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How Cryptocurrency Exchanges Record User Transactions on the Blockchain: A Technical Explanation
As more people join the world of cryptocurrency trading, understanding how exchanges like Binance and Coinbase record user transactions on the blockchain is becoming increasingly important. In this article, we’ll delve into the technical details of how these exchanges process user transactions, allowing traders to navigate the intricacies of decentralized exchanges (DEXs) and atomic swaps.
Blockchain Technology Overview
Before we delve into the specifics of how an exchange records transactions, it’s important to understand a few basic blockchain concepts:
- Blockchain
: A decentralized digital ledger that records all transactions made on a given network. It’s a distributed database that allows multiple parties to agree on the state of the ledger through a consensus mechanism.
- Atomic Swap: A type of swap that involves exchanging two assets at once, often used in cryptocurrency trading. Atomicity is required, meaning that both parties must execute the transaction in a single block, ensuring that there are no intermediate transactions.
Exchange Transaction Recording Process
When a user makes a transaction on an exchange like Binance or Coinbase, several steps take place to record the transaction on the blockchain:
- Transaction Creation: The transaction is created as a separate transaction on the blockchain. This involves sending two different messages: one for a buy order and another for a sell order.
- Chaincode Execution: A user’s account on the exchange is updated by executing the corresponding chaincode (a program that runs on the blockchain). Chaincode ensures that transactions are processed correctly, including updating user balances and transaction history.
- Transaction Broadcast: The created transaction is broadcast to the network, where it is verified by nodes using complex algorithms to ensure its validity and security.
- Blockchain Update: After verification, the transaction is embedded in the blockchain, creating a permanent record of the transaction.
- Chaincode Updates: Chaincode updates are also executed on the exchange’s blockchain, reflecting any changes made during a transaction.
Binance Trade Recording Process
Let’s take Binance as an example to illustrate how user transactions are recorded in their system:
- When Mr.X buys a BTC/USDT pair from Mr.Y, Binance creates a new transaction by sending two separate messages: one for the buy order and the other for the sell order.
- The buy message includes the details of the transaction: the asset being traded (BTC), the quantity, and the exchange rate.
- The sell message includes the reverse of the same data, with the asset traded (USDT) and the quantity.
- Both messages are sent to the network for verification.
- After verification, both transactions are incorporated into the Binance blockchain.
- Chaincode updates are also executed on the exchange’s blockchain, reflecting any changes made during the transaction.
Coinbase Trade Recording Process
Similar steps apply when Coinbase records user transactions:
- When Mr.X buys a BTC/USDT pair from Mr.Y, Coinbase creates a new trade by sending two separate messages: one for the buy order and the other for the sell order.
- The buy message includes the details of the trade: the asset traded (BTC), the quantity, and the exchange rate.
- The sell message includes the reverse of the same data, with the asset traded (USDT) and quantity.
- Both messages are transmitted to the Coinbase network for verification.
- After verification, both transactions are incorporated into the Coinbase blockchain.
- Chaincode updates are also executed on the Coinbase blockchain, reflecting any changes made during the transaction.
