How is a Transaction Verified on a Cryptocurrency Network?

Crypto transactions are decentralized and don’t rely on banks or intermediaries. They are irreversible, so once confirmed, they cannot be canceled or disputed like credit card payments. They use blockchain technology for transparency and security, allowing anyone to verify transactions without exposing personal information.

But how exactly are these transactions verified to ensure they are secure and legitimate? This process is crucial for maintaining trust in the system and preventing fraud.

In this article, we’ll explore the step-by-step process of transaction verification on a cryptocurrency network, explain the different consensus mechanisms, and discuss the security features that keep your digital assets safe. Whether you’re using a Tangem cold crypto wallet or any other wallet, understanding how transactions are verified is key to navigating the world of cryptocurrency.

Step-by-Step Process of Transaction Verification

Let’s go

Transaction creation

The process begins when a user initiates a transaction. This could be sending cryptocurrency to another person, swapping tokens, or even staking coins. The user specifies the amount, the recipient’s address, and any additional data required by the network, such as destination tag or memo.

Transaction Signing

The transaction data (amount, recipient address, fees, etc.) is formatted according to the blockchain’s rules. Then a cryptographic hash function (e.g., SHA-256 for Bitcoin) generates a unique transaction hash.

The sender’s private key is used to sign the transaction hash using an asymmetric cryptographic algorithm (e.g., ECDSA for Bitcoin, EdDSA for Solana). This creates a digital signature, which proves ownership and authorizes the transaction. The digital signature is now attached to the transaction and ready for broadcast to the network for validation and confirmation.

2. Broadcasting to the Network

After the transaction is signed, it is broadcast to the cryptocurrency network. This means the transaction is sent to all the nodes (computers) in the network. Nodes are responsible for verifying and relaying transactions to ensure they reach all participants in the network. This step is crucial for maintaining the decentralized nature of blockchain technology.

3. Transaction Validation

Once the transaction reaches the nodes, it undergoes a validation process. The nodes check several things:

Sender’s Balance: They ensure the sender has enough cryptocurrency to complete the transaction.
Digital Signature: They verify the digital signature to confirm the transaction was authorized by the sender.
Transaction Format: They check if the transaction adheres to the network’s rules and protocols.

If the transaction passes these checks, it is considered valid and moves to the next stage.

4. Adding to the Mempool

Valid transactions are then added to a pool of pending transactions known as the mempool. The mempool acts as a waiting area where transactions sit until they are picked up by miners or validators for inclusion in a block. Transactions in the mempool are often prioritized based on factors like transaction fees, with higher fees increasing the chances of being processed faster.

5. Consensus Mechanism Involvement

This is where the consensus mechanism comes into play. Different blockchains use different methods to agree on the validity of transactions and add them to the blockchain. The two most common consensus mechanisms are Proof of Work (PoW) and Proof of Stake (PoS).

Proof of Work (PoW): Used by Bitcoin, PoW requires miners to solve complex mathematical puzzles to validate transactions and create new blocks. The first miner to solve the puzzle gets to add the block to the blockchain and is rewarded with cryptocurrency.
Proof of Stake (PoS): Used by Ethereum and other blockchains, PoS selects validators based on the number of coins they hold and are willing to “stake” as collateral. Validators are chosen to create new blocks and validate transactions based on their stake, reducing the need for energy-intensive computations.

6. Block Confirmation

Once a miner or validator successfully creates a block, the transactions within that block are considered confirmed. The block is then added to the blockchain, and the transaction is finalized. However, for added security, most networks require multiple confirmations (i.e., additional blocks added on top of the one containing the transaction) before considering the transaction fully settled.

7. Finalizing the Transaction

After the block is added to the blockchain, it is propagated across the network, ensuring all nodes have an updated copy of the ledger. The transaction is now complete, and the recipient can see the funds in their wallet. This entire process, from creation to finalization, typically takes a few minutes to an hour, depending on the network and the consensus mechanism used.

Types of Consensus Mechanisms

Proof of Work (PoW)

PoW is Bitcoin’s original consensus mechanism. It relies on miners solving complex computational puzzles to validate transactions and secure the network. While PoW is highly secure, it is also energy-intensive, leading to concerns about its environmental impact.

Proof of Stake (PoS)

PoS is a more energy-efficient alternative to PoW. Instead of miners, PoS uses validators who are chosen based on the number of coins they hold and are willing to stake. This reduces the need for massive computational power and makes the network more scalable.

Delegated Proof of Stake (DPoS)

DPoS is a variation of PoS where users can delegate their staking power to other participants, who then validate transactions on their behalf. This system is designed to be more democratic and efficient, as it allows for faster transaction processing.

Layer 2 Solutions

Layer 2 solutions like the Lightning Network are designed to improve transaction speed and reduce costs by handling transactions off the main blockchain. These solutions are particularly useful for microtransactions and can significantly enhance the scalability of a blockchain network.

Security Aspects and Challenges in Crypto Transactions

Crypto transactions have their own host of potential challenges, including the infamous double spending problem..

Double Spending

Double spending is the act of using the same cryptocurrency funds more than once. This can happen if a user sends the same digital coins in two different transactions before the network confirms the first one.

Double spending is detected and prevented through blockchain’s consensus mechanism, which ensures that each transaction is unique and recorded only once. When a user attempts to spend the same cryptocurrency twice, nodes in the network verify whether the funds have already been used by checking the blockchain’s history. If a conflicting transaction is found, the network rejects the duplicate attempt.

PoW and PoS systems help prevent double spending by making it computationally or economically impractical to alter past transactions. In PoW, miners compete to solve complex puzzles, and only the longest valid chain is accepted, making it nearly impossible to reverse confirmed transactions. In PoS, validators must stake their own assets, and any fraudulent behavior, like double spending, results in losing their stake.

51% Attack

A 51% attack occurs when a single entity or group gains control of more than 50% of a blockchain network’s mining or validation power. This allows them to manipulate transactions, potentially reversing their own payments (double spending) and preventing new transactions from being confirmed.

In Proof-of-Work (PoW) blockchains like Bitcoin, an attacker with majority hash power could rewrite parts of the blockchain, undoing recent transactions. In Proof-of-Stake (PoS) networks, a similar attack could happen if someone controls most of the staked tokens, giving them disproportionate influence over transaction validation.

While 51% attacks can disrupt a blockchain, they don’t let attackers steal funds from other users or create new coins. Major networks with high decentralization and strong security measures make such attacks extremely difficult and costly.

Conclusion

Transaction verification is the backbone of any cryptocurrency network. It ensures that every transaction is legitimate, secure, and irreversible, maintaining trust in the decentralized financial system.

From the creation of a transaction to its final confirmation on the blockchain, each step involves complex processes and security measures designed to protect users and their assets.

Whether you’re using a Tangem cold crypto wallet or any other wallet, understanding how transactions are verified can help you confidently navigate the world of cryptocurrency. As blockchain technology continues to evolve, so too will the methods for verifying transactions, making the future of finance more secure and efficient than ever before.

Meta Title: How is a Transaction Verified on a Cryptocurrency Network? | Blockchain Explained
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