Ethereum Transactions – How do They Work?

Ethereum is currently the second most popular form of cryptocurrency, second only to Bitcoin in terms of adoption and investment. How does this alternative to Bitcoin work, and what is going on under the hood when you make a transaction?

Like many other cryptocurrencies, Ethereum borrows from the popular Bitcoin protocol, and its blockchain design has some similarities. One of the biggest things that sets Ethereum apart from the pack is the fact that it has been tweaked to support not only money-style transactions but other applications as well.

The Basics of a Transaction

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Like Bitcoin, Ethereum transactions require addresses and private keys. The public addresses are stored and are transactions to and from them are visible for anyone to see. The private keys are used to unlock these addresses to make a transaction. To view outgoing and incoming transactions from your Ethereum account, you can use etherscan.

Ethereum transactions can be sent in denominations as low as 18 decimal places; you don’t have send a full 1 ETH for a transaction to be valid. The ability to send small transactions is useful for Smart Contacts which require micropayments as a part of their functionality.

Transaction Components

In each Ethereum transaction, the following come into to play:

  • Input Address
  • Amount
  • Gas price
  • Gas limit
  • Output Address
  • Private Key

The input address is the address which the transaction will be sent from, the amount is the amount in ETH that will be sent, the output address is the receiving address, and the private key is used by the input address owner to sign the transaction.

The gas limit and gas price are used to calculate the fee which is given to the miner who validates your transaction. Your wallet or client should adjust the values of these for you automatically. However, it’s good also to know the following:

  • The higher the gas price, the quicker your transaction will be mined and sent
  • If you are not in a hurry, you can set a low gas price and pay very little for your transaction
  • The gas limit is the total amount of “processing power” you are willing to let your transaction use. This limit is more useful for ERC20 transfers and smart contracts (discussed later) and can help put an end to a faulty transaction which would otherwise keep eating up gas.
  • The total fee = Gas Limit * Gas Price

When an Ethereum transaction is sent it will be verified by miners and once validated, it will be confirmed. Confirmations on Ethereum usually take around 30 seconds, but this can vary depending on the gas price used in the transaction.

Advanced Transactions – Contracts

If you are planning on sending an ERC20 token on the Ethereum blockchain, the transaction will behave similar to an ETH transaction in your client or wallet; you will just need to additionally select the name of the token you wish to transfer. The process behind the scenes will be slightly different.

ERC20 tokens run on smart contracts. These contracts typically require more computational power (gas) to function. The gas limit will likely be more as it will be interacting with a contract.

Summary

The process of making an Ethereum transaction may seem slightly more complicated than a Bitcoin transaction. However, most of the more complex requirements are handled for you, within your wallet. Making a transaction is very simple once you know what to do. Remember to secure your cryptocurrency by keeping your private keys safe and double check the receiving address when making a transaction and you’ll be covered.

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