The easiest way to see how cryptocurrency works is to follow one transaction all the way through, from the moment you tap Send to the moment the recipient sees the money. In this lesson, we'll cover why you need keys and addresses, who charges fees and what for, why a transaction can't be reversed, and where new coins come from.
- Your coins aren't stored in your wallet: the wallet holds keys, and the balance lives on the blockchain.
- A transaction is signed with your private key and broadcast to the network, where thousands of nodes verify it.
- Miners or validators add transactions to blocks and earn fees and rewards for doing so.
- A confirmed transaction can't be reversed, so check the address and network before you send.
Keys, addresses and wallets: what you actually own
A lot of beginners picture crypto sitting in a wallet the way cash sits in a billfold. That's not how it works. All balances are recorded on the blockchain, a shared ledger stored on computers all over the world. Your wallet only holds the keys that prove you have the right to control certain entries in that ledger. That's why you can open the same balance in different apps: they're all just reading data from the network.
There are two keys. The private key is a long secret number you use to sign transactions. The public key is derived from the private key, and your address is derived from the public key. The address is a string that works like an account number, and you can safely give it to anyone. You can't work backwards from an address to the private key, and the security of the whole system rests on that.
When you create a wallet, it shows you a seed phrase of 12 or 24 words. That phrase is the master source the wallet uses to generate all of your private keys. Anyone who knows those words owns your coins, no matter where in the world they are. Choosing and setting up a wallet is covered in the lesson on how to create a crypto wallet.
Exchange support, wallet developers and chat "helpers" will never ask for your seed phrase. If someone asks for it, it's a scam. No exceptions.
What happens when you hit Send
Let's take an example: Anna sends Bob 0.01 BTC. Her wallet puts together a message with the details: where the coins come from, where they go, how much, and what fee Anna is willing to pay. Then the wallet signs that message with Anna's private key. Nobody can forge the signature without the key, but anyone can verify it with her public key.
The signed transaction is broadcast to the network. Every node that receives it checks the signature, makes sure Anna actually has those coins, and passes the transaction on. Within seconds, the whole network knows about it, but it isn't on the blockchain yet. For now, it waits in a queue of unconfirmed transactions. If the signature doesn't check out or the coins have already been spent, nodes simply drop the transaction and it goes no further.
Miners or validators pick transactions from that queue to build a new block. Once the network accepts a block that includes Anna's transaction, the transaction gets its first confirmation. Each new block added on top counts as one more confirmation, and the record gets harder and harder to reverse.
- The wallet builds the transaction: recipient address, amount, fee.
- The transaction is signed with the sender's private key.
- Network nodes check the signature and balance and relay the transaction to each other.
- The transaction waits in the queue until it's included in a block.
- The block is added to the chain and the transaction starts collecting confirmations.
- The recipient sees the coins at their address.
The network's queue of unconfirmed transactions. When lots of people are trying to send coins at the same time, the mempool gets congested, and transactions that pay higher fees make it into blocks first.
Mining and staking: who confirms transactions
There's no central server in a blockchain network, so something has to decide who writes the next block. That's the job of a consensus mechanism. Without one, every node would keep its own version of history, and the shared balances would fall apart. The two most common mechanisms are proof of work and proof of stake.
Bitcoin runs on proof of work. Miners use specialized hardware to run through numbers until they find one that fits, and whoever finds it first earns the right to write the block. To rewrite history, an attacker would have to redo all that work faster than the rest of the network, which would cost an enormous amount of money.
Ethereum switched to proof of stake in 2022. Validators lock up their coins as collateral, and the network picks who gets to propose the next block. If a validator cheats, part of that collateral is destroyed. This setup uses a tiny fraction of the electricity, and its security comes down to simple math: cheating costs more than playing fair.
| Proof of work | Proof of stake | |
|---|---|---|
| Who writes blocks | Miners with computing hardware | Validators who have locked up coins |
| What a dishonest participant risks | The cost of hardware and electricity | Their collateral |
| Energy use | High | Low |
| Example networks | Bitcoin, Litecoin | Ethereum, Solana, Cardano |
Where new coins come from and why you pay fees
Whoever writes a block gets a reward: brand-new coins issued by the protocol, plus the fees from every transaction in that block. That's where new bitcoins come from. The issuance rules are built into the code: total supply is capped at 21 million, and the block reward is cut in half roughly every four years.
Other networks play by their own rules. Ethereum has no hard cap on supply, but part of every fee is burned, which means it's taken out of circulation for good. Before you buy any coin, it's worth finding out how new units are issued and how many more could appear in the future.
A fee is what you pay for space in a block. Blocks have a size limit, so transactions get more expensive at peak times. On Bitcoin, the fee depends on how much data the transaction takes up, not on the amount: sending a million dollars can cost the same as sending a hundred. On Ethereum, you pay for computation, so swapping tokens through a smart contract costs more than a plain ETH transfer. Before you send, most wallets let you pick a speed (slow, normal or fast), and that choice sets the fee.
Coins, tokens and why a transaction can't be undone
Don't mix up coins and tokens. A coin is the native currency of its own blockchain, like BTC on Bitcoin or ETH on Ethereum, and it's what you pay network fees in. A token is issued on top of someone else's network through a smart contract. USDT, for example, exists on several networks: on Ethereum you pay the transfer fee in ETH, and on TRON you pay it in TRX. So before you send tokens, make sure the address holds a little of the network's native coin to cover the fee.
That leads to a common mistake: sending a token over one network to an address that expects it on a different one. The money usually doesn't vanish from the blockchain, but getting it back can be very hard or flat-out impossible. So when you withdraw from an exchange, take a few seconds to check the network as well as the address.
Once a transaction is confirmed, there's no taking it back. There's no bank on the network that will reverse it because you complained. That protects you from anyone meddling with your money, but it also means a mistake or a scam can't be undone. How many confirmations are enough is up to the recipient: exchanges usually wait for several blocks before they credit a deposit.
Before you send a large amount to a new address, send a small test transaction and wait for it to arrive. One extra fee is a lot cheaper than a mistake in the address or the network.
How to check a transaction yourself
The blockchain is public, so you can trace any transaction yourself, no middlemen needed. That's what block explorers are for: websites that show what's happening on the network in a readable format. Bitcoin and Ethereum each have several, and every major network has at least one of its own.
When an exchange or wallet sends coins, you get a transaction ID, also called a hash or TxID. Paste it into an explorer's search bar and you'll see the sender and recipient addresses, the amount, the fee, the block number and the number of confirmations. If someone tells you the money has been sent, but the transaction isn't in the mempool or in any block, it hasn't actually been sent yet, or you're looking on the wrong network.
This skill will come in handy more than once: in a dispute with exchange support, when you're checking an incoming payment, or just to understand what's happening with your money. You'll learn more about reading blockchain data in the lesson on on-chain analysis.
- Copy the transaction ID from the transaction history in your wallet or on the exchange.
- Open a block explorer for the exact network the transaction was sent on.
- Check the recipient address, the amount and the status: confirmed or still waiting in the mempool.
- Look at the number of confirmations and compare it with what the recipient requires.
Open the Bitcoin block explorer mempool.space, go to any recent block and pick one transaction from it. Find which addresses the coins came from and went to, how much was paid in fees and how many confirmations the transaction has. Come back to the page in half an hour: there will be more confirmations, which means new blocks have been built on top of yours.
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FAQ
Can a crypto transaction be reversed?
No, not once it's confirmed: there's no middleman on the network who could roll it back. While a transaction is still waiting in the mempool, some wallets let you replace it with a new one that pays a higher fee, but don't count on that.
Why is my transaction taking so long?
Most likely you set a low fee while the network was busy, and your transaction is stuck in the queue. Another possibility is that the recipient, such as an exchange, waits for several confirmations before crediting the funds.
What happens if I lose the phone with my wallet on it?
Your coins live on the blockchain, not on your phone, so if you've written down your seed phrase, you can restore the wallet on a new device. Without the seed phrase, there's no way to get back into a self-custody wallet.
Are crypto transactions anonymous?
On most networks, no. Addresses don't have names attached, but the entire transaction history is public. Once an address is linked to an exchange account where you passed identity verification, tracing your transactions is just a matter of routine.
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