Ever wanted to know the intricacies of blockchain transactions? We rarely get to hear that. Most often, enthusiasts engage other topics. They talk about token launch, trading, and market cap.
This article focuses on the technical stuff for a change. It explores the concept of blockchain transactions. Precisely, we will consider its process and comparative advantage.
Ready to jump in?
The Idea Behind Blockchain Transactions
The Evolution of Transactions: From Barter to Blockchain
We grew up hearing stories of trade by barter. Parents and grandparents of Gen Z particularly share lots of these. They witnessed and participated in this unique form of transaction.
From then, transactions became dependent on a medium of exchange. People used cowries, metals such as copper coins, and finally, paper cash.
This last invention was found cheaper to source. Moreover, it was easier to carry around compared to others. It quickly became the choice for everyday transactions, overshadowing coins.
However, paper money has its downsides. This is in the form of counterfeits. Governments and financial institutions struggle against the production of counterfeit money. These fakes hurt the economy in more ways than one.
The Rise of Bank Transactions
A new thing came up when digital transactions were invented. Paper money was not exactly replaced. Instead, it was being represented digitally. The money you have at hand could be changed into an abstract form and back.
This abstract form of money was more easily transferable. It also presented a higher level of safety to owners. Being so, it was readily accepted.
You could say that digital money brought a lot of solutions. However, some new problems emerged. An example is double-spend.
Enter Blockchain Transactions
Guess what the solution to double-spending was? Blockchain transactions. Blockchain brought about a revolutionary type of record.
The technology ensures that each transaction is unique and cannot be duplicated. This proves to be a robust solution for the issue of double-spend.
By decentralizing the verification process, blockchain adds layers of security and trust, making it a significant advancement in the evolution of transactions.
What is a Blockchain Transaction?
A blockchain transaction is basically a transfer of ownership. It involves digital assets, which is composed of data.
Here’s an explanation of that.
Data is the building block of digital assets. These digital assets serve as a representation of money. They are only useful within the blockchain ecosystem.
But blockchain itself is a database. Think of it as a humongous storage for digital assets. So, every user within the blockchain system is issued an address.
The idea here is that all assets within your storage address are yours. By sending them to another storage address, you are directly transferring ownership. The owner of the new address therefore has all rights over the property.
How Blockchain Transactions Work
Step 1 – Transaction Recording
A blockchain transaction involves the transfer of digital or physical assets. This transaction happens exclusively on a blockchain network. Everything is recorded in the form of a block.
Blocks ensure that no one party can make a false claim. They contain full transaction details. These include:
Both parties involved,
How the transaction was initiated,
Time of the transaction,
Location of the transaction,
Reasons for the transaction,
Value of exchange, and
Any pre-transaction conditions.
Step 2 – Consensus on Block
The blocks on a blockchain go through vetting. They are scrutinized by as many nodes as possible. This ensures that the transaction is valid. Moreover, it confirms that its details are accurate.
Other rules of agreement are also considered. These are stipulated by the network long before any transaction takes place. Passing the rules, validity, and accuracy checks are crucial for any block to be accepted.
Step 3 – Linking to Other Blocks
It takes the majority of nodes on a blockchain to accept or reject a block. If the consensus is positive, the block is added to the digital ledger.
In addition to this, the network formulates a block header. This value must match a nonce and bear a specified level of difficulty. It is then that a hash is created, linking the new block to all the others.
Here’s the interesting part. Altering data on any block changes its hash value. This gives away the fact that some manipulation has taken place. Besides, the links between blocks increase the validity of older data.
This altogether makes the blockchain a formidable form of storage.
Step 4 – Network-wide Sharing
The final piece of a blockchain transaction is distribution. The latest copy of the ledger is automatically sent to all network nodes.
Why Blockchain Transactions are a Better Option
Blockchain is a unique system. It may have taken off from traditional finance, but it is much different from it. The structure, its users, and the protocols they apply all stand out. Here’s why this is so.
Transactions these days are a result of two things. One is the activity of a user or users. The other is the activity of a system(s) that the transaction relies on. Both components must work as designed for a ‘handshake’ to occur.
A blockchain transaction works just the same. However, there are very outstanding aspects. They include:
Consensus Mechanism:
A consensus mechanism is an agreement-based system. One with hundreds or hundreds of thousands of entries.
Bitcoin network users set up sophisticated mining systems. These all work automatically. They arrange transactions into a block and compete to find a hash.
Once a suitable hash is found, they crosscheck its correctness. Mining systems then validate hash-related transactions against double spend. A majority of the computers have to agree to a decision.
This is what gets a transaction approved and its block added to an existing ‘chain’ of blocks.
Every consensus mechanism operates in one of several versions. Proof of Work (PoW), Proof of Stake (PoS), Delegated Proof of Stake (DPoS), or Practical Byzantine Fault Tolerance (PBFT).
Transparency:
Every user on a blockchain has access to all transaction information. As a result, the network is fully transparent. You can imagine how this reduces data alteration and increases reliability.
The same cannot be said of traditional digital transactions.
In such systems, transaction records are the property of a backbone institution. This easily allows internal manipulation of records and transaction data. For instance, an IT administrator may use back-end user privileges to inflate an account balance.
Since transaction records are not public, this might remain undiscovered. It often takes an audit or investigation to blow it open.
Immutability:
With blockchain, it’s impossible to alter transaction records.
Let’s say one ignores the transparency of the network. They still won’t be able to change anything. This is because blocks containing data are ‘chained’ to each other.
Attempting to alter a previous record changes its hash. This creates a domino effect across the entire chain of records. The hash link will be broken and the system will practically collapse.
Besides, why change a record when others have an original copy of it?
We’ve mentioned that blockchain records are always network-broadcasted. That gives countless users access to it. Moreover, the majority of nodes must agree before any changes can be implemented.
In essence, altering blockchain data requires control over a majority of the nodes. This is technically impossible for large networks with high hashing/staking power.
Conclusion
A striking difference exists between traditional finance and blockchain transactions.
With the first, transaction details are private. Records are also open to single-point manipulation. The other presents the very opposite.
The publicity and restrictions of blockchain enhance its overall security. In addition, the lack of intermediaries makes blockchain transfers faster. The Solana blockchain, for example, appears capable of 65,000 transactions per second. Impressive, right?