Transactions (Crypto)

Conducting transactions in the world of blockchain and crypto is a relatively straightforward operation. It does have costs, however, and the transactions are irreversible.

When two people meet in reality to conduct a transaction in cash, there is no intermediary and no underlying fee. Person A gives the cash to Person B, Person B gives the item to Person A. If the distance is too great, an intermediary can help to carry it out - Paypal, Venmo, banks, etc. These are centralized processors, capable of limiting access to your funds at their discretion.

When two people conduct a transaction in crypto, the intermediary is the network itself. A small fee (called gas) is paid to help secure the network and the transaction is automatically carried out. There is no centralized processor within the blockchain network - as long as you have access to your wallet, no one can limit your ability to send or receive digital assets.

Users of blockchain networks can only transact value to and from each other on the same particular network. There is no way by default to conduct transactions on one blockchain network with those on another blockchain network.

To put it another way - by default, you can't send BTC from your Bitcoin address to your friend's Ethereum address. There are ways to do such trades, but they usually rely on trusting a custodial third party - a risky proposition.

Transaction Security

The specifics of how transactions are secured depend on the underlying blockchain network and are called 'consensus methods.' The two most common consensus methods are 'Proof of Work' and 'Proof of Stake.'

Bitcoin uses the Proof of Work (PoW) consensus method. In this method, members of the network set up powerful specialized computers that are competing with each other to solve complex mathematical problems. These complex mathematical problems help to secure the network and make sure all transactions are legitimate, so the members running the computers are provided incentives.

Ethereum used to use the PoW consensus method, but switched to Proof of Stake (PoS) in 2022. The PoS method similarly relies on a subset of members with specialized computers to secure the network, but requires them to put up significant collateral to do so. This helps to ensure that members do not attempt to manipulate the network, because if they do, they lose their collateral.