How Blockchain Transactions Work: A Complete Guide

In today's cryptocurrency world, blockchain has become the foundation for secure and transparent financial transactions. However, for many users, the process of conducting transactions remains a mystery. In this article, we will delve into how blockchain transactions work, the stages they go through, and how to track and speed up transfers. We will also discuss the possibility of canceling transactions and the use of off-chain protocols to optimize payments. This information will help you better understand how blockchain operates and how to use its capabilities effectively.

What is blockchain?

Blockchain is a decentralized database that represents a sequential chain of blocks containing information about transactions. Unlike traditional centralized systems, where data is stored on a single server or in one data center, blockchain information is distributed among many nodes (computers) that are connected into a single network. Each node in the network stores a full copy of the blockchain, making the system resistant to failures and attacks since data cannot be forged or destroyed without disrupting the entire network.

This structure makes blockchain particularly useful in situations where trust between parties is limited or absent. Due to its distributed nature, every transaction in the blockchain network is transparent and can be verified by any participant, fostering a trustful environment. Despite its transparency, blockchain ensures a high level of anonymity: transaction data is represented as hashes—unique digital fingerprints that do not reveal personal information about users.

To draw an analogy to real life, blockchain can be compared to a continuous and unbreakable chain, where each block contains a unique set of data: creation date, version, logs of previous actions in the network, and hashes. This chain serves as the foundation for all transactions, and any attempt to alter one of the blocks triggers a chain reaction that will be instantly visible to the entire network. This property makes blockchain immutable—records within it cannot be altered or deleted, ensuring a high level of security and trust in the data stored in the system.

Thus, blockchain is a powerful tool for creating decentralized applications and systems where data security, transparency, and immutability are critical. This technology finds applications in various fields—from financial services to supply chain management and even voting systems.

The fundamental principles of blockchain make it a unique technology for data storage and transmission:

Decentralization:

Blockchain operates without centralized control, eliminating the influence of a single organization or individual over the entire network. This ensures resistance to censorship and minimizes the risk of power abuse.

Distribution:

Data in blockchain is stored on numerous computers (nodes) distributed worldwide. This makes the system resistant to failures and attacks targeting a central server.

Transparency:

The entire history of blockchain transactions is available for viewing by all network participants, which strengthens trust and makes blockchain ideal for auditing.

Security:

Blockchain uses complex cryptographic algorithms that ensure data integrity and protection. Each block is linked to the previous one, making data alteration nearly impossible.

Immutability:

Data recorded on the blockchain cannot be changed or deleted, ensuring its authenticity and reliability.

How blockchain transactions work with Bitcoin as an example

Bitcoin is not a physical currency or even a digital file that can be stored on a computer or data carrier. In reality, Bitcoin is a complex system of recording and accounting for transactions that occur on the blockchain. Bitcoin can be compared to a digital balance that reflects the entire history of transactions related to a specific address (wallet), and this balance is updated with each new transaction.

The key feature of Bitcoin is that it does not exist in physical form and does not represent any tangible assets. The essence of Bitcoin is reduced to transaction information recorded on the blockchain—a decentralized and immutable database. The Bitcoin blockchain stores the entire history of the movement of this cryptocurrency from its creation. This history includes all transactions ever made on the network: transfer dates, amounts, sender and receiver addresses.

Key parameters of a blockchain transaction:

Sender's address (input): The wallet identifier from which funds are sent.
Transaction amount: The number of bitcoins transferred.
Recipient's address (output): The wallet identifier to which funds are sent.

It is important to note that in Bitcoin, there is no concept of ownership in the traditional sense. The person holding the private key can sign transactions and manage the funds associated with a specific address. However, the Bitcoin system does not store any data about the owners, only information about the movement of funds.

Bitcoin ensures transparency and security of transactions, as all information is recorded in blocks that are sequentially added to the blockchain. Thanks to cryptographic protection, transaction data is safeguarded from forgery and alteration. Moreover, each new block contains the hash of the previous block, making it virtually impossible to alter any information without disrupting the entire chain.

Thus, Bitcoin represents a revolutionary form of digital money, where each "bitcoin" is essentially a record in a decentralized ledger, accessible to all network participants. This system allows users to securely and anonymously transfer funds worldwide, without intermediaries, making Bitcoin especially attractive in the context of the global digital economy.

How to track transactions on the blockchain

Bitcoin transactions can have two statuses: unconfirmed (pending confirmation) and confirmed (included in a block). One of Bitcoin's features is the ability to find any transaction, even very old ones.

How to track a transaction:

Visit specialized sites like Chain.so or Blockchain.info.
Enter the transaction hash in the search bar.
View transaction details, including the number of confirmations.

The number of confirmations is proportional to the transfer amount: the larger the amount, the more confirmations are required, which takes more time. This process ensures transaction security.

What to do if a transaction is unconfirmed?

If a transaction is not confirmed, it is not included in a block and is not processed. For a transaction to be considered completed, at least one confirmation from miners is required.

Reasons for lack of confirmation:

Lack of time: typically, a transaction is confirmed within 10 minutes.
Low fee: transactions with low fees are processed slower.
Network congestion: when there are many transactions, the system can slow down.

In most cases, it's enough to wait, but if the fee is too low, the transaction may "hang" for several days or even weeks.

How to speed up or cancel a blockchain transaction?

To speed up a stalled transfer, you can increase the transaction fee. You can do this using the CPFP (Child Pays for Parent) method, where the sender creates a new transaction with a higher fee, incentivizing miners to process the stalled transaction.

Ways to speed up a transaction:

Check the transaction queue on blockchain.info.
Restart the wallet with the "-zapwallettxes" parameter, which removes unconfirmed transactions.
Create a new payment with an increased fee.

Transaction cancellation is only possible before it is confirmed. Once a transaction is included in a block, it becomes impossible to change it. However, if the recipient does not enter their password to confirm the transaction, it can be canceled, and the funds will return to the sender.

Ways to cancel:

Use special wallets that allow transaction cancellations.
Manually add a script to the transaction before sending.

What are Off-chain transactions?

Off-chain transactions offer users significant advantages, particularly in scalability and cost reduction. They allow transactions to be executed without being recorded on the main blockchain, significantly speeding up the process and reducing the network load. However, it's important to note that while off-chain transactions offer higher performance, they require trust in third parties or special protocols to ensure data security and integrity.

Some of the most popular off-chain protocols include:

Lightning Network: This protocol was created for the Bitcoin network, and its main goal is to provide instant and low-cost transfers. Lightning Network operates by creating bi-directional payment channels between users, where transactions occur off-chain but can be recorded on the main network if necessary.
Liquid Network: Liquid Network is a sidechain based on the Bitcoin blockchain that allows fast and confidential transactions between exchanges and other major market participants. Liquid also provides the ability to exchange assets back to bitcoins.
Ethereum Plasma: Ethereum Plasma is a scaling solution similar to Liquid Network but applicable to the Ethereum network. It allows transactions to be conducted off the main blockchain, reducing costs and increasing transfer speed while maintaining a high level of security.

These examples demonstrate how off-chain transactions can enhance the efficiency and accessibility of blockchain technology, providing new opportunities for users and businesses.