By what means a transaction is entered into a blockchain?

Before a transaction can be added to the blockchain, it needs to be authenticated and authorized.

Transactions must go through several key steps before they are added to the blockchain. Our discussion today will focus on authentication using cryptographic keys, authorisation with proof of work, mining, and the more recent adoption of proof of stake protocols in blockchains.

The authentication process

Original blockchain was intended to function without a central authority (i.e. with no bank or regulator controlling transactions), but transactions must still be authenticated.

In this process, cryptographic keys are used, which are strings of data (like a password) that identify a user and give access to the “account” or “Bitcoin wallet” of value on the system. 

There is a private key for each user, and a public key that everyone can see. By using both, a secure digital identity is created in order to authenticate the user via digital signatures and to unlock the requested transaction. 

Obtaining authorisation

In order for the transaction to be added to a block, the transaction needs to be approved, or authorized, by the users.

A public blockchain is a distributed ledger, where transactions are added by consensus. It means that there must be majority agreement between the “nodes” (or computers) on whether the transaction is legitimate. People who own computers in the network are rewarded for verifying transactions. This is called ‘proof of work’.

The proof of work

A Proof of Work block can only be added to the chain if a complex mathematical problem is solved by the people who own the computers in the network. Those who solve the problem are known as miners, and they are usually rewarded for the work they do in cryptocurrencies. 

However, mining isn’t easy. Trial and error is the only way to solve the mathematical problem, and the odds of solving the problem are one in 5.9 trillion. This requires considerable computing power, which requires substantial energy. As a result, the rewards must outweigh the cost of the computers and the electricity costs associated with running them, since one computer alone would take years to solve the mathematical problem.

Power of Mining

Taking the Cambridge Bitcoin Electricity Consumption Index into account, researchers estimate the bitcoin network consumes almost 70 terawatt-hours (TWh) of electricity each year, ranking it as the 40th largest consumer of electric energy by country. In comparison, Ireland, which ranks 68th, consumes just over a third of Bitcoin’s energy, or 25 TWh, while Austria, ranked 42, consumes 64.6 TWh of electricity annually, according to 2016 data compiled by the CIA.

Problems with Proof of Work

Miners often pool their resources through companies aggregating a large group of miners in order to create economies of scale. In turn, the miners share in the rewards and fees that the blockchain network offers.

With more computers joining a blockchain project to solve the problem, the difficulty of solving the problem increases, and the network grows, theoretically distributing the chain further and making it more and more difficult to sabotage. Though in practice, mining power has largely been centralized in a few pools. The vast computing and electrical power available to these large companies is now necessary to build and maintain a blockchain network based on Proof of Work validation.

 The Proof of Stake

Some blockchain networks have adopted “Proof of Stake” validation protocols. This dictates that participants must own cryptocurrency in order to have a chance of selecting, verifying, & validating transactions. This saves a great deal of computing power since no mining is needed.

Moreover, blockchain technologies have been developed to enable “Smart Contracts” that automatically execute transactions when specified requirements are met.