Transaction validation is the process of determining if a transaction conforms to specific rules to deem it as valid. Validators (also called miners) check if transactions meet protocol requirements before adding the transactions to the distributed ledger as part of the validating process.
In decentralized networks, economic incentives are used to encourage validators to follow protocol rules. For example, a Bitcoin validator who is honest and follows the protocol rules will have a chance to earn revenue in the form of block rewards and transaction fees. On the other hand, a dishonest validator who attempts to add invalid transactions that don't meet protocol requirements to the blockchain will not earn any revenue unless a majority of the other validators are also dishonest.
A transaction is considered valid if the sender in the transaction has an initial balance in their wallet equal to or greater than the amount being sent in the transaction (including the transaction fee). Other rules can exist depending on the specific protocol in question, but this rule is generally applicable to all protocols.
An example of a scenario that includes a transaction which should be deemed invalid by a cryptocurrency protocol is the so called double-spend attack. The first transaction in this scenario is a valid transaction in which coins are spent from an address that has an adequate balance to fund the transaction amount. However, the malicious actor in this case then tries to prevent this valid transaction from being included in the distributed ledger. They do this by controlling a majority of the mining power in the network, thus allowing them to mine the longest version of the blockchain (i.e. the valid chain according to Nakamoto Consensus). If successful, the malicious actor will then be able to spend the same coins from the initial transaction a second time in what would be an invalid transaction if the original valid transaction had been included in the ledger.
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- Cryptographic hash functionMathematical hash function that is cryptographically secure and has the properties of collision resistance, hiding, and puzzle friendliness
- Cryptocurrency miningCryptocurrency mining is the process by which transactions are validated and new coins are minted in a decentralized cryptocurrency network.
- BitcoinBitcoin is a cryptocurrency and a digital payment system invented by an unknown programmer, or a group of programmers, under the name Satoshi Nakamoto. It was released as open-source software in 2009.
- Selfish mining attackA selfish mining attack or block withholding attack is when a cryptocurrency miner decides to keep a valid block they have successfully mined secret instead of broadcasting it to the network.
- Byzantine fault toleranceByzantine fault tolerance is a property of a distributed system such that it can tolerate components of a system failing in arbitrary ways, processing incorrect states, rather than simply stopping or crashing.
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