What is Blockchain Transaction? Complete Working, Importance and Challenges

Blockchain is a decentralized digital ledger that records transactions across a network of computers, ensuring transparency and security. The global blockchain market is projected to reach $163.83 billion by 2029, growing at a rate of 56.3%, highlighting its increasing adoption and potential.

To understand what a blockchain transaction is, it's important to recognize why it is gaining popularity. Its relevance in industries like finance, supply chain, and healthcare makes it an in-demand technology for the future.

What is Blockchain Transaction? Key Concepts and Examples Explained

A blockchain transaction is the transfer of data or assets between parties that is recorded on a decentralized digital ledger. Blockchain transactions operate on a peer-to-peer network, where each transaction is confirmed by multiple participants, making it resistant to tampering. 

In the next step of this process, once a transaction occurs, it is grouped with others into a "block" and added to a chain of previous transactions. These transactions are then verified using consensus mechanisms like proof-of-work or proof-of-stake. Since consensus mechanisms need multiple participants (nodes) to confirm the legitimacy of a transaction, it can prevent malicious transactions.

Let’s take an example and understand how blockchain transactions work.

Example of Blockchain Transaction

To understand the workings of blockchain transactions, let’s consider a Bitcoin transfer from one person to another using blockchain technology.

Here’s a blockchain example showing transactions.

• A company in one country wants to send a payment to a supplier in another country. The sender initiates the transaction by creating a request with payment details (amount, recipient details, etc.), signed with their private key.
• The transaction is broadcast to a decentralized blockchain network, which includes nodes from multiple participants (banks, financial institutions, etc.) in different regions.
• The blockchain network validates the transaction through consensus mechanisms (such as proof-of-work or proof-of-stake), ensuring that the funds are legitimate and the sender has enough balance to complete the transfer.
• Once validated, the transaction is grouped into a block and added to the blockchain, completing the transfer from the sender to the recipient. 
• The entire transaction history is recorded, ensuring that both parties can track the payment in real-time.

Blockchain includes blocks ( containing transaction data), chains ( links blocks in chronological order), and consensus mechanisms (such as proof-of-work) that ensure data integrity. These components work together to perform transactions. Let’s understand the workings of blockchain technology in detail.

Also Read: What is Blockchain Technology? [Explained]

Fundamentals of Blockchain Technology: An Overview

Blockchain technology includes components like hash encryption, authentication methods, and mining mechanisms, which work together to ensure secure and trustworthy transactions.

Here’s an overview of the components involved in blockchain technology.

• Hash Encryptions

A hash function takes input data (like a transaction) and gives a fixed-size output, known as the hash. Each blockchain block contains the hash of the previous block, creating a chain. This makes sure that once data is recorded, it cannot be modified.

Example: In Bitcoin, the hash of each block includes the hash of the previous block, creating an unbreakable chain.

• Authentications and Authorizations

Authentication in blockchain ensures that only authorized users can participate in transactions. Public and private keys are used for this purpose—public keys act as identifiers, while private keys are used to sign transactions. 

Authorization grants permission for users to perform certain actions, such as sending or receiving assets. This prevents unauthorized people from engaging in specific blockchain activities.

Example: When Raj sends Bitcoin to Kumar, he signs the transaction with his private key. Only Kumar can use his private key to access and spend the Bitcoin.

Also Read: Exploring Cryptography in Blockchain: Types and Key Algorithms

• Mining

The blockchain mining process adds new blocks to the blockchain. Miners compete to solve complex cryptographic puzzles, and the first to solve gets the right to add a new block to the blockchain. 

Mining maintains the decentralized nature of the blockchain by ensuring that transactions are checked and recorded. This is why successful miners are rewarded with cryptocurrency.

Example: In Bitcoin, the first miner to solve it validates the transaction and adds a new block to the blockchain, receiving a reward in the form of a Bitcoin.

• Proof of Work 

Proof of Work (PoW) is a consensus mechanism in which miners must solve a cryptographic puzzle to confirm transactions and add a new block to the chain. The difficulty of the puzzle keeps the system secure and prevents malicious actors from taking control.

Example: In Bitcoin's PoW system, miners can add a block to the blockchain only after solving a difficult mathematical problem.

• Proof of Stake

In this alternative method, validators are selected based on the number of tokens they possess and are willing to "stake" as collateral. The more tokens are staked, the higher the chance of getting chosen to validate the next block. 

PoW offers strong security but at the cost of high energy consumption and lower scalability, while PoS is more energy-efficient, faster, and scalable.

• Example: In Ethereum 2.0, validators are chosen based on how the amount of Ethereum staked.

In addition to these, smart contracts, decentralized applications (dApps), and cryptocurrencies also form a part of blockchain technology. 

Now that you’ve explored what a blockchain transaction is and its example, let’s understand this process in detail.

Blockchain Transaction Process: A Step-by-Step Approach

A blockchain transaction process starts when a user initiates a transaction and ends after validators check the transactions and add them to the block. It includes components like block header and processes like validation and consensus mechanism.

Here’s a breakdown of the blockchain structure and processes involved in transactions.

Blockchain Structure

Data in the blockchain is stored in blocks, each containing a collection of transaction records. It consists of three components: block header, transaction data, and Nonce. Let’s explore these components in detail.

1. Block Header

This contains metadata such as the block’s unique identifier (block hash), the timestamp of block creation, and the hash of the previous block in the chain. 

Including the previous block's hash ensures that the blocks are placed in chronological order, forming a continuous chain. This helps prevent tampering with transaction histories, which is critical in fraud prevention for financial systems.

Example: A block with a unique ID (block hash) like "abc123", a timestamp of "2025-01-22 10:30:00", and the hash of the previous block as "xyz789". These elements link the new block to the previous one

2. Transaction Data

This section holds records, such as the sender's and receiver's wallet addresses, the amount of cryptocurrency, and the digital signature of the transaction. The inclusion of digital signatures authenticates the transaction, helping to avoid fraudulent activities like unauthorized transfers.

Example: If Raj is sending 1 Bitcoin to Kumar, the transaction data looks like this:

• Sender's wallet address: "Raj123"
• Receiver's wallet address: "Kumar456"
• Transaction amount: "1 BTC"
• A digital signature verifying Raj’s identity: "signABC123

3. Nonce (Number Used Once)

The nonce is a random value used in the Proof of Work (PoW) process. Miners must find a nonce that, when combined with the block's data and hashed, creates a hash that meets specific requirements, like starting with a certain number of zeros. 

This mechanism prevents fraudulent transaction confirmations by ensuring only legitimate transactions are validated through the computational process.

Example: The miner tests different nonce values, and when they find a nonce (e.g., "56789") that produces a hash starting with "0000" (e.g., "0000abcde12345"), they successfully add the block to the chain.

Now that you know the different components of a blockchain, let’s understand how these components work seamlessly to perform transaction processes. 

Transaction Process

A blockchain transaction involves user initiation, validation, mining, confirmation, and post-transaction actions. Each of these steps plays an important role in verifying the transaction, maintaining its integrity, and ensuring that the transaction is properly recorded.

Here are the steps involved in the blockchain transaction process.

1. Initiation by a user

The transaction process begins when a user, typically the sender, records a new event or data point in the blockchain system. The user submits the transaction for processing, which includes relevant details like sender/receiver information, product IDs, transaction amount, etc.

Once initiated, the transaction is broadcast to a network of nodes (computers) spread across the globe through a peer-to-peer (P2P) protocol.

Example: A coffee producer in Brazil scans a batch of coffee beans and records details (origin, batch number, weight) on the blockchain system to verify the authenticity and traceability of the product.

2. Validation in the mempool

Once the transaction is submitted, it enters a temporary storage area where unconfirmed transactions are held and checked for validity by miners. This process confirms that the transaction doesn’t violate any network rules or is not fraudulent.

The miners use double-spending by ensuring that the sender is not trying to spend the same cryptocurrency more than once. They also prioritize transactions with higher fees, as they offer the most lucrative rewards. 

Example: A coffee transaction may be validated by checking whether the batch data is accurate, while a payment transaction verifies the sender's available funds or tokens.

3. Mining and block creation

The miners or validators compete to validate and secure the transactions through a process known as the consensus mechanism. The valid transactions are grouped and added to a new block. 

Once a block is successfully validated, it is added to the blockchain, and the transactions inside the block are considered confirmed. Proof of Work or Proof of Stake are the different consensus mechanisms used to achieve this step.

Example: A miner verifies a series of supply chain transactions, including the origin and shipping data of the coffee batch or the financial transactions between users, and adds them to a new block.

4. Confirmation and addition to the chain

After a successful mining or validation process, the new block is linked to the existing blockchain using cryptographic hashes to prevent tampering. Once the block is added, the transaction is confirmed, and the data in it becomes part of the public ledger.

Example: The coffee batch transaction or payment is recorded permanently on the blockchain, making the transaction history publicly accessible to all relevant parties. Since data on the blockchain is immutable, the end users can be sure that the information is not altered.

5. Post Transaction

After the transaction is complete, the involved parties can view the updated status of the data on the blockchain. Additionally, blockchain transactions may include fees or other data that are updated in real time.

Example: For a coffee supply chain transaction, a consumer can scan a product’s QR code to access detailed information on its journey.

Also Read: Understanding Blockchain Architecture in 2025: Key Concepts, Benefits, Applications, and More

Having explored the various steps involved in the blockchain transaction process, let’s now dive into the benefits and challenges of blockchain transactions to help you make an informed decision.

Benefits and Challenges of Blockchain Transactions

While blockchain offers benefits like security and transparency in transactions, it suffers from issues like regulatory compliance and energy consumption.

Here are the benefits and drawbacks of the blockchain transaction process.

Benefits of Blockchain Transactions

Blockchain transactions are beneficial in providing cross-border connectivity and security, making them a go-to method for cryptocurrency transactions.

Here are some benefits of the blockchain transaction process.

• Transparency and Immutability 

Once a transaction is recorded on the blockchain, it cannot be modified or deleted, ensuring that data is tamper-proof.

Example: In the supply chain industry, firms can track products from start to final delivery, ensuring that customers are guaranteed the authenticity of the product.

Also Read: What Makes a Blockchain Network Immutable? Immutability Explained

• Security and Fraud Prevention 

Blockchain transactions are secured using cryptographic algorithms, ensuring that only relevant parties can access transaction data. This prevents fraud and cyberattacks.

Example: In financial transactions, blockchain technology can provide secure and faster payments with lesser fraud compared to traditional banking systems.

• Reduced Transaction Costs 

Blockchain removes the necessity for intermediaries such as banks or payment processors, reducing transaction fees and costs.

Example: Cross-border payments made through blockchain are typically faster and cheaper compared to traditional banking routes.

• Increased Efficiency and Speed 

Without relying on intermediaries, blockchain can facilitate quicker transactions, particularly in industries like finance and healthcare.

Example: In real estate transactions, blockchain reduces the time required to transfer ownership, eliminating manual verification processes.

Also Read: Blockchain Technology in Cryptocurrency: Benefits, Challenges & Structure

Challenges of Blockchain Transactions

While blockchain transactions have security and transparency benefits, it also leads to high energy consumption and scalability problems.

Here are the challenges associated with blockchain transactions.

• Scalability Issues 

As more data is added to the blockchain, the time needed to process transactions may increase, which can affect performance. Ethereum 2.0 has been launched to address scalability by allowing parallel transactions.

Example: Bitcoin transactions can take longer to process during peak periods due to network congestion, which could delay payments.

• Energy Consumption 

Blockchains using Proof of Work (PoW) consensus mechanisms (e.g., Bitcoin) require significant computational power for solving cryptographic puzzles, leading to high energy consumption.

Example: Mining Bitcoin consumes large amounts of electricity, raising concerns about the environmental impact of PoW-based systems.

• Regulatory Uncertainty 

Since blockchain operates in a decentralized environment, the legal status of blockchain transactions and smart contracts can be unclear, leading to uncertainties for businesses.

Example: In cryptocurrency markets, regulatory bodies in different countries have varying stances, with some governments banning or limiting blockchain-based transactions.

• Adoption and Integration Challenges 

The technology requires new tools (e.g., cryptographic libraries) and often a complete modification of current systems, which can be challenging for many organizations.

Example: Companies in industries like healthcare face difficulties in integrating blockchain-based solutions with their old systems for secure patient data management.

Analyzing the benefits and limitations helps you make an informed decision about adopting blockchain transactions. It's also important to stay updated on developments in the field to capitalize on future opportunities.

Future of Blockchain Technology

Adopting techniques such as sharding, eco-friendly consensus mechanisms, and integration with AI and IoT will enable blockchain to overcome challenges like energy consumption and scalability.

Here are some concepts that can shape the future of blockchain technology.

1. Layer-2 Scaling and Sharding 

Layer-2 solutions, like the Lightning Network for Bitcoin, enable faster and more affordable transactions by processing them off the main blockchain. This reduces the number of transactions that need to be processed, thereby reducing energy consumption.

Sharding splits the blockchain into smaller pieces, allowing parallel transaction processing and significantly reducing latency.

Example: Ethereum 2.0’s transition to sharding is expected to increase the network's transaction capacity.

Also Read: Best Ethereum Project Ideas for Beginners 2025

2. Eco-friendly Consensus Mechanisms 

Proof of Stake (PoS) and other eco-friendly consensus mechanisms allow users to validate transactions based on the number of coins and not by solving complex problems. This reduces energy consumption.

Example: Ethereum is moving towards Proof of Stake in its Ethereum 2.0 to reduce its carbon footprint compared to PoW.

3. Integration with AI and IoT 

Blockchain can ensure that data collected from IoT devices is tamper-proof, and AI algorithms can use this data to perform predictive analytics and automation. 

This combination can lead to efficient and secure smart cities, industrial automation, and supply chain management. 

Example: IBM’s Watson IoT collects data and hosts it on blockchain to provide a secure, transparent, and immutable record of data. It can also automatically trigger smart contracts for predictive maintenance. 

4. Increased Privacy and Security 

New cryptographic techniques in blockchain, such as zero-knowledge proofs (ZKPs), will allow transactions to be verified without exposing sensitive data. This is relevant for sectors like healthcare and finance, where data privacy is crucial. 

Example: Zcash uses zero-knowledge proofs to enable private transactions on its blockchain without revealing transaction details to the public.

5. Alternative Banking

Using blockchain-based decentralized finance (DeFi) platforms, individuals can perform banking transactions and also earn interest without needing a bank account. 

Example: Bitcoin has enabled individuals in countries with unstable banking systems to store wealth and make transactions outside of traditional financial institutions.

Now that you’ve looked at how future trends like AI and IoT are changing blockchain technology, let’s understand how you can increase your knowledge in this field.

How upGrad Can Help You Advance Your Career Blockchain?

Blockchain transactions use techniques like consensus mechanisms and mining to provide a transparent and tamper-proof process for transactions and data sharing. 

Specialized knowledge is essential to work on this technology or use it for applications. upGrad's courses can help you grasp the foundational concepts of blockchain, preparing you for deeper learning and career advancement.

Here are some courses offered by upGrad in blockchain and related technology:

• Blockchain: A Quick Introduction
• Blockchain Features Simplified
• Introduction to Cryptocurrency
• Introduction to NFTs
• Blockchain Courses

Do you need help deciding which courses can help you in blockchain? Contact upGrad for personalized counseling and valuable insights. For more details, you can also visit your nearest upGrad offline center.

Similar Read:

• Step-by-Step Guide to Learn Blockchain Technology
• Top 10 Blockchain Applications in 2024
• Top 10 Tools for Blockchain Development You Should Know
• Decentralized Autonomous Organization [Comparison, Examples & Drawbacks]

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