Understanding Finality in Blockchain: All You Need to Know

In traditional financial systems, when transactions are confirmed, it is impossible to be undone. The same concept applies to blockchain. When finality is attained, the transactions become permanent and can’t be reversed.

Finality is usually attained through consensus on a blockchain network. Blockchains employ varying consensus mechanisms, each having a unique method of verifying transactions and making sure finality is achieved. Some of the well-known consensus algorithms include proof-of-stake, proof-of-authority, and proof-of-work.

What Are the Various Types of Finality?

There are several types of finality, including unconditional, instant, economic, and probabilistic. Let’s take a closer look at each.

Probabilistic Finality

Blockchains that use the proof-of-work consensus mechanisms have a probabilistic finality. In this case, the chances of reversing a particular transaction reduce massively when blocks are set on top of a verified transaction after being included in a certain block.

Economic Finality

Most proof-of-stake blockchains apply economic finality. Here, a transaction is deemed final if reversing it would not make financial sense. All proof-of-stake networks require validators to stake a specified amount of tokens as collateral. Therefore, the validators risk losing their tokens if they attempt to act against the stipulated rules.

Instant Finality

Blockchains like Ripple offer instant finality, meaning when transactions are recorded on the ledger, they are confirmed immediately, making them irreversible. Networks with this type of finality usually have few validators. For instance, Ripple only has 150.

Unconditional Finality

On blockchains with unconditional finality, transactions are considered unconditionally final when they are confirmed. That means no circumstances will make a confirmed transaction to be undone.

Why Does Finality Matter in Blockchain

Finality is crucial on any blockchain. It provides a much-needed level of trust and security, which ensures that once transactions are confirmed, they cannot be reversed or changed. Moreover, by verifying that transactions are legitimate, finality helps to prevent double spending, which occurs when the same token is used twice.

Finality is also vital to executing contracts between buyers and sellers on a blockchain. They make sure that the agreement between the two parties is unalterable.

Challenges to Attaining Finality in Blockchain

When a blockchain splits into various paths, forking occurs, producing several versions of the transaction history. In such a scenario, determining which version is legit becomes challenging for node operators.

Network latency, which happens when there is a delay in communication between the blockchain nodes, can complicate finality. Additionally, vulnerabilities in smart contracts could be exploited by bad actors, who may then reverse transactions.

Techniques and Consensus Mechanisms to Improve Finality

There are several methods that can be applied to improve finality. One of them is the introduction of longer confirmation times. These give room for more validations before any transaction is deemed final.

Further, blockchains can use the multiple confirmation technique, which involves a huge number of node operators checking the validity of transactions to ensure a wide consensus and lower the chances of malicious attacks or mistakes.

Also, blockchains could employ innovative consensus mechanisms like delegated proof-of-stake, pure proof-of-stake and HoneyBadgeBFT, which have greatly transformed the blockchain industry. For instance, by using the delegated proof-of-stake mechanism, blockchains select a small number of trusted parties to confirm transactions, thus improving finality and network effectiveness.

Future Trends for Attaining More Reliable Finality

All leading blockchains intend to achieve more reliable finality. Hybrid consensus models are among the trends that can help these chains attain the desired finality while maintaining robust security and network performance.

Moreover, there is rising interest in futuristic cryptographic methods such as zero-knowledge proofs and sharding. The former improves privacy by allowing node operators to verify transactions without revealing private information, while the latter speeds up the process of validating transactions by dividing a blockchain into small, manageable parts.

To maintain transaction finality amid growing quantum threats, blockchains are looking to adopt quantum-resistant cryptographic solutions in the near future. In addition, more blockchains seek to become interoperable, which will make them achieve more reliable finality.