How Does a Bitcoin Transaction Work? Inputs, Outputs and Change

Short answer: A bitcoin transaction takes amounts you received earlier (inputs) and splits them anew (outputs): one part to the recipient, the rest back to you as change. Whatever is left between inputs and outputs is the fee for the miner. Your wallet signs the whole thing with your private key, sends it to the network, and a miner writes it into a block. From that moment it is confirmed, and every further block makes it safer.

If you only hold bitcoin on an exchange, you see none of this: there is a number and a send button. As soon as you hold bitcoin in your own wallet, it pays to understand what happens behind the button. You then understand why sending 0.01 BTC sometimes costs more than sending 1 BTC, why an address you never used suddenly appears in your wallet, and why the merchant waits for confirmations.

The UTXO model: bitcoin like banknotes in a wallet

A bank account is a single number. When €100 comes in, it goes up. When €30 goes out, it goes down. Bitcoin works differently. There is no account with a balance, only individual amounts that were paid to your addresses. Experts call them UTXOs, "unspent transaction outputs": outputs of earlier transactions that have not been spent yet.

The easiest way to picture UTXOs is as banknotes in a wallet:

• Every payment to you is a separate note. If you withdrew from the exchange three times, there are three notes in your wallet, however large each one is.
• You can't tear a note. You spend it whole and get change back.
• A note can have any amount, for example 0.0734 BTC. There are no fixed denominations like €5, €10 or €50 notes.

What your wallet shows as your balance is just the sum of all notes belonging to your addresses. The blockchain itself knows no balance. It only knows transactions, and every transaction uses up old notes and creates new ones.

Inputs, outputs and change

Every transaction has two sides.

Inputs are the notes you spend. Each input points to an output of an earlier transaction, that is, to a note you received at some point. It is used up completely.

Outputs are the new notes being created. Each output has an amount in sats and a condition stating who may spend it later. Usually that is an address: only whoever holds the matching private key can spend it. What the different addresses look like is explained in Bitcoin addresses explained: bc1q, bc1p, 3 and 1.

A typical transfer has one input and two outputs: one to the recipient and one back to you. This second output is the change.

The change address

The change usually doesn't go back to the address the input came from, but to a new address in your own wallet. That's why after a transfer you sometimes see an address with a balance that you never gave to anyone. It still belongs to you: modern wallets derive all addresses from the same seed phrase, and change addresses come from a branch of their own.

The reason is privacy. If the change went back to the old address, anyone could see on the blockchain at once which output was the payment and which was the rest. With a new address this is harder to tell, though not impossible.

Several inputs in one transaction

If one note isn't enough, the wallet takes several. If you want to send 0.08 BTC and have notes of 0.05 and 0.04 BTC, both become inputs:

Each input makes the transaction larger, because a signature of its own is sent along for each one. That's why the transfer with two inputs costs more in fees than the one with one input, even though the amount plays no role. If you collect many small withdrawals in your wallet, you pay for it later when spending. How to plan for that is covered in the article on bitcoin transaction fees and the mempool.

The fee is the difference

A bitcoin transaction has no "fee" field. There are only inputs and outputs. Whatever the inputs hold beyond the outputs may be kept by the miner who writes the transaction into a block.

This leads to an expensive trap: if you build a transaction by hand and forget the change output, you give the whole rest to the miner. Normal wallets work out the change themselves. Good wallets also warn you when the fee is unusually high compared with the amount.

If the change is so small that an output of its own would cost more in fees than it is worth, many wallets leave it out and add the small rest to the fee. Nodes don't relay outputs of a few hundred sats anyway; they count as "dust".

Signing: who may spend a note?

Every output is tied to a condition, usually: "Whoever provides a valid signature for the key behind this address may spend it." When you send, your wallet creates a digital signature for each input with the matching private key.

The signature proves two things at once: you hold the key, and you agree to exactly this transaction. If anyone changes even one sat of the amount or the recipient on the way, the signature no longer fits, and all nodes reject the transaction. Nobody sees the private key itself; it never leaves your wallet. With a hardware wallet it doesn't even leave the device.

Sending, mempool and confirmation

1. Broadcast

Your wallet sends the finished, signed transaction to one or more nodes in the bitcoin network. This is called the broadcast. Each node checks it itself: do the inputs still exist? Are the signatures valid? Are the outputs no larger than the inputs? Is the fee high enough for its rules? If so, it passes the transaction on to its neighbours. Within a few seconds practically every node knows it.

2. Mempool

Until a miner picks it up, the transaction waits in the mempool, the waiting area of every node. There it is known, but not yet final. Your wallet shows it as "unconfirmed" or "pending". Miners pick the transactions with the highest fee rate from the mempool first. How long you wait therefore depends on your fee and on how busy the network is. How to choose the right fee and speed up a stuck transaction is covered in the article on fees and the mempool.

3. First confirmation

A miner bundles transactions into a block and uses proof of work to search for a valid solution for it. On average this succeeds every 10 minutes. If your transaction is in that block, it has 1 confirmation. Now your old notes are used up, and the recipient has a new note they can spend themselves.

4. Further confirmations

Every new block added to the chain afterwards counts as another confirmation. After 6 blocks your transaction has 6 confirmations. That takes about an hour on average, but it can also be 30 or 90 minutes, because blocks are found at random.

You can watch new blocks being created, and how many transactions they carry, live here:

Why 6 confirmations?

As long as a transaction only sits in the mempool, the sender can try to send the same notes again to themselves, with a higher fee. If a miner takes the second version, the first becomes invalid. This is called a double spend. That's why an unconfirmed payment is only a promise.

Once the transaction is in a block, an attacker would have to replace that block and every block found after it with a longer chain of their own. That takes computing power, and each further block makes it harder. Satoshi Nakamoto worked this out in the white paper: with 10% of the total computing power, an attacker has a chance of about 0.02% of reversing a payment after 6 confirmations. After 1 confirmation it is still about 20%.

So the number 6 is not a rule of the protocol but a proven convention. It dates from the early days: Satoshi's original software already showed payments with fewer than 6 confirmations as unconfirmed. You may decide how many confirmations to wait for based on the amount:

For you as the recipient this means: with large amounts, hand over goods or services only once the transaction is sufficiently confirmed. A screenshot or a TXID from the mempool isn't enough for that.

What this means for you as a saver

• Fewer, larger withdrawals. Every note you bring into your wallet becomes an input of its own later and costs fees when spent. One large note is cheaper to spend than twenty small ones.
• The change belongs to you. If an unknown address with a balance shows up in your wallet after a transfer, that's your change. It is secured by the same seed phrase.
• Choose the fee deliberately. If you're in no hurry, a low fee rate is enough. Your wallet shows you the fee in sats before sending; check it before you sign.
• Wait for confirmation. A deposit is only available once the recipient has seen enough confirmations. Allow some time with exchanges or merchants.
• Check the address. Nobody can take back a confirmed transaction. Compare the recipient address before sending, ideally on the screen of your hardware wallet.