How transactions are verified in Bitcoin Blockchain - Longest chain rule explained
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Have you wondered how transaction get approved in a Bitcoin block chain? Why you need to wait for 3 to 6 confirmations for the transactions to appear in your wallet. This video attempts to explain how a Bitcoin transaction is approved and the process behind it.
Let’s assume Mr. Gobish transferred Bitcoin worth 100$ from one crypto exchange to another. Once he does the transfer, the transaction message is sent to the network and passed around all the network participants which are also called nodes. This is added to the transaction pool. Currently, the transaction is in an ‘unconfirmed’ state. All the transactions in the transaction pool will be in an unconfirmed status.
Now we will understand who is a miner. In simple words, those who validate new transactions and record them on the global ledger of Blockchain are called miners and this activity is called mining.
To make it simple, let’s assume there are currently 3 miners who are trying to confirm the transactions from transaction pool including Gobish’s transaction of $ 100. Normally miners will select those transactions which will generate a higher transaction fees for them.
Currently, the numbers of confirmed blocks in the Blockchain public ledger is 998.
Once the miners identify that the 998th block is a valid block they will try to create a candidate block by adding unconfirmed transactions from the transaction pool. Now these miners are trying to add the 999th block. To add the blocks they have to solve a complex mathematical problem. This is known as Proof of Work (POW).
Let’s assume all the 3 miners were able to solve this problem and have Proof of Work.
Now we have 3 different candidate blocks, let’s call them 999 A, 999B and 999C
Now which of these block will form part of the valid block will depend upon the longest chain rule.
Let’s understand what is longest chain rule is.
Now there are other miners who are trying to create other valid blocks and based upon the speed by which a block is created others miners will keep on adding their blocks on top of the earlier blocks.
Here in this case Minor C had a better processor which was able to create a block faster than the miner A and B and hence new blocks were created on top of the block 999C. Now the longest chain is the one created by 999C and it will be keep on adding other blocks like 1000, 1001 and so on as miner C solved the proof of work before miner A and B.
So what happens to the blocks 999A and 999B? They have to create the Proof of Work again with new set of transactions from the transaction base.
Each confirmations represent adding each block. Each confirmation will take on an average of around 10 minutes or more per block.
Applying the longest chain rule and proof of work, unconfirmed transaction will become a confirmed transaction and added to the Blockchain ledger
Once the blocks are added miner will receive a transactions fees and block fees which will be the new Bitcoin created as an incentive for approving the transactions.
Block rewards will be reducing every year and in the end only transaction fees will be there as new Bitcoins will not be created.
We will get in to more details about mining and the incentives in our subsequent video.
