a bet, or the winnings are paid out to you, a transaction occurs - either you send funds from your cryptocurrency wallet to the platform, or the smart contract pays out your winnings into your wallet, automatically.
So, the core takeaway is simple - every single action that you perform on the blockchain is considered a transaction. That being said, though, why is it even important, in the first place?
The Public Nature of Transactions on the Blockchain
You see, one of the main wonders of blockchain technology is that all of the events happening on the network are completely public, and available for anyone to see. Of course, there are exceptions, but the general idea is still that.
Naturally, you are able to remain completely anonymous while you perform these transactions - instead, what others will see are the crypto transaction ID (hash), your public wallet address, the total amount of crypto sent, as well as the address of the receiver.
Think about the example I gave earlier - the one with you trading a chocolate bar for a banana with your friend. Now, imagine that, instead of trading something, your friend asked you to lend him some Bitcoin, for a project that he’s working on. So, being the awesome friend that you are, you’ve sent your friend the BTC that he asked for.
The moment that the network receives your transaction information, it will become public, and everyone will be able to see that one wallet sent another wallet an X amount of BTC. However, no one will know who the wallets belong to, since there’s absolutely no identifying information that would give your identity away.
Well, unless you tell everyone your public wallet address, though. If that’s the case, your transactions might not be all that anonymous!
The public nature of cryptocurrency transactions is considered to be the cornerstone of blockchain technology. It enables a lot of transparency within the industry, and prevents a lot of potential scams and hacking attempts, since you can always track all of the assets, no matter how many wallets they might get transferred through!
The Importance of Understanding How Transactions Work in Crypto
The last big thing that I want to emphasize in this section is the WHY - WHY you should even know and care about how do cryptocurrency transactions work, in the first place.
For starters, you will be transacting with crypto, every single day. Well, at least if you plan to trade, sell, purchase, and transfer cryptocurrencies between wallets - many crypto enthusiasts do just that!
Understanding how transactions work - rather, what is classified as a transaction, in crypto - is super-valuable when you’re dealing with taxes, too. All countries have their own, specific tax laws and regulations, and in some areas, you might get taxed for every transaction that you perform!
In situations like these, it’s important to know how to track all your transactions, as well. Online, you will find a variety of different cryptocurrency tax calculators and crypto transaction trackers - you can put in your wallet address, download Excel files, create spreadsheets, and organize your transactions in a way that would be presentable to the relevant tax authorities.
Understanding cryptocurrency transactions is valuable when it comes to the security of your crypto assets, too! Imagine that you’ve sent some crypto to a stranger, in exchange for a service. Later that day, that person contacts you, and says that they haven’t received their payment, and that you should resend it.
Well, if you understand how transactions work, you can simply go and check your transaction ID on the blockchain explorer, and see that the payment was, in fact, successful - then, you can rest assured that you have proof of paying the individual!
Lastly, understanding blockchain transactions will allow you to start looking for cryptos with no transaction fees, or fastest crypto transaction speeds, depending on your own preferences. These are some advanced topics, but once you understand blockchain transactions, they will start becoming clearer to you, too!
I can go on and on with the examples, but the underlying sentiment remains the same - understanding cryptocurrency transactions is one of the first steps that everyone should take when starting out and learning about crypto.
Wrapping Up
In this section, we’ve only scratched the surface of what are cryptocurrency transactions, and how do they work. You can go much deeper, studying what happens on the blockchain when someone performs a transaction, or what to do when a transaction is stuck, but these are topics that deserve their own sections!