Transferring and storing funds under the centralized finance system has been efficient so far. A good example is Indian government’s UPI payment architecture. However, it has all the issues that comes with a centralized system. For instance, citizens’ information is collected and stored on a central database that is not foolproof from privacy and human rights abuses. And with regulating bodies looking over the transactions, large transactions require a huge completion fee.
Blockchain transactions have eliminated this dilemma. Now even transactions as huge as $600 million can be completed within ten minutes at just $7. Similarly, other transactional benefits (which we will discuss ahead) of using a blockchain have made DeFi so popular globally. It is worth noting here that blockchain transactions don’t only constitute value transfer directly between peers but also the interaction between humans and code, and code and code via smart contracts. But before entering into the benefits and completion of blockchain transactions, we need to learn ‘What is a blockchain transaction?’
What is a Blockchain Transaction?
Consider a ladder game with four participants in it. The game’s rules are that the participants must answer various quizzes and verify some stats to add steps to the ladder and advance to the next level. If you try to grasp this game, you will understand the basic principle of a blockchain.
Unlike a centralized financial system, where you have to pay a fee to an authority to facilitate a transaction, a blockchain allows participants to add and verify the transfer of data or value.
To understand this, we require to understand blockchain first. A blockchain consists of a network of PCs (Nodes) that store the data related to all the transactions on that network. This data is stored in replica form, and the data gets added to the network in the form of blocks where the nodes time stamp and verify the transaction.
Distributing blocks for transactional information to the blockchain chronologically is known as a blockchain transaction. Such a transfer of funds/data brings about multiple changes to the whole process. Compared to traditional banking, this process may stretch to a few minutes, even for large transactions. For the security of funds’ transfer, each block addition may take up to 36 nodes to verify the transaction. So, a blockchain transaction can be called the next step to financial polygamy globally.
How are Blockchain Transactions Approved?
Since we have already mentioned that it lies on the nodes to approve a transaction, it is important to understand how the whole mechanism works. Adding a single block typically takes every single node on the network to look at the transaction details, and then if 51 percent of the nodes agree to the details and verify them, a block gets added to the chain. This whole mechanism is called consensus and mainly has two types; Proof-of-Work and Proof-of-Stake.
1. Proof of Work
As the name suggests, this consensus mechanism works by adding a block to the chain and is completed by solving complex mathematical equations. Initially, miners used to get 50 BTC for solving much simpler equations on their home PCs when the Bitcoin blockchain was introduced. Now, the algorithm for solving just one complex mathematical equation related to Bitcoin blocks requires immense computing power. In the entire industry, miners have supercomputers dedicated to mining more Bitcoin and similar cryptos and keep adding blockchain transactions into blocks.
Similarly, the blockchain that requires a PoW consensus mechanism uses different algorithms to solve and verify transaction details. The Proof-of-Work mechanism is made a tad easier by the ASIC chips and leverage pools that allow the miners to take help in solving the equations. Since PoW requires so much energy, some currencies are even looking for a more sustainable PoW consensus.
2. Proof of Stake
Since it was becoming hard to deal with environmental concerns raised by environmentalists and concerned people over the energy-intensive nature of the PoW consensus mechanism, nowadays, the blockchain is given the authority to choose a node that has to read, verify and add blockchain transactions to the ledger.
This eliminates the competition between miners to add a block, thus reducing the need for excessive computational power. The protocol on the blockchain can randomly select the validator (node) or by comparing the holdings, previous computation time, etc. The validators usually stake (lock in) some crypto assets with the network in this consensus mechanism and get rewarded in native crypto coins upon successfully adding the block.
3. Delegated Proof of Stake
The delegated proof of stake consensus mechanism requires even lesser energy and time consumption to add a block. Networks like EOS use this mechanism where only a limited number of validators need to approve the transaction. It saves time and resources and makes the whole consensus mechanism less competitive.
There is a chance for hackers to manipulate this mechanism, and research is going on to remove the possibility of transaction manipulation. Currently, a node is considered a validator only after clearing certain criteria related to proof of stake. The blockchain protocol itself often decides the criteria.
Tracking Blockchain Transactions
Multiple block explorers can be used to track a blockchain transaction. These often use the unique id and the wallet details through which the transaction occurred. You can understand the whole process through these steps:
1. The first step required to track a transaction on the block explorer is to look for that transaction on the wallet. Firstly add your wallet details to the software and then look for the transaction you want to track. There are no limitations related to what cryptocurrency was used in the transaction.
2. Now click on the transaction and find its unique transaction ID. Usually, it is a combination of alpha-numeric characters associated with a particular transaction on the blockchain. Bitcoin is called the TXID and might have other names on different blockchains.
3. Now, if you have connected the main wallet with the block explorer, click on the ‘view on blockchain’ section to track the transaction on the blockchain.
The process becomes manual if the main wallet has not been connected. Just search the transaction id on explorer, and the users can find the number of confirmations associated with the transaction. Depending on the wallet used, the number of nodes working on the transaction, and the route taken, various confirmations will be tracked on the blockchain. If the search shows ‘no transaction found,’ then the blockchain transaction has not occurred and needs to be reinitiated.
After the discussion, we are sure you will have learned ‘what are blockchain transactions?’ The DeFi ecosystem has helped evolve the underlying conditions of how the transfer of payments occurred earlier. Some currencies are working on bridging the gap between CeFi and DeFi to provide a relationship between the financial institutions and banks.
Decentralizing financial control has provided more freedom for people to manage their own money and invest it through proper mediums. Even with all the freedom and transparency, DeFi has also been able to provide security to blockchain transactions with the help of contributing nodes. So, it can be concluded that moving forward, we will witness advancements in blockchain transactions and thus ease in transferring funds. Imagine a world where cross border remittances and other types of payments are settled instantaneously with barely any fees. Well it is a reality already for those who believe in Web3/decentralized crypto-linked ecosystem. They are already able to transfer money from one country to another country where their family lives within few seconds to minutes at a fraction of what Web2 peers like Paypal and Western Union charges!
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