Does blockchain provide a better system for transactions than our traditional method?
Ever since the inception of Bitcoin 13 years ago, the crypto space has managed to gain a lot of appreciation from the tech community but of course, cryptocurrency is just one of the utilities of Blockchain technology. Blockchain technology is so revolutionary that people refer to it as the biggest invention ever since the internet. Sticking to blockchain and its first worldwide utility which is a cryptocurrency, how does a transaction in the blockchain really work? Does it provide a better alternative to our traditional method?
How does blockchain transaction really work?
Blockchain forms an important part of the whole cryptocurrency puzzle even though it was based on a couple of technologies that were already introduced in the late 1980s and 90s like Cryptography and digital ledger posting to merge into one cohesive system. Blockchain has endless possibilities of application which is fair to see the claims that everything will one day be tokenized and become a part of a huge global network of blockchains.
Blockchain has plenty of applications from Supply Chain Management in Logistics to Data Storing and Verification Processes in Government, it forms a data system that not only decentralizes but also provides transparent information for all the stakeholders to take part. Blockchain’s main application currently is in the Decentralized Finance space which aims to build financial applications and services that eliminates the use of third parties institutions such as Decentralized Exchanges, Lending, and Borrowing Platform, and also NFTs.
A key piece behind the success of DeFI relies on how the blockchain could process transactions and exchanges of currency could happen between users. To know how these exchanges occur, we need to know what a blockchain is. A blockchain in simple terms is an immutable digital ledger of transactions that is duplicated and distributed across the entire network of computer systems on the blockchain.
It comprises a series of blocks that are connected to form a continuous chain hence the term Blockchain. Each block contains data such as transaction or smart contracts functions and each time a new block is added, the record will automatically be added to every participant’s ledger. This decentralized database will then be managed by all the participants of the network and time-stamped with a cryptographic signature called the hash.
This hash function is what makes the blockchain system secure as every block not only contains its hash but also the hash of the previous blocks linking them with one another. This means that if anybody will somehow want to corrupt the blockchain network, they will have to somehow change the data in all of the blocks in the chain across all distributed versions of the ledger within the network which is virtually impossible.
How does the correct transaction is registered in a block then?
- First, a transaction is requested between the sender and receiver via their respective wallet addresses, this process will use a system of Public Key Cryptography in which the receiver will send his public key to be filled in the Recipient Address and the sender will sign/stamp the transaction using his private key.
- Once the transaction is sent to the network, it will be grouped with other transactions into a block, ready to be picked up by any miners/validators to verify and confirm the transactions.
- This block is then shared with the whole network to be verified by active miners/validators to verify the transactions. Every computer in the network checks the transaction against some validation rules that are set by the creators of the specific blockchain network.
- Miners/Validators will also complete a series of cryptographic puzzles to generate a hash and nonce that will both seal the block and encrypt the data inside.
- These hashes are then used to register and add the new block to the blockchain.
- Once the block is added, your transaction is confirmed and completed in the blockchain and now the transaction is part of the blockchain which then cannot be altered in any way.
Of course, this process will be slightly different for every network in the crypto space as most blockchains have their consensus mechanism to validate and verify transactions. Some networks also have different block sizes which would affect the speed of the transactions being confirmed but with Bitcoin, it will generally take 10 minutes for the transaction to be confirmed. Of course, there are blockchain networks like Solana that have the capability of processing 50,000 transactions per second and offering much cheaper transaction fees compared with our traditional payment systems such as Visa and Mastercard. But is blockchain a significant upgrade for our daily transactions?
Is it a necessary upgrade to our traditional system?
Blockchain has a lot of potential in the future as a form of evolution to our current transaction system but to achieve that it needs to provide a significant benefit that is not present in our traditional system. Blockchain is quite an evolution to our digital payment system as it provides a decentralized platform for verification but it might not be an easy way for transactions for our early generation who are used to the physical transaction system.
Nevertheless, it does provide significance in terms of transparency and security, a lot of which are lacking in our current system. Transparency provides an ability to obtain the necessary information so everybody can make better decisions. Can you imagine if the next time you purchase something, you can always look back on your spending pattern using your wallet address and transaction id in the network? Not only are you able to keep tabs on your spending but the immutable record could help you budget. Of course, this is also available using our current Banking system but a centralized server will always be prone to hacking and alteration.
This eventually brings us to the point of security as the odds of hacking a decentralized server like Bitcoin or Ethereum is far less than our current centralized system. Plus not only our security is protected but blockchain also provides us a way to transact in the network while still maintaining our privacy, things which would virtually be impossible within our current system.
Of course, there are Pros and Cons with Security and Privacy as too much anonymity will also bring adverse results while there are also benefits with our current transaction system. Some of those are its ease of use, speed, and worldwide utility, things that may not yet be present in the decentralized transaction system. With the current increase in regulations and adoption of blockchain, the hope is that these two systems would eventually be used to bring out the best in one another and ensure a better transaction system for all of us.
We in Nagaya Technologies Pte. Ltd believes that there is an enormous potential behind the blockchain technology and its application in our daily lives. This is why we created the World’s first Hybrid Digital Asset called Nagaya which is based on its own blockchain technology as we believe that this technology can provide enormous value to everybody. For more information regarding the latest updates on Nagaya and our whitepaper, you can visit us at nagaya.io
Or you can talk to us at t.me/nagayaofficial