Trace a real bitcoin transaction on a public explorer and explain each part of it.
A bitcoin transaction on a public block explorer shows you a lot of raw data at once, with almost nothing explained. Hashes run across the screen, the amounts on the left do not add up to the amounts on the right, and a fee appears without any visible sum behind it. All of it can be read, and each number has a source you can find on the same page.
Darren, who had never used a block explorer, opened one and clicked into a transaction. He saw long strings of letters and numbers, two columns of amounts that did not agree, and a fee he could not trace, and he closed the tab. The exercise here is written for that point. You take a single real transaction and work through it part by part until you can account for every figure.
Allow about 20 minutes. Have a browser open, choose any public bitcoin block explorer, and keep a screenshot tool and a place for notes nearby. There is no sign-up, and you do not need to own any bitcoin.
Start the way you did in Lesson 1.1, "Bitcoin is a shared ledger that nobody runs": open the explorer and click a recent block. Inside the block is a list of transactions. Look for one with one or two inputs and two outputs. That shape is simple to follow, and you will see it often, since an ordinary payment usually takes this form.
Open the transaction and note its transaction ID, the block that includes it, its time, and how many confirmations it has. Confirmations came up in Lesson 1.2, "Why proof of work makes the ledger hard to rewrite", so record the current count beside the block number.
On most explorers the left column is headed inputs. Inputs tell you the source of the money: each one refers to coins the sender received in some earlier transaction and has not spent yet. No balance sits against an address the way it would in a bank account. Bitcoin tracks unspent pieces instead, and spending means using up a piece in full.
The right column, headed outputs, shows the destination. Usually one output is the payment and the second is the change output: the portion of the input returned to the sender, frequently to a new address their wallet generated. Think of handing over a S$10 note for a S$7 meal. The full note goes across the counter, and S$3 is handed back to you.
The explorer does not mark which output is change, so any guess carries some doubt. Three things point you towards it:
An address that shows up for the first time is a likely home for change. Payments tend to be round amounts in some currency, while change tends to be an untidy remainder. Change usually shares the address format that the sender's wallet uses.
Note down the output you have picked as change, along with your reasons for picking it.
You will not find the fee among the outputs. It is the gap between the two sides: total inputs minus total outputs. That amount goes to the miner as part of their reward for putting the transaction into a block.
Suppose, with figures made up for illustration, a single input of 0.0150 BTC is spent. 0.0100 BTC goes to the recipient and 0.00498 BTC comes back to the sender as change. Subtract both outputs from the input: 0.0150 minus 0.0100 minus 0.00498 leaves 0.00002 BTC as the fee.
For the percentage, measure the fee against the payment: 0.00002 divided by 0.0100 gives 0.002, which is 0.2%. Measuring it against the input makes the cost look smaller than it is, since the change was never really leaving the sender. To see the amounts in Singapore dollars, use a price. At S$90,000 per bitcoin, another made-up figure, the payment comes to S$900 and the fee to S$1.80.
The size of a bitcoin fee is set by how much block space the transaction occupies and how busy the network is at the time. The amount being sent plays no part in it. A S$50 transfer and a S$50,000 transfer can pay an identical fee, which leaves a percentage that looks tiny on the larger one and painful on the smaller.
Everything on your screen is open to anyone, anywhere: addresses, amounts, the time, and the trail of earlier transactions sitting behind each input. Clicking an input takes you to the transaction that created it, and from there you can keep stepping backwards through the money's history for many steps.
Names do not appear anywhere. An address is a long string with no identity attached to it, so bitcoin is described as pseudonymous rather than anonymous. The connection between an address and a person is made outside the ledger. Any exchange that checked your identity has a record of the addresses it paid coins out to. Putting an address in a social media post links it to your account. Analytics firms look at patterns across the whole ledger and group together addresses that are probably controlled by the same person. Once even one address is linked to you, every amount that passes through it can be followed.
The working rule for Darren, and for you, is to assume every transaction you make is public and permanent, since on this ledger it is.
Everything fits on one page. Put a screenshot of the transaction at the top and label the inputs, the payment output, the change output and the fee directly on it. Underneath, use about half a page of your own words to describe the transaction's path: the sender's private key signed it, it was broadcast, a miner picked it up, it went into a specific block, and later blocks then buried it. Finish with two sentences, the first on what a stranger could learn from this transaction and the second on what they could not.
If you can explain your screenshot to a friend without looking at your notes, you have done the exercise properly. Choose your transaction now and start labelling.
Write half a page explaining one transaction you traced. Include a screenshot with its inputs, outputs and fee labelled.
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