How do transactions happen in the blockchain?

Transactions must be authenticated and authorized before they can be added to the blockchain.

A transaction must go through a number of critical steps before being added to the blockchain. Today, we are going to focus on authentication using cryptographic keys. On the authority on proof-of-work, the role of mining, and the recent adoption of proof-of-stake protocols in post-blockchain networks.

Knowledge Byte: Understanding Blockchain 101 | Cloud Credential Council

1. Authentication:

The 5 Factors of Authentication. Nowadays, the terms “Multi-Factor… | by Renan Dias | Medium

The original blockchain was designed to operate without a central authority. (i.e. no bank or regulator controlling the transaction), but the transaction still has to be authenticated.

This is done using a cryptographic key, a string of data (like a password) that identifies the user and grants access to their account or wallet value on the system.

Each user has their own private key and public key that everyone can see. Using both of these creates a secure digital identity for the user to authenticate through a digital signature that unlocks the transaction they wish to perform.

2. Authorisation:

Once a transaction is agreed upon between users, it needs to be approved and authorized before a block can be added to the chain.

For public blockchains, the decision to add transactions is made by consensus. This means that most nodes (or computers in the network) must agree that the transaction is valid.

Authorisation — Prosacon

Those who have computers in the network are encouraged to verify transactions through rewards. We know this process as proof of work.

3. Proof of Work:

Proof of work requires that people with computers in the network must be able to connect blocks to solve a complex mathematical problem. Solving problems is known as mining, and miners are usually rewarded for their work in cryptocurrencies.


But mining is not easy. A mathematical problem can only be solved by trial and error. And the probability of solving the problem is about 1 in 5.9 trillion. This requires substantial computing power which uses a considerable amount of energy. This means that the reward for mining must exceed the cost of the computer and the electricity to run them, as it would take years for a computer alone to find a solution to a mathematical problem.

4. The Power of Mining:

The Cambridge Bitcoin Electricity Consumption Index estimates that the bitcoin mining network consumes approximately 70 terawatt hours (TWH) of electricity per year, making it the 40th largest consumer of electricity by ‘country’. By comparison, Ireland (ranked 68) uses more than a third of bitcoin consumption, or 25 TWH, according to 2016 data compiled by the CIA, and Austria at number 42 consumes 64.6 TWH of electricity per year.

5. The Problem with Proof of Work:

To create the scale of the economy, miners often pool their resources through companies that mobilize a large group of miners, then these miners share the rewards and fees through the blockchain network. As the blockchain grows, try to add more computers and solve the problem. The problems get harder and the network gets bigger and then theoretically distributed further down the chain. It sabotages and unites that become more difficult.
While in practice, some mining power has become concentrated in the hands of a few pools, large organizations now have the vast computing and electrical power needed to maintain and develop a proof-of-work verification-based blockchain network.

6. Proof of Stake:

The blockchain network has since adopted a “proof-of-stake” verification consensus protocol, where participants must have a stake in the blockchain. Usually owners of certain cryptocurrencies have the opportunity to select, verify and verify transactions. This saves substantial computing power resources as no mining is required.

Consensus Algorithms: Proof of Stake — Bitpanda Academy

In addition, blockchain technologies have evolved to include “smart contracts” that automatically execute transactions when certain conditions are met.

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