How is a transaction verified on a cryptocurrency network?

3 min readOct 19, 2023

The process of verifying transactions on a cryptocurrency network involves several steps and participants, primarily conducted through a decentralized system using various forms of technology like cryptography, blockchain, and consensus algorithms. Here’s a simplified explanation:

Transaction Initiation:

A user initiates a transaction by sending cryptocurrency to another user’s digital wallet. This transaction is represented online as a “block”.
The transaction includes the sender’s wallet address, the recipient’s address, the amount of cryptocurrency to be transferred, and a digital signature. The digital signature, created using the sender’s private key, is crucial for security and authenticity.

Broadcast to Network:

This block is broadcast to every node (computer, server, or miner) in the cryptocurrency network. These nodes receive the block and validate the transaction.

Verification by Nodes:

Nodes (participants in the network) verify the transaction. This involves several checks:
Authenticity: Using the sender’s public key, nodes can verify the digital signature attached to the transaction to ensure it was indeed created by the sender’s private key.
Funds Availability: Nodes check the sender’s balance in the blockchain ledger to ensure they have enough cryptocurrency to complete the transaction.
Transaction Format: They confirm that the transaction adheres to network rules.

Mining and Consensus:

Once verified, the transaction is included in a new block of transactions. Before this block is added to the blockchain, however, it must go through a process called “mining.”
Mining involves solving complex cryptographic puzzles that require significant computational power. The first miner to solve the puzzle gets to add the block of transactions to the blockchain and is rewarded with newly created cryptocurrency tokens (this process varies with different cryptocurrencies).
Different networks use different “consensus mechanisms” to agree on transaction validity and the mining process. The most common is Proof of Work (PoW), but others include Proof of Stake (PoS), Delegated Proof of Stake (DPoS), and more.

Adding to the Blockchain:

Once the consensus is reached, the new block is added to the existing blockchain in a way that is permanent and unalterable. This block becomes a part of the public ledger, and the transaction is considered confirmed.

Completion:

The recipient’s wallet balance is updated, and the transaction is complete. The updated record is available on the public ledger for any node to verify.

This entire process ensures security, anonymity, and decentralization, key principles behind cryptocurrencies. However, the process might slightly differ depending on the cryptocurrency in question, as different currencies might use different consensus algorithms or have different network rules.

How is a transaction verified on a cryptocurrency network?

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Written by Vinod Kumar