I know it is frustrating when your crypto transactions just take forever to complete but do you know how a crypto transaction takes place behind the scenes?
Most cryptocurrency transactions involve a bank, an exchange and the blockchain. So ideally, delays can happen from any of the three parties. Delays may happen because of late transaction settlements from the bank, or maybe there could be a slow down on the exchange front.
But you should also note that delays may happen because of blockchain too.
A blockchain meticulously records every crypto transaction to maintain transparency within the network. However, there are multiple blockchains with varying attributes leading to some blockchains processing faster transactions than others.
Let’s understand how varied attributes of a blockchain is responsible for delayed transactions:
Blockchain records a transaction only after it is authenticated. Authentication ensures that people on the blockchain agree that the person transferring these cryptocurrencies actually has them.
But the way through which individuals come to a consensus differs from blockchain to blockchain. Miners on every network distinctly verify trades before adding them to the blockchain, and the procedure to verify transactions is called the Consensus Mechanism.
There are various types of consensus mechanisms:
- Proof of Work (PoW)
- Proof of Stake (PoS)
- Delegated Proof of Stake (DPoS) and
- Proof of Authority (PoA)
Let me explain this in detail by taking the example of PoW and PoS:
PoW is a mechanism that requires miners to solve complex computational problems to validate and confirm a transaction on the network.
Why PoW requires Minors?
When a miner solves a complex problem, your transaction receives one confirmation. Now, varying on the cryptocurrency you are trading, you will require a different no. of confirmations for your transaction to be complete.
E.g. In a Bitcoin transaction, you need three such confirmations, whereas, in a Bitcoin Cash transaction, you will need seven such confirmations.
This means you need miners to solve these highly complex problems thrice and seven times, respectively, for your transactions to be complete. And so, with such a complex mechanism, the transactions take a lot more time.
Compared to PoW, PoS is a much faster way to verify transactions. Even though you need the same no. of confirmations here as well, in PoS, miners are not required to solve computational problems; instead, they have to perform staking.
Staking is where individuals who want to become validators on the network freeze their cryptocurrency holdings in a wallet to perform verifications. Here, individuals can only verify transactions equivalent to the cryptocurrency staked by them.
How Is PoS Faster Than PoW?
PoS is faster than PoW because PoW requires extensive amounts of hardware and electricity supply for people to solve complex problems. Practically thinking it isn’t something that an individual can pull off alone, as it requires enormous investment amounts to get the necessary materials in place, limiting the no. of participants who can join the process.
Whereas in PoS, the process is a lot more collaborative, as it doesn’t require people to buy expensive hardware. Plus, here, validators don’t need to solve complex problems resulting in more people contributing as validators leading to faster verifications.
Another factor contributing to the delays is the transaction speed of the blockchain.
What is Transaction Speed of the Blockchain?
The transaction speed refers to the data transfer speed of a blockchain from one account to another. This speed dictates the no. of transactions that can be confirmed in a specific time frame.
For E.g. The EOS blockchain is one of the fastest blockchains surpassing Visa in transaction speed with the potential to handle 50,000 transactions per second.
Whereas the Bitcoin blockchain has a limited processing speed of handling 4-5 transactions per second.
However, each block’s size, block time, transaction fee, and network traffic influences transaction speed. A blockchain that can process a more number of transactions in a specific time frame is more viable than others. Faster transaction processing speed means faster transaction completions.
The Bottom Line
All in all, I would like to say that blockchain plays a crucial role in deciding the speed of transactions. Every cryptocurrency runs on a blockchain, each of which has different consensus mechanisms, varying scalability power and distinct traffic on its network.
It is important for you to know and understand the impact it can have on your transactions. Nonetheless, we understand that the cryptocurrency ecosystem has several bright minds constantly working to ensure the network’s smooth and safe functioning.
Some examples of their efforts are Sharding and the Lightning Network to enhance blockchain’s functioning and enable faster transaction processing.
[su_note] KuberVerse is an educational initiative. Anything expressed here directly or indirectly is not investment advice. And we ask you to do your own research before investing. [/su_note]
Disclaimer : Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered as investment/financial advice from CoinSwitch. Any action taken upon the information shall be at user's own risk.
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