3.2 Transaction lifecycle and validation

Blockchain transactions follow a complex lifecycle, from initiation to confirmation. This process ensures security and validity through digital signatures, multi-step verification, and consensus mechanisms. Understanding this lifecycle is crucial for grasping how blockchains maintain trust and integrity.

Transaction finality is a key concept in blockchain, referring to the irreversibility of confirmed transactions. This feature provides immutability and trust in the transaction history, preventing double-spending and ensuring the integrity of the ledger. Finality is achieved through consensus and multiple confirmations.

Transaction Lifecycle and Validation

Blockchain transaction lifecycle

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• Transaction initiation
  • User creates a transaction using their wallet software specifying recipient address, amount, and any additional data
• Transaction signing
  • User's wallet signs the transaction with their private key proving the transaction originated from the user's wallet
• Broadcasting the transaction
  • Signed transaction is broadcast and propagated to nodes across the blockchain network
• Transaction validation
  • Nodes verify the transaction's validity based on predefined criteria including signature verification, sufficient balance, and adherence to network rules
• Transaction pooling
  • Valid transactions are added to the memory pool (mempool) where they await inclusion in a block
• Block creation
  • Miners or validators select transactions from the mempool and bundle them into a new block
• Block validation and consensus
  • Miners or validators compete to add the new block to the blockchain using a consensus mechanism (Proof-of-Work, Proof-of-Stake) to reach agreement
• Block confirmation
  • Once a block is added to the blockchain, the transactions within it are considered confirmed with multiple confirmations increasing the security and finality of the transactions

Digital signatures in transactions

• Digital signatures are created using the user's private key and prove that the transaction originated from the owner of the private key
• Signatures ensure the authenticity of the transaction
  • Confirms the transaction was created by the claimed sender preventing impersonation and unauthorized access to funds
• Signatures maintain the integrity of the transaction
  • Any modification to the transaction data invalidates the signature making tampering with the transaction content detectable
• Signatures are verified using the corresponding public key allowing nodes to confirm the signature's validity without revealing the private key
• Digital signatures are a crucial component of blockchain security
  • Provide non-repudiation, ensuring users cannot deny their actions enabling trustless and secure transactions without intermediaries

Transaction validation process

1. Signature verification
   • Nodes check if the transaction has a valid digital signature confirming the transaction originated from the claimed sender
2. Balance verification
   • Nodes ensure the sender has sufficient funds to cover the transaction amount preventing double-spending and spending more than one's balance
3. Adherence to network rules
   • Transactions must follow the specific rules and format of the blockchain network including data structure, size limits, and any network-specific requirements
4. Smart contract execution (if applicable)
   • For blockchains with smart contract functionality (Ethereum), nodes execute the associated smart contract code ensuring the transaction complies with the contract's conditions and logic
5. Consensus rules
   • Transactions must adhere to the consensus rules of the blockchain such as transaction fees, block size limits, and other network parameters

• Valid transactions are added to the memory pool (mempool) awaiting inclusion in a block by miners or validators while invalid transactions are rejected and not propagated further

Transaction finality concept

• Transaction finality refers to the irreversibility of a transaction once confirmed with confirmed transactions permanently recorded on the blockchain and cannot be altered, reversed, or deleted providing immutability and trust in the transaction history
• Finality is achieved through consensus and multiple confirmations
  • Transactions are considered final after a certain number of block confirmations with more confirmations resulting in a higher level of finality and security
• Finality is important for preventing double-spending and ensuring the integrity of the ledger
  • Once a transaction is final, the funds cannot be spent again eliminating the risk of transaction reversal or manipulation
• The level of finality depends on the blockchain's consensus mechanism and network characteristics
  • Proof-of-Work (PoW) blockchains (Bitcoin) have probabilistic finality with finality increasing with each subsequent block confirmation
  • Proof-of-Stake (PoS) and Byzantine Fault Tolerant (BFT) blockchains can achieve faster finality through validator voting and consensus
• Transaction finality is crucial for real-world applications and use cases enabling secure and reliable transfer of value and assets and providing confidence in the settlement of transactions