What is Internal Transaction?

An internal transaction, or a message, is a byproduct of a smart contract mechanism that is caused by an external transaction. An external transaction is transmitted from an Ethereum (ETH) account into a smart contract.

Smart contracts are blockchain-based protocols used to verify contracts on the Ethereum blockchain. They are developed to be self-executing and business-automated and act without the involvement of any third party or central authority.

In the Ethereum ecosystem, smart contracts act like computer programs that manage the ETH balance and perform crypto transactions. Transactions completed via smart contracts are traceable on the blockchain and cannot be reversed. They are sent to Ethereum accounts known as EOAs – externally owned accounts. Most EOAs are privately owned.

Smart contract interactions with Ethereum accounts automatically trigger preset procedures which cause byproducts known as internal transactions. A single interaction between an EOA and a smart contract can sometimes trigger hundreds of internal transactions. Such transactions are value transfers that take place during a token transfer or a smart contract activation.

Smart contracts are required for certain Ether and token transactions. Such transactions show up on the main ETH transaction history as internal transactions and are not publicly visible. Transactions act as an event that alters the state of the Ethereum chain, as they write new data into the blocks rather than processing it.

There are various triggers to a state change on the Ethereum blockchain. However, transactions are the most common. Transaction information is generally transparent, i.e., visible to the blockchain network, and developers can use address activity notifications to track crypto transfers and inform users about the executed transactions.

Unlike regular transactions, internal ones do not come with a cryptographic signature and are stored off-chain. Attempts to store internal transactions on-chain require more gas and are rarely executed. Internal transactions are used exclusively to transfer Ether, which has a direct effect on the balance of the wallet address. 

There is little information on internal transactions as they occur. Therefore, users may be unaware that their wallet or smart contract was involved in an internal transaction.

The process of tracing internal transactions is slow and CPU-intensive. It requires a lot of energy from the network nodes, which can lead to some of them breaking and impacting the overall node data.

The nodes also restrict the tracing process to a limited number of blocks, usually around 30 minutes worth of blocks. This means that users that wish to trace an internal transaction must act fast to collect relevant information about the internal transaction in question.

The traced results can require a massive amount of storage space, which complicates the retrieval process. Given the amount of time, processing power, and nodes required for the procedure, tracing an internal transaction is only possible for a limited number of blockchain users.