How crypto works
How a crypto transfer actually works, step by step
English version for the United States.
Most losses in cryptocurrency happen because the sender does not know which step is reversible and which is not. This article follows a single transfer from the moment the amount is typed to the moment it is final, and names the point after which nobody can help.
01The key, not the coin
A wallet does not hold coins. It holds a private key, and the key produces signatures. The balance lives on the network, and the key is the only thing that can authorize moving it.
This is why a wallet can be restored on a new phone from a recovery phrase and why nobody can restore it without one. The phrase is a compact form of the key, and it is the whole asset. Anyone reading it holds the funds, and losing it loses them permanently.
02The address and the one character that matters
An address is where the funds go. It is derived from a key that somebody else controls, and the network does not check whether that somebody is who you meant.
Address substitution is the most common single cause of loss in ordinary transfers. Malware replaces the address in the clipboard, a support impersonator sends a corrected one, a screenshot from a chat carries a lookalike. Checking the first and last characters is not enough, because generated lookalikes match exactly there. The address is either copied from the system of record or verified in full.
| Stage | Still fixable | What to do |
|---|---|---|
| Amount and address typed | Yes | Verify the address in full against the system of record |
| Signed but not broadcast | Yes | Discard the transaction |
| Broadcast, waiting in the queue | Sometimes | Replace by fee where the wallet supports it |
| Included in a block | No | Nothing returns the funds |
| Confirmed and final | No | Preserve evidence, report, stop further loss |
03The network, and why the fee is not a formality
A transaction enters a queue and is included in a block by whoever builds it. The fee is a bid for that inclusion. Underpaying does not lose the money, it leaves the transfer waiting.
The network also has to match. Sending an asset on one network to an address that exists on another is a separate and common way to lose funds, and it is not reversible by the exchange unless it happens to control both sides.
04Confirmations and finality
A transfer is not complete when it is broadcast. It is complete when enough blocks have been built on top of it that reversing it is no longer practical. Exchanges wait for this before crediting, which is why a deposit can be visible on the network and absent from the balance.
After finality there is no recall, no chargeback and no support decision that returns the funds. This is the property that separates a transfer in cryptocurrency from a card payment, and it is the reason every check has to happen before sending rather than after.
05Questions and answers
Can a crypto transfer be canceled?
Once a transaction is included in a block it cannot be canceled. While it is still waiting in the queue some wallets allow it to be replaced with a higher fee, which can supersede it. After confirmation nothing returns the funds.
What happens if I send to the wrong network?
The funds move on the network you selected, to an address that may have no owner there. Recovery is possible only when a single custodian controls both sides, and it is a favor rather than a right.
Why is my deposit visible on the network but not in my exchange balance?
The exchange waits for a set number of confirmations before crediting. Until that number is reached the transfer exists on the network and not in the account.
Written by Ilia Zavialov, digital security consultant. Profile of Ilia Zavialov