Satoshi Nakamoto, the creator of Bitcoin, published an article “Bitcoin: A Peer-to-Peer Electronic Cash System” in 2008 and introduced a fundamentally new way of exchanging money. From that moment on, the need for a third party, like a bank or other financial institution, simply disappeared. In fact, this has become a new financial revolution.
Today we will talk how blockchain transactions are conducted from a technical point of view, how reliable they are, what features they have and how they can be tracked.
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- How does blockchain work in general?
- How are transactions organized?
- What features do blockchain transactions have?
- How to test a blockchain transaction?
- The reasons why transactions can freeze
1. How does blockchain work in general?
We should start with the fact that Bitcoin is the first ever completely digital currency. Unlike electronic money, it does not exist even as a digital file. It is a huge stream of data about all the transactions that have ever been conducted. Blockchain is presented in the form of a giant accounting book, which is available to all network participants.
Each transaction is not stored separately, the information is placed in the blocks. Different networks have different block sizes, for example, until recently one block in the network of Bitcoin “weighed” 1 MB. But the BitMEX report says that after the introduction of the new SegWit protocol, the average size of one block has increased to 1.06 MB, and some have reached 2 MB.
In order to obtain a new block, there are different mechanisms for consensus. The most widespread ones are:
- PoW (proof of work). Here, the miners need to solve a complex cryptographic equation. After that, a new block is added, for which the system rewards the finder with a certain number of coins.
- PoS (proof of stake). This mechanism involves adding a new block to a user who has a certain number of coins. The more coins a user has, the more likely he/she will generate a new block.
Each subsequent block stores information about the previous one. Another important feature of blockchain is its decentralization, since information is simultaneously stored by all participants of the system (miners, master nodes). Thus, after the block is added to blockchain, it can not be changed or deleted.
2. How are blockchain transactions organized?
As it was mentioned above, transactions that are carried out in the network of blockchain do not require the participation of a third party. Let’s see how this happens in practice.
Let’s say you want to transfer 0.5 BTC to another person. Before the system recalculates the wallets’ balances (not transfer, namely, the recalculation), this transaction will fall into the so-called Memory Pool – the operational memory of all the miners connected to the network. After this, the blockchain transaction must be confirmed by at least 6 different miners. They (miners) should check the correctness of the transaction:
- the amount of commission for each byte of information;
- the physical possibility of adding a transaction to an existing block (if there is too little space left in the block, the transaction is transferred to the next one that still needs to be found).
After these actions, the data on the operation are permanently entered in the blockchain, and the coins are credited to the wallet of the recipient.
3. What features do blockchain transactions have?
Based on the abovementioned information, it is worth highlighting a number of features that are typical for blockchain transactions:
- Irreversibility. Since the blockchain system is a decentralized system, it is not possible to affect the data that has already been entered in the register. Therefore, it is impossible to mark the already completed operation.
- Lack of regulation. Due to the absence of the center from which the system is managed, it is impossible to completely prohibit and shut down cryptocurrencies. To do this, you must destroy all the computers of miners.
- Anonymity. Each blockchain has its own level of anonymity, but in any case, even in pseudonymous anonymous networks, such as Bitcoin, for example, the names and surnames of users are never used for transactions.
- Reliability. The network algorithm fixes the balance of all the wallets at the same time, but only a user who has a private key can make a transaction from a particular wallet. Subject to observance of elementary security rules, it is not possible to crack the wallet. You can lose your coins only because of your own fault. For example, if you send them to the wrong wallet, infect your computer or smartphone with a virus or somehow let scammers get private keys.
4. How to test a blockchain transaction?
Transactions in the Bitcoin network can be tracked on the site www.blockchain.info. In order to see information about a particular transaction, you need to go to this site and enter a unique transaction hash in the search bar. Then the system displays the actual information.
In this service you can also see information about a particular wallet:
- transactions in the history (by dates);
- the total number of coins that passed through the wallet;
- the list of all addresses which there have ever been interactions with (incoming or outgoing operations);
- current balance.
5. The reasons why transactions can freeze
The main problem of Bitcoin and many other coins is the speed of blockchain transactions. As for BTC, this indicator reaches a mark of 7 operations per second. Previously, when the total number of users was small, this was enough. But now, with the growing popularity of the industry, the “line” for the transaction can turn into tens and even hundreds of thousands of unconfirmed operations. You can view the current list, which is updated in real time, on this service.
Some transactions may even freeze in the Memory Pool for a long period of time (up to 72 hours). What factors affect the speed of transaction confirmation?
- Total pool load.
- A very small commission. Miners confirm transactions with a larger commission in the first place.
- The transaction weight is too big, and it simply does not fit into the almost completely filled block. In this case, it will be automatically transferred to the next one.
Cryptocurrencies have made a real revolution in the financial sector, on a scale that we still can not comprehend. The number of blockchain transactions is growing every year. In order for everyone to be able to use Bitcoin at the same time (like Visa, for example), it is necessary to solve the problem with bandwidth.
Blockchain transactions have both their advantages: the absence of intermediaries, small commissions, anonymity, security, and their shortcomings: irreversibility, low throughput.
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