What is the finality of blockchain and why is it important?

Importance of blockchain finality

Author: Dilip Kumar LianGuaitairya, Cointelegraph; Translation: Song Xue, LianGuai

1. Understanding the Finality of Blockchain

In traditional financial systems, once a transaction is confirmed, it cannot be reversed. Similarly, achieving finality in a blockchain network ensures that transactions are permanent and cannot be modified after being added to the blockchain. This concept is crucial for ensuring the security and integrity of the blockchain.

Finality is achieved through consensus in a blockchain network. Different blockchain networks adopt different consensus algorithms, each with unique methods to validate transactions and ensure finality, such as Proof of Work (PoW), Proof of Stake (PoS), or Practical Byzantine Fault Tolerance (PBFT).

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2. Types of Finality in Blockchain

Finality in blockchain can be probabilistic, economic, immediate, unconditional, or related to the entire state of the blockchain.

In blockchain, there are multiple types of finality, each describing different levels of determinism and irreversibility for transactions and blocks. The main types of finality in blockchain are as follows:

Probabilistic Finality

In most blockchain systems, finality is probabilistic, especially in systems that employ PoW consensus, such as Bitcoin. The possibility of reversing a transaction decreases exponentially once the confirmed transaction is included in a block and the block is placed on top of the confirmed transactions.

Economic Finality

The concept of economic finality is usually associated with PoS systems. From an economic finality perspective, a transaction is considered final if attempting to reverse it becomes financially infeasible. In PoS, validators or nodes need to provide a certain amount of cryptocurrency as collateral. If they approve fraudulent transactions, they face the risk of losing their collateral, making malicious behavior economically impractical.

Immediate Finality

The Ripple network provides near-instant finality, ensuring that once a transaction is recorded on the ledger, it is immediately confirmed and irreversible. Transactions are validated by 150 validators. These validators have the potential to win a spot in Ripple’s unique node list, which consists of 35 validators.

Unconditional Finality

A transaction, once confirmed, is considered a fully unconditional final transaction. It will not be reversed under any circumstances. Achieving unconditional finality can be challenging and often requires highly centralized or unique consensus methods.

State Finality

In some blockchain systems, finality refers to the entire state of the blockchain, not just transactions. State transitions (changes in the blockchain state, such as the execution of transactions or smart contracts) cannot be modified or reversed once completed. For applications like smart contracts, the accuracy of the entire application state is crucial, making state finality essential.

3. Why Finality is Important in Blockchain

The finality of blockchain provides the necessary guarantee for the validity and persistence of transactions, making it a fundamental concept for the reliability and functionality of this technology.

Finality provides a high level of security and trust for the system, ensuring that once a transaction is confirmed, it cannot be changed or reversed. By validating transactions and recording them on the blockchain, finality prevents double-spending issues, where the same digital asset can be used multiple times.

For example, if someone owns a Bitcoin (BTC) and tries to transfer it to two different recipients through separate transactions, double-spending may occur. By ensuring finality, blockchain technology can prevent this situation. Once a transaction is confirmed and recorded on the blockchain, the digital asset is considered spent and cannot be used for any further transactions.

In the context of smart contracts, finality is crucial. The details of agreements between buyers and sellers are directly embedded in smart contracts, which are automatically executed code. Finality ensures that the outcomes of these contracts are deterministic and immutable.

Furthermore, finality is essential for decentralized applications (DApps) to ensure their activities are secure and trustworthy. Finality ensures that the decisions and transactions made within these applications are unchangeable and irreversible. Additionally, blockchain establishes trust among network users and participants by making transactions final. Knowing that transactions are irreversible increases users’ trust in the system.

4. Challenges in Achieving Blockchain Finality

Forking, network latency, smart contract vulnerabilities, and 51% attacks are some challenges that hinder the finality of blockchain transactions.

When a blockchain splits into multiple paths, forking occurs, resulting in different versions of transaction histories. Consensus mechanisms are tested by such divergence, making it challenging to determine which version is legitimate.

For example, a hard fork may occur due to disagreements among the community or developers regarding protocol updates. Different factions may continue to support the PoW blockchain until the issue is resolved, leading to a lack of finality.

Network latency or delays in data communication between nodes further complicate matters. Slow network connections can delay the propagation of transaction information on the blockchain network, resulting in transaction order and validation errors.

In addition, vulnerabilities in smart contracts can lead to unintended behavior, allowing malicious actors to exploit them and reverse transactions. Similarly, entities with over 50% network mining power in a PoW blockchain can manipulate the blockchain’s history and reverse transactions, undermining finality and security.

Due to these concerns, the integrity of the blockchain is compromised, and developers need to implement robust consensus algorithms and effective network protocols to minimize forking and latency issues and ensure timely and secure finality of transactions.

5. Enhancing Finality with Technology and Consensus Algorithms

Longer confirmation periods, multiple validations, and cutting-edge security algorithms such as Algorand’s Pure PoS, Delegated Proof of Stake (DPoS), and HoneyBadgerBFT, may help enhance the finality of blockchains.

One method involves longer confirmation times, allowing for more validations before a transaction is considered final. By extending the time required to achieve consensus, the likelihood of confirming the validity of transactions and making them irreversible increases significantly.

In addition, using multi-validation techniques (where transactions are checked by multiple nodes or validators) provides an additional layer of security, ensuring broader consensus and reducing the possibility of errors or malicious attacks.

Furthermore, innovative consensus algorithms such as Algorand’s Pure PoS, DPoS, and HoneyBadgerBFT have changed the industry. Algorand combines the PoS approach with Byzantine agreement to ensure transactions have fast and irreversible finality.

By implementing a reputation-based system, where a small group of trusted representatives validate transactions, DPoS enhances the effectiveness and finality of the network. Similarly, the HoneyBadgerBFT algorithm improves finality and security by implementing asynchronous Byzantine consensus, even in the presence of malicious nodes or network delays.

6. Future Trends and Developments for Achieving Faster and More Reliable Final Results

Essentially, to achieve faster and more reliable final results in the future, a multidisciplinary approach combining different consensus technologies, cutting-edge encryption, and improved interoperability is needed.

Exposure to hybrid consensus models is one such trend. These hybrid consensus algorithms strive to improve scalability and performance while maintaining strong security by combining the advantages of various consensus algorithms. Projects have been exploring the combination of PoS methods as they consume significantly less energy than PoW techniques and can speed up confirmation times.

In addition, there is increasing interest in advanced encryption methods such as Zero-Knowledge (ZK) proofs and innovative technologies like sharding. Zero-Knowledge proofs enable parties to verify transactions without revealing private information, thus improving efficiency and privacy. Sharding is a method of dividing the blockchain into smaller, more manageable parts, reducing the computational burden on nodes and accelerating transaction processing speed.

The development of quantum computing may render existing encryption techniques obsolete, necessitating the creation of quantum-resistant algorithms. Blockchain networks are actively researching quantum-resistant cryptographic solutions to maintain the security and finality of transactions in the face of quantum threats.

Another area of focus is how different blockchains can interact with each other. Using protocols such as Polkadot and Cosmos, transactions between networks can be completed quickly and seamlessly. This interoperability enhances the overall effectiveness of blockchain systems, resulting in faster and more reliable final results.

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