What You Need To Know To Understand Blockchain Technology Part 5

Consensus algorithms. Transactions and users.


The goal of using a consensus algorithm on a blockchain network is to determine which transactions get to become parts of the blockchain. On financial networks, these transactions are about users sending funds to each other and the examples below will be about transactions in which users send money on a blockchain network.

This being said, such transactions do not have to be about money. For example, they can be about a shipment on a logistics network. Transactions on such a blockchain could be about any change of shipment status, be it the shipment leaving a port or arriving at destination. Such transactions would work in a very similar way to how transactions work on a financial network: parties that are members of the ecosystem would have an agreement about how transactions become parts of blockchain. Then, the blockchain would provide the ecosystem with all the benefits of the blockchain technology: any party would know the location of any cargo at any time in real time. The records would be immutable and would have timestamps, meaning that no party would be able to make any unsubstantiated claims about sending or not receiving shipments and all of this would be happening without a need to have a trusted third party oversee the process because the blockchain network would be such a party.

To determine which transactions to add to its blockchain, the Bitcoin blockchain uses a consensus algorithm known as proof-of-work. Some other networks use proof-of-stake, proof-of-weight and other consensus algorithms or a combination of several of them. The most popular algorithms are proof-of-work and proof-of-stake.


Initiating transactions on cryptocurrency networks

Because the goal of proof-of-work on the Bitcoin network and other blockchain networks is to help users agree which transactions to add to the blockchain, it is important to take a look at transactions as they appear.

Here’s what happens. First, a user A decides to send funds to user B. Then, the user A sends the funds to an address of the user B. The transaction becomes available on the network as unconfirmed, meaning that it is not a part of the blockchain ledger yet.

Here you can see such transactions as they appear on the Bitcoin network: https://blockchain.info/unconfirmed-transactions The process works in a similar way on other cryptocurrency networks, too. Here you can see pending transactions on the Ethereum network: https://etherscan.io/txsPending

After this, miners pick up the transactions and compile them into blocks of the Bitcoin blockchain.


Miners vs users vs nodes on blockchain networks

Typically, a blockchain network would have three types of members: users, nodes and miners. These types are not mutually exclusive, meaning that you can be a user of a network, a node on the network and a miner on the same network, but you don’t have to do all three at the same time.

A user on a blockchain network can participate in transactions. On a public blockchain network such as Bitcoin or Ethereum, all you have to do to be able to send and receive funds is get a free wallet. You do not have to do anything else. When you send funds to someone, you can choose to include or not include a fee in your transaction. Typically, when a network has a lot of pending transactions, miners will include into the blockchain the transactions that come with fees first because on a network such as Bitcoin the miners get to keep 100% of the fees. However, when a network is not busy, miners still have an incentive to keep including transactions and creating blocks of the blockchain. Even when transactions do not come with fees, miners still have an incentive to include them because they get rewards from the blockchain for creating the blocks of the blockchain, regardless of what transactions they include in the blocks.

A node on a blockchain network is someone who has a full copy of the network’s blockchain. Depending on a network, a full copy can have a very large size. For example, in March of 2018, the size of the Bitcoin blockchain was over 160 gigabytes. You can see the live map of the nodes on the Bitcoin network by visiting https://bitnodes.earn.com/

While being a node on a proof-of-work network doesn’t pay any pay, many people still choose to do it for a number of reasons. First, running a node on a network helps the network execute the rules. Nodes do so my rejecting blocks and rejecting transactions that do not adhere the network’s consensus algorithm. In this sense, nodes play a critically important role, as critically important as miners.