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Why Is Finality Crucial in Designing and Evaluating Blockchain Systems?

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In the blockchain world, finality means that once a transaction or a group of transactions is confirmed, it becomes impossible to change. Think of it like traditional financial systems where it’s set in stone once a transaction is done. 

Similarly, in blockchain, achieving finality ensures that a transaction becomes permanent and cannot be tampered with once it’s recorded on the blockchain. This permanence is essential for the security and trustworthiness of blockchain technology.

Finality depends on the specific blockchain network and its consensus mechanism. Different blockchains use various methods to validate transactions and ensure finality. For instance, there’s proof-of-work (PoW), proof-of-stake (PoS), and practical Byzantine fault tolerance, each with its unique approach to ensuring that once a transaction is confirmed, it stays that way.

We’ve all experienced the frustration of waiting in a long line for something, and it’s inconvenient. That’s why companies need to consider the speed of cryptocurrency transactions seriously.

When transactions happen on a blockchain, they have a natural level of finality, often called “immutable.” However, it’s important to note that most blockchain protocols initially provide only a preliminary level of finality. This means that transactions aren’t immediately set in stone, but their level of finality increases as more blocks are confirmed.

The finality rate of a blockchain depends on its latency level, which is the time it takes for a blockchain to confirm a transaction. So, when designing a payment system, it’s critical to minimize latency to ensure its effectiveness.

Different Types of Finality in Blockchain

Finality in blockchain refers to the level of certainty and irreversibility of transactions and blocks. Blockchain systems offer various types of finality, each with its characteristics:

Probabilistic Finality: This finality, like Bitcoin, is common in blockchain systems using Proof-of-Work (PoW) consensus. Probabilistic finality means that as more blocks are added on top of a confirmed transaction, the likelihood of reversing that transaction diminishes exponentially.

Economic Finality: Economic finality is often associated with Proof-of-Stake (PoS) systems. In this context, a transaction is considered economically final when it becomes financially impractical to reverse it. PoS validators stake a certain amount of cryptocurrency as collateral, and if they approve fraudulent transactions, they risk losing their stake, making it economically irrational to act maliciously.

Instant Finality: Some networks, like Ripple, offer near-instant finality. Once a transaction is recorded on the ledger, it is confirmed and irreversible. Ripple relies on a network of validators, and transactions are validated by 150 of them. Validators that consistently perform well may earn a place in Ripple’s Unique Node List, which comprises 35 validators.

Unconditional Finality: Transactions that achieve unconditional finality cannot be undone. However, achieving unconditional finality often requires a high degree of centralization or a unique consensus mechanism due to its challenging nature.

State Finality: In certain blockchain systems, finality extends beyond individual transactions to encompass the entire state of the blockchain. Once a state transition occurs, such as a transaction or the execution of a smart contract, it becomes unmodifiable and irreversible. State finality is particularly important for applications like smart contracts, where the accuracy of the entire application state is crucial.

Understanding these different types of finality is essential in evaluating blockchain systems’ security reliability and suitability for specific use cases.

The Significance of Finality in Blockchain

Finality plays a vital role in blockchain technology by ensuring the validity and permanence of transactions, which is fundamental for the technology’s reliability and effectiveness.

Finality provides a high level of security and trust within the system. It guarantees that once a transaction is confirmed, it becomes unalterable and irreversible. This crucial feature prevents the problem of double spending, where the same digital asset could be used more than once. 

For example, if someone attempted to send one Bitcoin (BTC) in two separate transactions to two recipients, finality ensures this cannot happen. Once a transaction is confirmed and recorded on the blockchain, the digital asset is considered spent and cannot be used in subsequent transactions.

In the context of smart contracts, finality is essential. Smart contracts contain the terms of agreements between buyers and sellers in self-executing code. Finality ensures that the outcomes of these contracts are predictable and cannot be changed.

Furthermore, finality is crucial for decentralized applications (DApps) to ensure the safety and trustworthiness of their operations. It guarantees that decisions and transactions within these applications are permanent and cannot be reversed. Additionally, finality fosters trust among users and participants in the blockchain network, as they know that transactions are irreversible, increasing confidence in the system.

Challenges in Achieving Finality in Blockchain

Several challenges in the world of blockchain hinder the achievement of transaction finality. These issues include forking, network latency, vulnerabilities in smart contracts, and the potential for 51% attacks.

Forking: Forking occurs when the blockchain splits into multiple paths, creating different versions of the transaction history. This divergence puts the blockchain’s consensus mechanism to the test, making it difficult to determine which version is legitimate and causing delays in achieving finality. 

Disagreements among the community or developers on protocol updates, leading to hard forks, can contribute to this lack of finality.

Network Latency: Network latency refers to delays in data communication between nodes. Slow network connections can disrupt the order and validation of transactions by delaying the propagation of transaction information across the blockchain network, further complicating finality.

Smart Contract Vulnerabilities: Vulnerabilities in smart contracts can result in unexpected behavior, allowing malicious actors to exploit them and potentially reverse transactions. This poses a threat to finality and security in blockchain transactions.

51% Attacks: In proof-of-work (PoW) blockchains, an entity controlling over 50% of the network’s mining power can manipulate the blockchain’s history and reverse transactions. This undermines both finality and security.

Understanding Finality in Finance

To grasp the concept of finality in blockchain, it’s helpful to first dive into its importance in traditional finance. In finance, the focus is on settlement finality, a critical aspect. This concept revolves around ensuring that once a transaction is initiated, it will eventually be completed and cannot be reversed, even if the parties involved face financial difficulties or fail. This level of certainty is crucial in financial systems.

When a platform or payment network lacks finality (certainty that transactions will be settled), it introduces higher systemic risks for all participants. Therefore, in traditional financial markets, established standards and legal frameworks mandate settlement finality, especially for entities known as financial market infrastructure providers.

In Europe, for instance, the settlement finality directive guarantees that final settlement occurs regardless of whether the sending participants encounter insolvency or cancel orders. This is vital to prevent any cascading effects. Consider a supplier who often relies on their clients’ payments before they can compensate their employees.

However, even in traditional finance, finality is only sometimes immediate. Let’s explore this with two examples:

1. Buying a new phone with a credit card: Although the money changes hands instantly, the merchant might have to wait several days until they receive the funds from the credit card company. During this time, the transaction can still be reversed or canceled.

2. Buying a new phone with cash: Purchases made with cash are immediately settled and final, providing instant certainty.

Finality in Proof-of-Stake (PoS) Consensus

When it comes to PoS blockchain networks, achieving finality is a critical aspect. We’ll explore the finality guarantees of some major PoS platforms to understand how they work:

Tendermint: Tendermint ensures absolute finality. A block is finalized if it receives ⅔ or more pre-votes and pre-commits. However, if ⅓ or more validators become unresponsive, the network halts. Tendermint prioritizes consistency over availability.

Thunderella: Thunderella provides absolute finality through its fast path. Valid transactions are instantly confirmed if ¾ the fast path committee is honest and online. However, overall finality occurs when transactions are recorded on the underlying blockchain, which can be chain-based or BFT-based. Thunderella prioritizes availability.

Algorand: Algorand achieves probabilistic finality by ensuring that an attacker controls less than ⅓ of the protocol’s value. It aims to minimize the probability of forks, prioritizing strong synchrony for definitive agreement on each block.

Dfinity: Dfinity achieves probabilistic finality by increasing the probability as the block weight on a chain grows. It aims for near-instant finality, and if the network splits, it pauses the random beacon to prevent divergence.

Ouroboros Genesis: Genesis achieves probabilistic finality based on chain selection rules, considering short- and long-range forks.

Casper FFG: Casper FFG aims for absolute or economic finality with a ⅔ supermajority of validators agreeing on a block. It prioritizes consistency and ensures safety even if an adversary controls the proposal mechanism.

Casper TFG: TFG achieves absolute finality, allowing validators to have different fault tolerance thresholds asynchronously.

Finality in Proof-of-Work Chains

In Proof-of-Work blockchain networks, nodes rely on the “longest” or heaviest chain rule to establish consensus.

Here’s how it works: Two separate paths emerge when two miners broadcast the same block simultaneously. New blocks are continuously added until one chain becomes longer than the other, typically within one or two blocks. Once the longest chain is confirmed, it’s officially accepted, and transactions on the shorter chain are rejected.

For instance, in Bitcoin, users often wait for six block confirmations, roughly taking an hour, to consider their transactions final. However, it’s essential to understand that finality in Proof-of-Work chains is probabilistic, meaning there’s always a tiny chance of a network attack reversing transactions. As Vitalik Buterin noted, “Finality is always probabilistic.”

While Proof-of-Work networks with well-distributed hash rates are generally secure, two types of attacks could impact finality:

Selfish Mining: This involves miners withholding a newly mined block to create a fork, which they continue to mine until it surpasses the longest chain. However, as of 2021, no instances of selfish mining have been reported.

51% Attack: If one miner controls over 50% of the network’s hashrate in a Proof-of-Work blockchain, they can reverse transactions and perform double-spending. Ethereum Classic experienced multiple 51% attacks, including three in one month in 2020.

Conclusion

Finality in blockchain is a fundamental concept that defines the certainty and irreversibility of transactions and blocks within a blockchain network. This concept comes in various forms, each tailored to different consensus mechanisms and use cases.

Probabilistic finality, commonly found in Proof-of-Work systems like Bitcoin, relies on the accumulation of blocks to decrease the likelihood of transaction reversals. Economic finality, prevalent in Proof-of-Stake networks, ensures that reversing a transaction would be financially impractical for validators. As seen in Ripple, instant finality offers immediate confirmation and irreversibility of transactions through a network of validators. 

Unconditional finality is the most secure form, where transactions cannot be undone under any circumstances, though it often requires a high level of centralization or unique consensus methods. Last but not least, state finality extends beyond transactions to encompass the entire state of the blockchain, ensuring that state transitions are immutable.

Understanding these various types of finality is crucial when designing and evaluating blockchain systems, as it directly impacts security, reliability, and the suitability of blockchain for specific applications. Ultimately, finality plays a pivotal role in establishing trust, preventing double spending, and ensuring the integrity of blockchain networks.

FAQs

What is blockchain finality?

Blockchain finality refers to the level of certainty and irreversibility of transactions and blocks on a blockchain network.

How does economic finality work in blockchain?

Economic finality in blockchain occurs when reversing a transaction becomes financially impractical for validators, often seen in Proof-of-Stake (PoS) systems.

What is the significance of instant finality in blockchain?

Instant finality ensures that once a transaction is recorded on the ledger, it is immediately confirmed and irreversible, providing rapid transaction settlement.

Why is unconditional finality challenging in blockchain?

Unconditional finality is difficult to achieve as it requires transactions to be irreversible under all circumstances, often necessitating a high degree of centralization.

How does state finality benefit smart contracts in blockchain?

State finality ensures that state transitions, such as smart contract executions, are unmodifiable and irreversible, guaranteeing the accuracy of the entire application state.

Disclaimer. The information provided is not trading advice. Cryptopolitan.com holds no liability for any investments made based on the information provided on this page. We strongly recommend independent research and/or consultation with a qualified professional before making any investment decisions.

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Damilola Lawrence

Damilola is a crypto enthusiast, content writer, and journalist. When he is not writing, he spends most of his time reading and keeping tabs on exciting projects in the blockchain space. He also studies the ramifications of Web3 and blockchain development to have a stake in the future economy.

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