How are Transactions Confirmed on the Blockchain?
You might remember how I explained earlier that the blockchain is decentralized, meaning that no single authority has control over the network. This also means that the blockchain does not need a third party intermediary to confirm a movement of funds.
If that’s the case, how are transactions confirmed? This is where things get really interesting!
The blockchain is a community-based platform, meaning that in most cases, anybody can contribute to the network to help verify transactions. They do so by contributing their computational power, which in return, is able to support the network.
Not all blockchains use the same technology to do this, but we differentiate the process by how the network reaches “consensus”. Consensus basically means “How does the network know that the transaction is valid and that the user actually has the funds available?”
Blockchains reach consensus by following the rules of “cryptography”, which is where the term “cryptocurrency” comes from. Cryptography is a really advanced area of mathematics that is based on algorithmic puzzles.
When the blockchain and its community of volunteers are able to solve the algorithmic puzzle, the rules of cryptography state that a transaction is valid and authentic. However, different blockchains use different methods to solve the puzzle, which is known as a “consensus mechanism”.
Confused? Don’t be, as my “What is blockchain” guide is now going to give you an example!
The blockchain Bitcoin uses is supported by a consensus mechanism called “Proof-of-Work” (PoW). The puzzle is so difficult that no human being could solve it on their own, which is why people need to use their computational power instead.
Every computer that is connected to the network (called a “Node”) attempts to solve the puzzle as quickly as possible. Whoever solves the puzzle first, gets a reward – free, new Bitcoin. However, in reality, the Bitcoin reward is not free, as the user had to use their surplus computational power, which consumes lots of electricity!
PoW is just one example of how a blockchain reaches consensus. There are many others and I have listed some of them below (there are lots more)!
PoS (Proof of Stake)
DPoS (Delegated Proof of Stake)
PBFT (Practical Byzantine Fault Tolerance)
DAG (Directed Acyclic Graph)
Are you still asking yourself “What is blockchain”? I hope not! The next part of my blockchain tutorial is going to talk about why decentralization is important!
So far no insurance company has ever paid out on a Bitcoin company's claim. Worth considering also.
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