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How Do ETH Transactions Work? 3 Types of Transactions

By Brian Nibley · November 03, 2021 · 4 minute read

We’re here to help! First and foremost, SoFi Learn strives to be a beneficial resource to you as you navigate your financial journey. Read more We develop content that covers a variety of financial topics. Sometimes, that content may include information about products, features, or services that SoFi does not provide. We aim to break down complicated concepts, loop you in on the latest trends, and keep you up-to-date on the stuff you can use to help get your money right. Read less

How Do ETH Transactions Work? 3 Types of Transactions

When most people think of a crypto transaction, they think of the simplest type: a token transfer, in which one wallet sends coins to another wallet. On Ethereum, users can send ETH to each other in this manner. These transactions function in the same way as those on Bitcoin or other networks do.

But thanks to its smart contract capability, Ethereum has two additional types of transactions that can be performed on its network. These transactions involve deploying a smart contract, and interacting with contracts that have already been deployed.

What Is an Ethereum Transaction?

Ethereum transactions are like instructions that accounts give to the network. When an account sends a transaction, the state of the Ethereum network will be updated accordingly.

The simplest type of transaction is a token transfer, which involves transferring ETH from one account to another. Smart contracts also function through the use of Ether transactions. Each time a smart contract gets deployed onto the network, it must be done with a transaction. And each time someone interacts with a smart contract, this action also takes place through an Ethereum transaction.

Before we dive deep into each type of Ethereum transaction, here’s an overview of how ETH transactions work.

How Do ETH Transactions Work?

A transaction alters the state of the Ethereum Virtual Machine, and as such must be broadcast to the entire network. Nodes broadcast the request for a transaction to be carried out by the EVM. Once that happens, miners initiate the transaction and propagate the change in state to all the other nodes.

A transaction fee paid to miners must be included for the transaction to be mined and become valid. On Ethereum, transaction fees are called Gas.

What Are Gas Fees?

The term “Gas” is used to describe a unit of measurement for the amount of computational power needed for performing tasks on the Ethereum network. Because every Ethereum transaction requires computational power, transactions come with a cost. Gas is the fee needed to conduct an Ethereum transaction.

Gas fees must be paid in ether (ETH), the native currency of Ethereum. ETH Gas prices are denominated in a unit referred to as gwei, which is a term assigned to an amount of ETH equal to 0.000000001 ETH.

Recommended: How to Buy Ethereum (ETH)

What Information Is Included in an Ethereum Transaction?

While an Ethereum transaction looks relatively simple on the user end, there is quite a lot of information involved. A single transaction contains the following:

•   Recipient: This is the address that will receive the transaction. For externally-owned accounts, the transaction will involve a transfer of value. For contract accounts, the transaction will result in the contract’s code being executed.

•   Signature: This identifies the sender. The signature is generated when the transaction is signed by the sender’s private key.

•   Value: The amount of ETH that will be transferred between the sender and recipient

•   Data: An optional field to include any additional data (such as the bytecode for a smart contract)

•   Gas Limit: The maximum number of Gas units that the transaction will be allowed to consume

•   Max Priority Fee Per Gas: The amount of gas intended to serve as a tip to the miner who processes the transaction

•   Max Fee Per Gas: The max Gas fee a user is willing to pay for the transaction to be processed

Types of ETH Transactions

Whereas blockchain networks can only transfer value, Ethereum can transfer value as well as handle “normal” smart contract transactions as well as internal transactions.

All Ethereum transactions include each piece of information listed in the section about what information is included in transactions. Both the information included in the data field and where the transaction is sent to differentiate one type of transaction from another.

Token Transfer

A token transfer is the simplest Ethereum transaction type. It involves one ETH account sending ETH to another. When someone sends ETH from their crypto wallet to a friend’s crypto wallet, a token transfer has taken place.

Normal Transaction

A normal Ethereum transaction deploys a smart contract on the Ethereum network. A smart contract is compiled into what’s known as bytecode and then deployed onto the network through a transaction.

In this type of transaction, the “to” field is empty, since no individual entity like a user’s wallet will be receiving the transaction. Instead, the “data” field includes the bytecode of the contract to be deployed.

Internal Transaction

An internal Ethereum transaction is one that executes a function on an existing smart contract. The main difference between this type of transaction and the others is that the “data” field contains a piece of code called a function selector. The account sending the transaction is known as a function executor, and the transaction gets sent to that of the smart contract account.

Recommended: Guide to Setting Up an Ethereum Wallet in 2021

ETH Transaction Life Cycle

After a transaction is submitted, a series of events takes place:

1.    A transaction hash gets cryptographically generated.

2.    The transaction is broadcast out to the network in a pool of numerous other transactions.

3.    A miner selects the transaction and includes it in the next block to verify the transaction and declare it “successful.”

4.    The transaction receives “confirmations.” Each confirmation equals one new block created since the block that the transaction was a part of. The more confirmations, the more certain it is that the transaction will be properly processed by the network.

Sometimes recent blocks can get re-organized, which can make it appear as though the transaction wasn’t successful. But the transaction could just wind up being included in a different block. The likelihood of this happening decreases with each confirmation.

The Takeaway

Token transfers are one type of Ethereum transaction that work just like any other crypto transaction. Users can send each other coins over the blockchain using their Ethereum transfer ID without the need for any third-party intermediary.

The other types of Ethereum transactions could look very different from a user’s perspective, as it might not even be obvious that any transaction is happening. Interacting with smart contracts can take many different forms depending on the application. But under the hood, everything is being powered by an ETH transaction of some kind. The main thing that differentiates these transactions is the type of information contained within.

SoFi Invest® gives investors the tools they need to trade Ethereum online along with dozens of other crypto including Bitcoin, Litecoin, Cardano, Dogecoin, Solana, and Enjin Coin.

Find out how to get started with SoFi Invest.

Photo credit: iStock/MundusImages


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