Sending Funds

Today's lesson explores the steps required for sending Bitcoin. Sending funds might seem straightforward, but it involves a careful process to ensure security, efficiency, and cost-effectiveness. Let's dive right into it!

In traditional payment systems like Visa or PayPal, senders can change their minds and request refunds through the centralized network operator. However, the decentralized Bitcoin network operates differently, resembling cash or gold transactions more closely.

Once a transaction is confirmed on the Bitcoin network, it becomes irreversible by the sender. The only way for the funds to be returned is if the receiver chooses to do so voluntarily.

The irreversible nature of Bitcoin transactions offers a significant advantage to merchants by eliminating the risk of payment fraud. As a result, merchants often offer discounts to customers who choose to pay with satoshis, passing on the savings from reduced fraud risk.

In order to send satoshis to someone, you need to have the following three pieces of information:

Let’s discuss these one by one.

Start by clicking your wallet’s “Send” button.

Next, enter the bitcoin address given to you in one of two formats: text or QR code. A bitcoin address should start with “1”, “3”, or most commonly “bc1”. If you received a QR code, you will need to scan it with your wallet. Either way, it’s critical to double check that the address you were given matches the address within your account to ensure you didn’t make a mistake and it wasn’t changed by a malware.

Continue by entering the amount you want to send. Most wallets allow you enter the value in satoshis or in bitcoin. Pay attention to use the correct denomination. Most wallets also allow you to enter fiat amounts, such as dollars, and the amount of satoshis would be calculated based on the current global average exchange rate.

Finally, it’s time to set the fee rate. Most wallets calculate the fee automatically based on current network conditions, however you can override this automatic setting.

The fee rate is set as a certain amount of sat/vB. The higher your rate is, the more attractive it is for miners to include your transaction in the next block. Since you’re competing with other users for the limited space in the next block, you need to estimate what is the optimal fee rate. If you set it very high your chance are excellent, but you have to pay more in fees. If you set it too low, you won’t make it into the next block and thus you will have to wait longer. You can estimate what is an optimal fee rate by looking at a blockchain explorer, such as mempool.space. Here you can observe the latest few blocks and the range of fees that people paid for their transactions within them. The site also gives you a good estimation for how much fee you should pay.

Broadcasting and Verifying

Once you filled out all these fields, you can submit the transaction. Some wallets will ask you for a password or a pin code. Others authenticate you with biometric data.

Next, your wallet first generates what is known as a 'raw transaction hex,' which includes all the data required for the transaction. This data is signed using your private keys. Once signed, it is submitted to the Bitcoin network, a process commonly referred to as 'broadcasting a transaction.'

Now, wait until the transaction confirms by monitoring it in your wallet account or on a blockchain explorer. The recipient will also immediately see the transaction in their account as "unconfirmed". For small amounts people typically accept the payment with a single confirmation. For high value transactions people may wait for 3-6 confirmations. As time goes by, all bitcoin transactions will continue receiving confirmations without end.

The optional advanced UTXO selection will be discussed in later lessons.