How Does a Blockchain
Transaction Work?
Maria sends money to her friend Tom using an online payment system.
The transaction between Maria and Tom is then sent to their respective banks for processing.
Maria’s bank and Tom’s bank both record the transaction in a jointly-maintained financial ledger.
After each bank confirms that the transaction is valid, the money gets transferred from Maria to Tom.
The transaction from Maria to Tom should, in theory, be logged by both banks and on both copies of the financial ledger in the exact same way. But what if Maria’s bank and Tom’s bank disagree on the rules of transaction processing, or even on the validity of the transaction? And what if Maria and Tom want to prove to an auditor that the transaction was reliably recorded? Our current system does not have a way for these issues to be addressed quickly and with certainty.
This is where Blockchain comes in.
With Blockchain technology, transactions look like this:
Maria sends money to Tom using an online payment system, like a bitcoin wallet. The transaction shows Maria’s identity and the transmitted value and is authorized by Maria with an electronic signature.
Maria’s transaction gets sent to one of the nodes on the Blockchain network.
The transaction then gets broadcast to every node on the Blockchain network. Each node verifies whether Maria has enough money to pay Tom and whether her digital signature on the transaction is valid.
If the transaction is valid, nodes agree to add it to the Blockchain.
Once the transaction is in the Blockchain, Maria’s and Tom’s balances are both updated. Tom receives a notification, which he can then independently verify.
In a Blockchain-based system, there are no transaction processing errors because all nodes are programmed to follow the same rules. The transaction will go through immediately because Blockchain eliminates the need for approval from a third party. And it’s easy for Maria and Tom to produce a proof of their transaction, which can be used in an audit or tax accounting.
