What is a Blockchain Transaction - The Journey of Digital Money

On May 22, 2010, Laszlo Hanyecz paid 10,000 Bitcoin for two pizzas. That transaction is visible forever on the blockchain—a permanent, unchangeable record anyone can view fifteen years later. No bank approved it. No payment processor facilitated it. No authority can reverse it.

This is what makes blockchain transactions fundamentally different from PayPal or your bank: they're not database entries controlled by companies. They're mathematical proofs, verified by thousands of computers, secured by cryptography, and permanent.

But here's what nobody tells beginners: not all blockchain transactions work the same way. Bitcoin handles transactions completely differently than Ethereum. Understanding these differences affects how much you pay, how fast your money moves, and what happens when things go wrong.

What Actually Happens When You Send Crypto

When you send cryptocurrency, you're not actually moving anything. There are no digital coins hopping from wallet to wallet. Instead, you're creating a cryptographically signed message that says "I authorize transferring these coins to this new address." Then you broadcast that message to thousands of computers, they verify your signature and check you own what you're sending, and if everything checks out, they add your transaction to the blockchain's permanent record.

The magic happens in three phases: creation, broadcasting, and confirmation.

Phase 1: Creating the Transaction

When you hit "send" in your wallet, the software constructs a transaction including the recipient's address, the amount, a transaction fee, and proof you own the funds. Then it takes your private key and creates a cryptographic signature—mathematical proof you authorized this specific transaction.

Your signature isn't like signing your name on a check. It's a mathematical relationship between your private key and the transaction data. Change even one character and the signature becomes invalid. This makes blockchain transactions tamper-proof.

The Tale of Two Models: UTXO vs Account

Bitcoin uses the UTXO model (Unspent Transaction Output). Instead of accounts with balances, Bitcoin treats every transaction as chunks of Bitcoin created by previous transactions. When you spend Bitcoin, you consume entire UTXOs as inputs and create new UTXOs as outputs.

Say Alice has 5 BTC and wants to send Bob 3 BTC. She creates a transaction that uses her entire 5 BTC UTXO as input, creates a 3 BTC UTXO for Bob, creates a 1.999 BTC UTXO back to herself as "change," and leaves 0.001 BTC as the miner's fee. It's like paying for a $3 coffee with a $5 bill—you get $2 in change, except on Bitcoin you're creating two new bills and destroying the original.

Ethereum uses an account model—much more like traditional banks. Every address has a balance, and transactions simply add or subtract from these balances. If Alice has 5 ETH and sends Bob 3 ETH, her balance decreases to 2 ETH and Bob's increases to 3 ETH. Simple and intuitive.

Why does this matter? Bitcoin's UTXO model provides better privacy since each transaction can use different addresses for change, but creates larger transactions when combining multiple UTXOs. Ethereum's account model is simpler and more efficient for smart contracts but makes transaction history easier to trace.

Phase 2: The Mempool Waiting Room

Once your transaction is signed, your wallet broadcasts it to the blockchain network. But it doesn't immediately get added to the blockchain. First, it sits in the mempool—a waiting room where unconfirmed transactions hang out until a miner or validator picks them up.

Think of the mempool as airport security during Thanksgiving. Everyone's trying to get through, but there's limited capacity. Bitcoin blocks average 2,000-3,000 transactions, Ethereum blocks handle 150-200. When the mempool is empty, your transaction sails through in the next block. When it's congested, you're competing with thousands of others for limited block space.

This is where transaction fees matter. Miners and validators prioritize transactions that pay higher fees. Set a low fee during high congestion, and your transaction might sit for hours or days. Set it too high, and you're burning money—though at least it goes through quickly.

During the NFT mania of 2021, Ethereum's mempool was consistently packed. People were paying $50, $100, sometimes over $200 in gas fees just to mint an NFT before it sold out. Bitcoin's mempool exploded to over 500,000 pending transactions in May 2023 when Ordinals took off, with fees spiking to $30+ for simple sends.

Phase 3: Confirmation and Finality

Eventually, a miner on Bitcoin or validator on Ethereum picks your transaction from the mempool, includes it in a block, and broadcasts that block to the network. Other nodes verify the block follows all the rules, and if everything checks out, they add it to their copy of the blockchain. Your transaction now has "one confirmation."

But one confirmation isn't enough for high-value transactions. Blockchains are probabilistic, not absolute. There's always a tiny chance the block containing your transaction gets "orphaned"—meaning another miner found a competing block at the same time, and the network accepted the other one instead.

This is incredibly rare, but the risk exists. That's why most services wait for multiple confirmations. Bitcoin exchanges typically require 3-6 confirmations, which takes 30-60 minutes. Ethereum exchanges usually wait 12-35 confirmations, about 3-7 minutes.

Gas Fees and the Speed Problem

Ethereum transaction fees (gas fees) are notoriously expensive—often $20-$100+ for DeFi interactions. Bitcoin fees are simple: pay per byte. Ethereum fees are based on computational complexity. Simple transfers cost 21,000 gas, complex smart contracts cost hundreds of thousands. Gas price fluctuates with demand, measured in "gwei." During high activity, your $2 transaction becomes $40.

The solution? Layer 2 networks like Arbitrum and Optimism process transactions off-chain and batch-settle them, reducing fees to $0.01-$0.50. Most everyday Ethereum activity has moved to L2s.

Why can't blockchains process transactions instantly like Visa? The blockchain trilemma: you can have decentralization, security, and scalability—pick two. Visa does 65,000 TPS because it's centralized. Bitcoin does 7 TPS because it prioritizes decentralization and security. Ethereum does 15-30 TPS. Newer chains like Solana claim thousands of TPS by sacrificing some decentralization.

Irreversibility: No Chargebacks in Crypto

Blockchain transactions are irreversible. Once confirmed, they cannot be undone by you, the recipient, or any authority. This is both a feature and a bug. Feature: prevents fraud and chargebacks. Bug: mistakes are permanent. Send to the wrong address? Gone forever.

Traditional finance has consumer protections—credit card chargebacks, bank reversals. Crypto has none because there's no central authority. This is why security matters: use hardware wallets, double-check addresses, test small amounts first.

Real-world examples: Bitcoin transactions cost $1-5, confirm in 10-60 minutes. Ethereum mainnet transfers cost $2-3 for simple sends, $10-50 for smart contracts. The same Ethereum transaction on Layer 2s costs $0.01-0.30 with near-instant confirmation.

The Future

Blockchain transaction technology is evolving. Bitcoin's Lightning Network enables instant, near-free off-chain transactions. Ethereum's roadmap moves most activity to Layer 2s. Newer chains promise thousands of TPS with sub-second finality.

But fundamental tradeoffs remain. Faster usually means more centralization. Lower fees mean less validator incentive. The question isn't whether blockchain transactions will replace traditional finance entirely—they won't. The question is what role they'll play in a hybrid system where you choose your tradeoffs: consumer protections versus censorship resistance.

Why That Pizza Transaction Matters

Laszlo's 10,000 BTC pizza purchase wasn't just a transaction—it was proof of concept. It demonstrated that blockchain transactions could move real economic value between real people for real goods. No bank needed. No payment processor taking a cut. No authority granting permission.

Fifteen years later, that transaction remains visible, verifiable, and unchangeable. Every blockchain transaction since then inherits from that first pizza transaction. They're all permanent records, secured by cryptography, verified by consensus, and controlled by whoever holds the private keys.

Understanding how these transactions actually work transforms crypto from magic internet money into something you can reason about and use effectively. Whether you're sending your first $10 in Bitcoin or building the next DeFi protocol, you're participating in Laszlo's pizza legacy: proving that peer-to-peer electronic cash actually works.

References

1. Nakamoto, S. - "Bitcoin: A Peer-to-Peer Electronic Cash System" - https://bitcoin.org/bitcoin.pdf
2. River Financial - "Bitcoin's UTXO Model" - https://river.com/learn/bitcoins-utxo-model/
3. Ethereum Foundation - "Transactions" - https://ethereum.org/en/developers/docs/transactions/
4. Ethereum Foundation - "Gas and Fees" - https://ethereum.org/en/developers/docs/gas/
5. YCharts - "Bitcoin Mempool Size" - https://ycharts.com/indicators/bitcoin_average_mempool_size
6. Vitalik Buterin - "Endgame" - https://vitalik.eth.limo/general/2021/12/06/endgame.html
7. L2Beat - "Layer 2 Scaling Solutions" - https://l2beat.com/scaling/summary
8. Mempool.space - "Bitcoin Mempool and Fees" - https://mempool.space/
9. Etherscan - "Ethereum Block Explorer" - https://etherscan.io/
10. Solana - "Network Status" - https://status.solana.com/