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Blockchain: A Gentle Introduction to Transactions

Bitcoin VS Ehtereum VS Ripple

Introduction

A cryptocurrency transaction is to all effects a financial transaction. After the 2008 financial crisis, cryptocurrencies gained popularity due to the need of a peer-to-peer electronic cash system where the trust could be shifted from banks and centralized institutions to crowds and cryptography. A cryptocurrency relies on a blockchain - continuously growing list of records called blocks, which are linked and secured using cryptography. It is "an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way" (Bonaventura, 2018).

Although a blockchain is a decentralized peer-to-peer system with no central authority, it still has some questions to be answered:

We will try to answer these questions describing different transaction mechanisms for various cryptocurrencies, giving particular emphasis to Bitcoin, and then briefly analysing other currencies such as Ethereum and Ripple.

Bitcoin Transactions

Bitcoin consists of (Antonopoulos, 2018):

In Bitcoin users can prove the ownership of their digital currency by their keys. Transactions are verified by the network nodes (miners) through cryptography and recorded in a public distributed ledger called blockchain (Wikipedia, 2022). A transaction tells the network that the owner of some Bitcoin has authorized the transfer of that value to another owner (Antonopoulos, 2018). It is constituted by an input and an output.

An input has two main parts:

  1. Output of the previous transaction (Txid, Vout)
  2. Signature of the person sending the money (scriptSig)
An output has two main parts as well:
  1. Amount of money being transferred
  2. Conditions under which the money can be received and determined by a cryptographic puzzle (scriptPubKey)

Transaction Output

Bitcoin is a "transaction-centric" cryptocurrency where a transaction states explicitly from which transaction it is taking the money from (txid). There are no coins, no senders, no recipients, no balances, no accounts, and no addresses. All these are constructed at higher level (Antonopoulos, 2018). The currency to be spent lays on the transaction output and all the nodes on the blockchain track all the unspent transaction outputs (UTXO). From a user perspective, their sum is the balance of their wallet.

The amount of cryptocurrency in a transaction output can be any multiple of a satoshi (the smallest denomination of Bitcoin that can be recorded on the blockchain) and once created it is a discrete and indivisible quantity that can only be spent in its entire amount. This fundamental characteristic implies that in the occurrence that the value of a transaction is less than the UTXO, change will need to be generated. Usually, to satisfy the required transaction amount, wallets applications retrieve all the UTXOs that adds up to that amount or more and complete the transaction. In any case, a transaction consumes a previously recorded UTXO and creates a new transaction output that can be consumed by a future transaction (Antonopoulos, 2018). Moreover, there is a special case where a transaction can be created without spending a UTXO: it is called the Coinbase and happen if and only if it is the first transaction of a block.

Transaction Input

A transaction input identify which UTXO will be consumed and provide proof of ownership trough an unlocking script. Again, it is important to note how the transaction input doesn't have explicitly stated the value of the transaction and the locking script that sets the conditions for spending it, we must use the referenced UTXO to obtain them.

Transaction Fees

In a Bitcoin transaction an output doesn't equal the amount of the input and it's indeed slightly less of the latter because of a fee: this can be considered as an award for the Bitcoin miners for securing the network. Furthermore, this approach is highly affective against any attack attempt to the network because of its economic infeasibility. Transaction fees are calculated not on the base of the amount of the transaction but on its size in kilobytes and that their weight affect the processing priority of the blocks to be mined (Antonopoulos, 2018).

As said by Antonopoulos (2018) we can summarize a Bitcoin transaction saying that they move value from a transaction input to a transaction output. An input is a reference to a previous transaction output and is showing where the value is coming from. A transaction output directs a specific value to a new owner's Bitcoin address and can include a change output back to the original owner. Outputs from one transaction can be used as inputs in a new transaction, thus creating a chain of ownership as the value is moved from owner to owner.

Transaction Verification

Bitcoin uses Proof of Work (PoW) to ensure blockchain security and consensus. "Proof of Work", as its name implies, requires that the decentralized participants that validate blocks show that they have invested significant computing power in doing so. In Bitcoin, validators (known as "miners") compete to process a block of transactions and add it to the blockchain (Bonaventura, 2018).

Both the locking script on the UTXO and the unlocking script to validate a transaction are written in a language called Script. It is not a general-purpose language, and it cannot do many of the things that modern programs do. This is an intentional security feature that ensures that the language is not Touring Complete avoiding infinite loops and possible attacks to the network (Antonopoulos, 2018). Bitcoin validation relies on two types of scripts to validate a transaction: a locking script and an unlocking script. The locking script (or scriptPubKey) is the spending condition placed on an output while the unlocking script (scriptSig) solves the conditions placed on an output and allows the output to be spent (Antonopoulos, 2018). Every node can validate a transaction and it is done by executing the unlocking and locking scripts together and in sequence.

Ethereum Transactions

One of the features of Bitcoin is that it relies on a Forth-like stack-based scripting system that is not Touring-complete. Even if the Script language offers a high level of security, it is not flexible in writing more complicated contracts. With this limitation in mind, a new blockchain platform that is Touring-complete has been implemented, enabling the possibility to write contracts, named smart-contracts, using a high-level programming language (Chowdhury, 2019).

The Ethereum blockchain is essentially a transaction-based state machine, where, based on those inputs, will transition to a new state; the correct current state is a single global truth, which everyone must accept. To cause a transition from one state to the next, a transaction must be valid, and it must go through a validation process known as mining (Kasireddy, 2017).

In Ethereum we have two kinds of accounts: Externally Owned Account (EOA) and a Contract Account. An externally owned account can send messages to other externally owned accounts or to other contract accounts by creating and signing a transaction using its private key, while, unlike externally owned accounts, contract accounts can't initiate new transactions on their own (Kasireddy, 2017). Any action on the Ethereum blockchain starts from EOAs, and is interesting to note that a message between two externally owned accounts is simply a value transfer, but a message from an externally owned account to a contract account activates the contract account's code, allowing it to perform various actions (Kasireddy, 2017).

Transaction Fees

Transactions require a fee and must be mined to become valid (Batra, 2022). They are named "Gas", and they are the unit used to measure the fees required for a particular computation. Gas price is the amount of Ether you are willing to spend on every unit of gas and is measured in "gwei". With every transaction, a sender sets a gas limit and gas price. The product of gas price and gas limit represents the maximum amount of Wei that the sender is willing to pay for executing a transaction.

Transaction Process

For a transaction to happen, the following conditions must be satisfied:

If all these points are verified, we deduct the upfront cost of the transaction from the sender's balance and we increase his nonce by 1. At this point, we can calculate the gas remaining as the total gas limit for the transaction minus the intrinsic gas used. Finally, we're left with the new state and a set of the logs created by the transaction.

As for Bitcoin, a transaction needs to be signed using the sender's private key. This proves that the transaction could only have come from the sender and was not sent fraudulently. Additionally, with the signature hash, the transaction can be cryptographically proven that it came from the sender and submitted to the network (Batra, 2022). Ethereum has used PoW for security and consensus since its genesis but is moving to Proof-of-Stake (PoS). This is because PoS is thought to be more secure, less energy-intensive, and enables new scaling solutions to be implemented. Also, in PoS, validators explicitly stake capital in the form of ether into a smart contract on Ethereum. This staked ether then acts as collateral that can be destroyed if the validator behaves dishonestly or lazily (Smith, 2022).

Ripple Transactions

Ripple seeks to adopt its currency XRP as the bridging currency for all global transactions; it is not mined like other cryptocurrencies and its network operates on a distributed ledger that uses consensus instead of mining like other blockchains meaning that it isn't susceptible to "51% attacks". (Gunter, 2021).

Like Ethereum, Ripple uses a configuration model where the ledger marks systematic changes to a specific state of the network. These changes are referred to as transactions, and these transactions alter consensus to the underlying account. Consensus is Ripple's mechanism for achieving distributed agreement and it achieves this by relying on pre-trusted nodes known as "validators" to ensure a transaction's validity and propagate it across the network. Some nodes just make and receive payments for their users while others operate as validators carrying out the consensus process (Cata, 2018).

Transaction Process

A transaction is the only way to modify the XRP Ledger and are only final if signed, submitted, and accepted into a validated ledger version following the consensus process (XRP Ledger, 2022). Every signed transaction is hashed, and this can be used as proof of payment since anybody can look up the transaction by its hash to verify its final status. Transactions included in a ledger destroy some XRP as a transaction cost and the exact amount of XRP to destroy is defined by the signed transaction instructions. Transactions that fail are also included in ledgers because they modify balances of XRP to pay for the anti-spam transaction cost (XRP Ledger, 2022).

Only signed transactions can be submitted to the network and included in a validated ledger. A signed transaction is immutable: its contents cannot change, and the signature is not valid for any other transaction (XRP Ledger, 2022).

The process of sending a transaction has different steps:

  1. Creation of unsigned transaction
  2. Sign the transaction with one or more signatures
  3. Submit the transaction
  4. The consensus mechanism agree on which provisional transaction gets included in the next validation ledger
  5. Application of the transaction to the ledger by different servers (validators)
  6. If enough trusted validators created the exact same ledger, the ledger is declared validated and immutable

Every new transaction the validators "look" at the ledger, which is a snapshot of the current state of transactions on the network and agree upon the current state utilizing the Ripple Protocol Consensus Algorithm (RPCA). Prior to verification, validators take all the valid transactions it has seen that have not yet been applied to the current ledger and makes them public as a list known as the "candidate set". Each validator then groups the candidate sets of all validators on its UNL (unique node list) and votes on the accuracy of all transactions. Transactions that receive more than a minimum percentage of "yes" votes are passed on to the next round while transactions that do not receive enough votes will either be discarded or included in the candidate set for the beginning of the consensus process on the next ledger. The final round of consensus requires at least 80% of a validator UNL agreeing on a transaction. All transactions that meet this requirement are applied to the ledger (Cata, 2018).

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