The concept of finality in blockchain refers to the blockchain transactions in which no further cancellations or modifications can be made. Finality is achieved through a unique method of transactions which includes consensus mechanisms like Proof of Stake (PoS) and Proof of Work (PoW) etc.
In blockchain, there are different types of finality. These are differentiated into different types based on certainty and irreversibility of blockchain transactions.
Probabilistic Finality
Majority of the blockchain systems are probabilistic, especially those that involve PoW consensus like Bitcoin. The chances of reversing the transactions are very low when blocks are put on top of the confirmed transactions after it has been included in a block.
Economic Finality
The economic finality is often related to the Proof of stake system. A transaction is said to reach the terms of economic finality when it is not reversed. It means going back would be financially unavailable.
Instant Finality
When the transaction reaches its finality within an instant, it means it can not be reversed as soon as it is recorded in a ledger. Ripple network offers the Instant Finality. Transactions are instantly confirmed and irreversible.
Unconditional Finality
When the transactions reach the finality without any conditions. It means in any situation it is not reversed. It is impossible with a strong degree of centralization or a unique consensus method.
State Finality
In some blockchains, finality means the complete state of the blockchain, not just transactions. A state transition i.e. the change in the transactions or execution of smart contracts cannot be changed. For smart contracts to reach the state finality is a must as the accuracy of the entire application state is important.
Why is Finality in Blockchain Important?
Finality is important in blockchain because it provides security and trust in the system which makes sure that once the transaction is done. It also helps to avoid double-spending once the transaction is done on the blockchain.
Double spending can take place for instance when someone needs to transfer Bitcoin to two separate accounts. Once the transaction is confirmed and recorded on the blockchain, the digital assets get locked and can not be used in any more transactions.
Decentralized apps (dApps) make sure that their activities are safe and secure through blockchain finality. This gives the assurance that the transactions made are safe, secure, irreversible, and immutable.
However, some challenges prevent blockchain from reaching its finality. Issues like smart contract vulnerabilities, forking, and network dormancy cause hurdles in blockchain to reach finality.
Bad actors can take advantage of smart contract vulnerabilities. When any entity has 50% or more of the mining power, then they can make amendments in the smart contract. So this makes an issue in reaching the blockchain finality.
The dormancy of the network will cause a delay in the communication between the nodes and the validators thus leading to slowness or errors in the transactions.
Forking happens when a blockchain splits into many paths that lead to many versions of transaction history. The consensus method is put to the test through these path divisions. This makes it difficult to decide which version is the legitimate one and thus delays the finality.
Nancy J. Allen is a crypto enthusiast and believes that cryptocurrencies inspire people to be their own banks and step aside from traditional monetary exchange systems. She is also intrigued by blockchain technology and its functioning.
Source: https://www.thecoinrepublic.com/2023/10/14/finality-in-blockchain-what-is-it-and-why-is-it-important/