What Are Bitcoin Confirmations
What Bitcoin is and how it operates can be a confusing process to understand. This first-of-its-kind decentralized network has paved the way for one of the biggest technological revolutions for decades, and the core gravitating concept of blockchain seems to be only just beginning its development. The way these chains are confirmed and verified is one of the core pillars of blockchain technology; it creates the security that traders and users need whilst simultaneously creating a paid responsibility for actors known as miners.
Bitcoin confirmations are a core concept for any prospective Bitcoin trader to understand as they will help you to unearth what Bitcoin is and how this technology really operates. For that reason, we have constructed this short and easy-to-follow explanation of what Bitcoin confirmations are, how they work within the Bitcoin ecosystem and what degree of confirmations is defined as secure for the future transactions you may wish to undertake. But before that, it's important to understand what Bitcoin really is and the core building blocks that make up its mechanics.
What Is Bitcoin
Bitcoin was created in 2009 shortly after the 2008 economic recession. The seismic events of 2008 had revealed a new concern for centralized financial systems and out of this grew the first truly decentralized peer-2-peer cash system: Bitcoin. This network was supposed to be able to simply send financial transactions and the value they hold to one another without the need for any centralized authority. The Bitcoin network would inherit its infrastructure from the community of miners that ran and verified its transaction, and get its security from cryptographic encryption.
It was this cryptography element that also interested some users to see Bitcoin as a store of value, as a comparable virtual gold. Today this is how we know Bitcoin; it now sets the bar and trends for the entire cryptocurrency market with a total market capitalization of over $777 trillion. Bitcoin also famously has no leader, instead, it is a mysterious figure known as Sitoshi Nakomoto, a riddle yet to be solved by the community. You can find the Bitcoin white paper online written by Satoshi that sets out the core principle of how this technology works.
How Bitcoin Works
You can imagine the Bitcoin network as a big order book full of transactions, or a ledger. Users can send amounts of Bitcoin to other users on this ledger by using a specific address, just like with a traditional bank transaction. But where a bank transaction is sent to the centralized network of that bank to be verified Bitcoin is sent to the decentralized Bitcoin ledger. This is how funds are sent to users.
Miners are the next crucial part of this puzzle as they provide the physical infrastructure for this platform to be run on. Once they have verified the transactions and sorted them into blocks users know that the funds they are sending and receiving are secure, and this is what creates a functioning financial network. It really is more simple than you may think, at least when we talk about its process in this simplified way. The technology behind this that makes this all possible is truly amazing and has use-cases that we may not have even thought of today, as is the nature of novel technology. But it's the mining and transaction confirmations that really make the Bitcoin network possible.
What Are Bitcoin Confirmations?
To understand Bitcoin confirmations we first have to have a basic understanding of mining and how these actors (miners) help to form blocks and Bitcoin confirmations.
Mining has two key facets:
It is the process in which transactions become confirmed.
The process of new Bitcoin entering into the overall supply.
When users send transactions to one another they are then entered into an unconfirmed transactions pool to be sorted and verified by the network’s miners. This verification process is called mining and essentially comprises computers solving complex mathematical equations. You need a lot of computer power to complete these problems so miners are required to have special hardware to do so. But it's the utility within this complex problem-solving process that holds the key to Bitcoin’s success.
Essentially, once a problem is solved it means a block has been created. A block represents a collection of verified and confirmed transactions that give the network security of trade. Miners all work on these problems to create verified blocks, and once connected into a chain they form the Bitcoin ledger and its blockchain network.
Once a miner successfully creates a block they are rewarded with Bitcoin and the overall market supply is slightly increased. These rewards are halved every four years as a deflationary measure to ensure the integrity and value of the Bitcoin supply. It is designed in this way to be a direct antagonist to the current financial system.
Bitcoin confirmations are the core piece of security within this financial ecosystem. When a user signifies that they want to make a payment in Bitcoin this is sent to an unconfirmed transaction pool and miners undergo the verification process. Once this verification process is complete the block is constructed, we can describe this as one confirmation. Once this group of transactions is confirmed and grouped into a block miners then begin working on the next block. Blocks are constructed, or chained, on top of one another so every time a new block is added to the chain it becomes harder to manipulate or change an old transaction. If a new block is built on top of an older block then the community can have faith that the transactions they are built on are valid and verified.
The degree of security you enjoy depends on how many Bitcoin confirmations there have been. Also, another influencing factor can be the value the transaction represents. Manipulating blocks requires an extreme amount of computing power so it is unlikely to be undertaken for a small amount for example.
How Many Confirmations Determine a Secure Transaction?
When using Bitcoin as a peer-2-peer cash system you must be cautious that you wait for an applicable amount of Bitcoin confirmations in relation to the value you are sending. Here we look at what number of confirmations is secure for three different types of transactions.
Smaller transactions will always be the most secure on the network because they have a lower risk of being a target for manipulation. In fact, small transactions are usually recognized as secure with just one Bitcoin confirmation. This is not an exact science and discretion is advised, but overall we can summarize by saying one conformation is more than likely secure for smaller transactions.
For any medium-sized transaction, the general quota of six Bitcoin confirmations is what constitutes a secure transaction. In fact, if a transaction has six Bitcoin confirmations then it becomes 99.9% certain that it will not be canceled. Six transactions take around one hour to complete.
Multimillion Dollar Transactions
Any Bitcoin transaction with a value this big needs to be done in a controlled environment and with experts to advise you. A transaction of this size can require dozens of Bitcoin confirmations to ensure it will not be canceled so should be made with extreme care and diligence.
Bitcoin confirmations are a core part of what makes the network function so well. They help integrate miners who nurture and support the system, while simultaneously providing the security and verification financial transactions require.
How these confirmations work can be quite confusing, but it is an important aspect for traders and Bitcoin users to understand because of the degree of security it can provide. On average, we would say that six Bitcoin confirmations are what is required to make a transaction 99.9% certain not to cancel, but the more confirmations the higher the degree of security. Always make sure to consult an expert when making large value transactions.