Blockchain technology is meant to provide a shared record of transactions, without the need for a central authority to keep track. It is much easier to record a transaction, though. But the users and applications require to understand when this transaction can be considered as permanently settled. That’s where the finality of blockchain comes in.
Finality is the state in which a transaction or change in blockchain’s state is considered permanent and cannot be easily reversed. Traditional finance settlement can include banks, clearinghouses, brokers and other centralized entities that confirm transactions before they can be considered complete. Much of this process is replaced with decentralized consensus mechanisms by blockchains to eliminate much of the intermediary.
What Is Blockchain Finality?
Blockchain finality is a guarantee that the transaction is not going to be modified, canceled, or reversed within the normal functioning of the blockchain network. Once it is final, the deal will no longer be considered final.
This is especially relevant as there is no central authority in decentralized networks to certify the validity of a transaction and ensure that it will stay valid. Rather, blockchains employ cryptography, consensus protocols, validators or miners and economic incentives to achieve consensus regarding the condition of the ledger.
One of the biggest reasons for finality is to avoid double-spending. For instance, when they send crypto to a vendor, that vendor should have the confidence that the transaction won’t be later lost on the blockchain in favor of a conflicted transaction.
One way to view the finality of a blockchain is to ask: When is it safe for users to consider a transaction final?
The answer could be even more crucial for DeFi protocols. For example, a lending protocol requires that a user’s collateral deposit be safely recorded before they’re permitted to borrow against it. Likewise, when building a cross-chain bridge, you must be sure of the finality of a transaction on the source chain before publishing or creating an asset on the destination chain.
How Does Blockchain Finality Work?
A blockchain’s consensus mechanism is closely related to finality. Consensus helps distributed participants agree on which transactions and which blocks should make it to the accepted blockchain history.
A transaction that the user enters is pending at first. Then, miners or validators (depending on the blockchain) verify the transaction and add it to a proposed block.
PoW network miners compete to be the first to have their computers solve the puzzles and gain the right to add blocks. The security of the blockchain is partially based on the amount of computation power behind the history.
Validators on PoS networks stake cryptocurrency to validate transactions and make decisions about the network. They can suggest and vote on blocks as per the rules of the specific protocol.
Types of Blockchain Finality
There are two main ideas that contribute to understanding the finality of blockchain: probabilistic and deterministic.
Probabilistic Finality
The most widely known case of a blockchain with a probabilistic finality is Bitcoin.
A transaction is harder to reverse by others the more blocks that are mined after the block in which it is contained. But there isn’t always a time at which the protocol states a transaction can never be reversed.
For instance, if someone sends a transaction to Bitcoin to a particular block, which is the newest block in the blockchain. It is possible for another block to take the place of the block containing the transaction, causing a temporary reorganization of the chain.
An attacker would have to work more and more to replace that history, the more blocks added on top of the transaction. The deeper the confirmation, the less likely it is to be a reversal.
The reason is that exchanges and other services might need a few confirmations to credit a Bitcoin deposit. In the Bitcoin Industry, six confirmations are generally the rule of thumb, but depending on the transaction size, risk appetite, and the service in question, the number could be different.
What is important is that confirmations and finality are not synonymous. When a transaction is confirmed, it means that it has been added to a block. Finality means how much that transaction can be considered to be final.
Deterministic Finality
Some other blockchain networks have a finality that is more explicit.
Deterministic or strong consensus finality systems have validators voting on blocks and a predetermined threshold for consensus. If that threshold is reached, the block can be deemed “finalized” by the protocol.
Proof-of-Stake networks can be used in conjunction with explicit finality mechanisms in block production. For instance, Ethereum’s Proof-of-Stake consensus mechanism determines the checkpoints on the Ethereum network when a threshold of validator participation is met.
This may lead to more certainty of settlement than waiting on further blocks. But deterministic finality doesn’t mean that any blockchain is impervious to all failures. The guarantees rely on the assumptions, the validator’s behavior, and the security model of the protocol.
Depending on the specific PoS system, such actions may also incur significant economic consequences, even slashing, in which dishonest validators can lose some of their staked funds.
Finality vs Transaction Speed
Finality is not always equated with speed of transactions, however.
A blockchain’s transaction speed is the rate at which it processes or adds a transaction. Finality means that at a certain point that transaction may be final and not be subject to a reversal.
A blockchain might be able to facilitate transactions rapidly, but may take longer for transactions to be deemed final. However, if one network processes transactions less often, but has a well-established finalizing mechanism, another network may process more frequently, but lack a finalizing mechanism.
For both developers and users both of these properties are important. A financial application with a high value might focus on higher-level guarantees of finality, whereas a payment application might focus on rapidly settling payments.
What is the importance of the finality of cross-chain transactions?
With the rise of various blockchain networks, finality has become even more crucial. Each blockchain may have their own consensus and settlement guarantees.
Assume that an asset is moved across different blockchains. A cross-chain protocol might have to watch the transaction in the source chain first and then release or create an asset in the destination chain.
The destination network might have acted on such an action before the source transaction is committed, and if the chain is reversed later, the destination network may have acted on a transaction that no longer exists in the accepted history of the chain.
Cross-chain infrastructure needs to consider the finality of each of the blockchain chains it connects.
These protocols, like Chainlink’s Cross-Chain Interoperability Protocol (CCIP), aim to facilitate cross-chain communication with security features applied to source-chain transactions and destination-chain execution. The general rule is that each blockchain’s confirmation process shouldn’t be the same for blockchain systems to work cross-chain.
What Can Cause Finality to Fail?
While blockchain networks are set up to ensure that history cannot be altered, this comes down to the security assumptions of the network.
Potential threats include:
- Chain reorganizations
- Consensus bugs
- Network partitions
- Bad validators or miners
- Majority attacks
- Software failures
- Synchronized efforts at shaping agreement
The implications vary according to the blockchain. The situation of a temporary reorganization of a probabilistic system is quite different from the case of an actual failure of a network’s finality mechanism.
Wrapping Up
Finality will gain greater significance as blockchain goes mainstream into payments, financial markets, tokenized assets, and cross-chain applications.
To users, finality offers a sense of security that the transaction is complete. It defines the order in which developers can safely act on blockchain events when building an application. It facilitates institutions to create predictable settlement processes.
The bottom line is that finality for blockchain is not just about waiting for a transaction to be added to their respective blocks. It’s all about grasping how a blockchain’s past is trusted.
Some networks are based on computational work and reversals are increasingly unlikely.
Others have implemented validator voting and economic incentives where they had a stronger guarantee of finality. Both methods try to address the same core issue: how to get the transactions that are part of the permanent history of the network agreed upon by the decentralized participants.