How does the blockchain resolve arbitration issues?

Question

I understand that a bitcoin wallet is nothing but a transaction record performed on the block chain.

How are transaction details updated in the decentralised block chain?

In a centralised system a transaction is based on the transaction record maintained in their centralised servers. For example A and B are connected to centralised C. When A initiates a transaction with B, C refers to its centralised database and verifies whether it is a valid transaction and permits the transaction based on the validation results. In other words, there is a central log for cross verification and debugging to settle issues when there is arbitration needed by any one of the two transacting parties.

But in decentralised transaction there is no centralised arbitrator. How is arbitration provided in case of a misplaced transaction?

In other words is there any confiscate mechanism to strip the owner of his bitcoins who is involve in illegal practices?

Answer 1

I understand that bitcoin wallet is nothing but transaction record performed on block chain.

A bitcoin wallet stores keypairs, and allows the use to interact with the network by sending/receiving bitcoin transactions.

How are transaction details updated in decentralised block chain?

A 'full node' can be run by a user that wants to independently verify the state of the network for themselves. Each full node keeps their own local copy of the network state (blockchain history), and the nodes communicate new blocks and transactions to each other. By doing so, all of the nodes will come to agree upon the current network state, without the need for a central server.

How are arbitration resolved in case misplaced transaction.

Network nodes follow a set of rules (often called 'consensus rules'), that allow them all to arrive at the same conclusion about what the network state should be. In the event of conflicting blocks, the chain with the 'most work' is eventually ruled the valid chain.

In other words is there any confiscate mechanism to strip the owner of his bit coins who involve in illegal practices?

No.

Answer 2

I understand that bitcoin wallet is nothing but transaction record performed on block chain.

Bitcoin wallet is mainly used for secure key management. But wallets also show transaction history associated with the addresses which are derived from keys or added as watch-only in the wallet.

How are transaction details updated in decentralised block chain?

I create a transaction, sign it and broadcast it using my node. It's relayed to other nodes and reaches mempool of most of the nodes in the network. Once miners include it in a block, the transaction gets confirmed. Each block mined after this increases the number of confirmations for my transaction.

Each block is validated by full nodes and invalid blocks are rejected.

In other words is there any confiscate mechanism to strip the owner of his bit coins who involve in illegal practices?

No. I don't understand what exactly you mean by "illegal" but Bitcoin is censorship resistant and there is no process to invalidate certain UTXOs because they were involved in some transactions or linked with some identity.

Answer 3

A node verifying that a transaction is performed looks at the block chain... but perhaps more explicitly, it looks at "block chains." There's no actual requirement that a node only look at just a single block chain when deciding whether a transaction is valid or not.

They can then assign some level of trust as to whether the transaction occurred, and act appropriately.

The algorithm is designed around eventual consistency. If most nodes are honest (meaning the follow the recommendations in the algorithm), the algorithm will naturally move towards all honest nodes agreeing upon which block chain is "true." This is managed with a feedback loop: miners trust the longest chain that they are aware of, and miners lengthen that chain by mining. A malicious player would need to have a majority on the mining power for the entire bitcoin network in order to convince the honest miners to believe their fraudulent claims. Practically speaking this would require hundreds of TW of energy (for comparison, the largest nuclear powerplant is currently 0.008TW). Without such power, they could only provide fraudulent chains which are shorter than the main chain. This would be detected by an honest node, and they would choose not to honor the transactions on that chain.

This is why it is typically recommended to wait for 6 blocks before considering a transaction to be "official." Due to networking, its plausible that you could see a fraudulent block appear with your transaction. However, it is exceedingly unlikely that you would see 6 blocks appear on the fraudulent chain without seeing the "honest" chain, with more work put into it. By 6 blocks (give or take), it is unlikely that someone could, say, buy up all of the AWS servers and quickly race ahead of the honest miners to make their fraudulent chain into the "best" chain.

As for mechanisms to confiscate illegal gains, there's none written into the algorithm. The algorithm only looks at the length of the chain when deciding which chain is valid. There are known tricks involving double-spending which take advantage of this. However, at the highest level, there is a way. If all "honest" actors decide that the longest block chain is "fraudulent," and they agree on another block chain that is not fraudulent, they are free to all shift to this new block chain. This would go against the algorithm, technically, but would be something that could be done socially.