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1.3 Working Mechanisms Of Blockchain Transactions

How does a Transaction on Blockchain Work?

Blockchain mechanisms are complex, the following gives a brief overview of transaction processing on blockchains. Start by watching this blockchain demo.

Start by watching this blockchain demo.

You can also try out the blockchain demo tool yourself. To do so, click here.

Record the Transaction

A blockchain transaction shows the movement of physical or digital assets from one party to another in the blockchain network. It is recorded in a data block and includes details such as (e.g., Who was involved in the transaction? When did the transaction occur? How much of the asset was exchanged?).

Figure 3: Sample Bitcoin transaction (Source: Mempool Space, accessed on 27.10.2022)

As indicated in the figure, the transaction ID is the unique identifier used to track the transaction, all transactions are traceable through block explorer websites. The input address indicates who the sending address(es) of the funds is/ are, the output address is the funds receiving addresses. In this case, there is one external receiving address and the input

address receives the unspent Bitcoin back via the input address. The transaction information lists details about the transaction such as the amount of fees paid to the miner, the total amount of Bitcoin input. The difference between the total amount of Bitcoin input and output determines the transaction fee.

Figure 4: Sample Bitcoin transactions (Source: Mempool Space, accessed on 30.11.2022)

The block information gives information about the block size (1.12 MB in this example), the median miner’s fee that has to be paid to miners in order for your transaction to be included in the block, which miner/ mining farm mined the block and other key information. All transaction data (see Figure 3) is listed for each individual transaction in the block itself. The block information (see Figure 4) is so to speak only the summary of the transaction data within the block. Generally speaking, the Bitcoin block size is around 1MB, though there are proposals and discussions about enlarging the block size to achieve more scalability for Bitcoin as a transaction network.

Finding Consensus

Most participants on the distributed blockchain network must agree on the current state of the network and the validity of transactions via using consensus mechanisms. Consensus means that there is a general agreement on the current state of the network. Depending on the type of network, rules of agreement can vary but are typically established at the start of the network. Imagine a group of people going to the movies. If there is no disagreement about a proposed movie selection, a consensus is reached. If a consensus cannot be found, the group could split up and go separate ways. In terms of the blockchain, the process is formalized and reaching consensus means that at least 51% of the nodes in the network agree on the next global state of the network.

Link the Blocks

Once consensus has been reached, transactions on the blockchain are written into blocks.

A cryptographic hash is also appended to each new block, as was shown in the video previously. The hash then creates the chain linking the blocks together. If the data in the block is edited, the hash value changes which shows tampering. Each additional block re-verifies the previous block.

Share the Ledger

The system then broadcasts the newest copy of the central ledger to all participants in the network which updates the status of the stored copy of the blockchain for all participants. Mining requires significant computational resources and takes a long time due to the complexity of the software process. In exchange, miners earn a small amount of cryptocurrency. The miners act as modern clerks who record transactions and collect transaction fees. All participants across the network reach a consensus on who owns which coins and or tokens.

What Are the Benefits of Blockchain Technology?

Blockchain technology brings many benefits to asset transaction management:

Advanced Security

Blockchain systems provide the high level of security and trust that modern digital transactions require. There is always a fear that someone will manipulate underlying software to generate fake money for themselves. But blockchain uses the three principles of cryptography, decentralization, and consensus to create a highly secure underlying software system that is nearly impossible to tamper with. There is no single point of failure, and a single user cannot change the transaction records.

Improved Efficiency

Business-to-business transactions can take a lot of time and create operational bottlenecks, especially when compliance and third-party regulatory bodies are involved. Transparency and smart contracts in blockchain make such business transactions faster and more cost and time efficient.

Faster Auditing

Enterprises must be able to securely generate, exchange, archive, and reconstruct e-transactions in an auditable manner. Blockchain records are chronologically immutable, which means that all records are always ordered by time. This data transparency makes audit processing faster.

What is the Difference Between Bitcoin and Blockchain?

Bitcoin and blockchain might be used interchangeably, but they are two different things. Since Bitcoin was an early application of blockchain technology, people inadvertently began using Bitcoin to mean blockchain, creating this misnomer. As was shown in a previous chapter, blockchain technology has many use cases outside of Bitcoin. Bitcoin is a digital currency that operates without any centralized control and uses blockchain technology as the underlying infrastructure.

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