Understanding Block Finality in Crypto Transactions

In 2023, Ethereum had encountered an issue that temporarily disrupted its normal operation. Normally, Ethereum continuously approves (rather finalizes) new blocks of transactions. However due to a bug the blockchain stopped finalizing blocks for about two hours across both incidents.

The problem was caused by a bug in a specific software called the Prysm client which many of Ethereum’s nodes use to operate. Although new transactions were still being recorded, they weren’t getting the final stamp of “block finality”.

The issue was quickly addressed, and normal operation resumed relatively fast—within minutes on the first day and about an hour on the second day.

Why are we talking about this incident? Well, because we realize with this incident that without finality the trust and reliability that users and applications place in the blockchain can be compromised.

Block finality in the context of blockchain technology is the point at which transactions within blocks are considered irreversible and permanently part of the blockchain. 

If finality is not achieved it could potentially lead to double-spending problems or other security issues. So let’s understand exactly what block finality is in crypto!

What Is Block Finality in Crypto?

Blockchain finality is an important concept in the architecture of distributed ledger technologies. It refers to irreversibility once a transaction has been confirmed and added to a block in a blockchain network like Bitcoin or Ethereum. It means that a transaction is deemed final and can no longer be altered.

This is basically the reason why transactions on the blockchain are permanent and why we refer to them as immutable.

One of the differences between traditional financial systems and blockchain systems is that in the latter once a transaction has been correctly processed, the chance of it being reversed should and is slim to none. However, this isn’t usually the case in traditional finance. 

There is another term we should know about. Latency. In blockchain it refers to the delay between when a transaction is submitted and when it is confirmed (finalized) on the blockchain. So basically, lower latency means faster transaction confirmation times.

The two above mentioned concepts work in tandem. The latency level of a blockchain directly affects its finality rate. A higher latency means a slower rate of achieving finality. Conversely, low latency contributes to a quicker finality rate. Obviously, the blockchain with low latency rate is considered more efficient for transactions.

Now think of this. For businesses and financial transactions, immediate finality is extremely important, right? High latency (or rather delays in finalizing transactions) can negatively impact businesses. Especially those that rely on quick transaction times such as retail or financial services. 

Also, it may not be necessary to mention that waiting a long time for a transaction to be confirmed can be impractical in everyday shopping or critical financial operations.

How Does Block Finality Work?

You should understand that Block finality is achieved differently in PoW, PoS and other consensus mechanisms. So let’s discuss this, shall we?

Proof of Work (PoW) Finality

In Proof of Work systems like Bitcoin finality is achieved when a transaction is included in a mined block and subsequent blocks are added on top. Block finality in here is achieved through a distributed consensus mechanism that uses the follow the “longest” chain rule. 

PoW finality is probabilistic in nature. Because there is always a non-zero chance of a transaction could be reversed if a longer alternative blockchain branch is accepted by the network.

In Bitcoin, it is generally accepted that a transaction achieves sufficient finality after six confirmations (or rather six additional blocks have been added to the chain). We can reliably conclude here that this process prevents double-spending by making it highly impractical to alter the blockchain history.

Proof of Stake (PoS) Finality

Block finality in proof-of-stake (PoS) chains differ from one PoS implementation to another. So let me explain!

Proof of Stake mechanism is where validators stake their cryptocurrency as collateral to earn the right to validate transactions, create new blocks and participate in the consensus process. Read about it in detail here.

Lets have an implementation example, alright? For example, Casper FFG (Friendly Finality Gadget)—an Ethereum PoS implementation achieves finality by introducing validators to confirm the validity of the chain after every 100 blocks. A block is finalized after the approval of ⅔ of all validators.

Other Consensus Mechanisms

Now let’s discuss the block finality mechanism in DPoS and BFT Variants. 

Delegated Proof of Stake (DPoS) basically works in a way that token holders elect a smaller number of validators (delegates). Then, these delegates work on their behalf to validate transactions and achieve finality.

Coming to Byzantine Fault Tolerance (BFT) finality mechanisms it can be said that they are crucial in systems requiring immediate finality. BFT algorithms achieve consensus even if some validators are faulty or malicious. Let me give an example here. 

Tendermint used by the Cosmos network achieves finality when any block receives more than ⅔ of the pre-votes and pre-commits. This continues in perpetuity unless ⅓ of all validators become unresponsive.

Here’s a comprehensive overview you need to understand the Cosmos Network that uses a unique consensus mechanism called Tendermint.

What Are the Types of Block Finality?

On the blockchain, there are various types of finality. They are classified according to the levels of certainty and permanence with regard to transactions and blocks.

Finality in blockchain can be probabilistic, economic, instant, unconditional or related to the entire state of the blockchain.

Probabilistic Finality

We had a mention of this type earlier in the PoW mechanism of achieving finality. Probabilistic finality means that the chances are low for a transaction to be reversed with more blocks added to a chain.

Economic Finality

Well, economic finality is often associated with PoS mechanisms. This is where finality is achieved through financial incentives. Well, the idea behind this is it becomes very expensive for anyone to revert transactions in such a blockchain network. So the validators in PoS run the risk of losing their stake if they approve fake transactions.

Instant Finality

Instant finality is a block finality type where once a transaction is recorded on the ledger it is immediately confirmed and irreversible. Instant finality is hard to achieve. That said, decentralized protocols like Shardeum and Ripple provide almost near instant finality with a high level of certainty.

Talking about Ripple, in here transactions are validated by 150 validators which can potentially earn a spot in Ripple’s Unique Node List of 35 validators.

Unconditional Finality

Unconditional finality means that a transaction is fully final and cannot be undone under any circumstances. You know, achieving this level of finality often requires a high degree of centralization or a unique consensus mechanism.

State Finality

In some blockchain systems, finality refers to the entire state of the blockchain and not just individual transactions. A state transition (say, a transaction or smart contract execution) cannot be modified or reversed once completed. 

What Is the Importance of Block Finality in Crypto Transactions?

Finality eliminates the risk of double-spending. That is where you attempt to spend the same cryptocurrency twice. This way, the digital asset is considered spent and cannot be used again. Also, block finality prevents malicious attacks that could tamper with transaction history. 

However it is clearly undoubtful that achieving finality in a decentralized system like blockchain is not a straightforward task. It requires a delicate balance of various factors like the consensus algorithm, network latency and the network’s security mechanisms. 

Block finality is also necessary for the deployment of smart contracts. 

Smart contracts incorporate the agreement details between transacting parties in their self-executing code. Read more about its role in DeFi here.

So block finality makes sure that the outcomes of these contracts are predictable and irrevocable.

Conclusion

So we have now talked about the recent finality issues in Ethereum and that served as a crucial reminder for us to explore the types of blockchain finality in crypto transactions and its importance. Finality as we now know offers a very powerful defense against issues like double spending and improving the reliability of decentralized networks.