What “Final” Actually Means When You Trade on a Decentralized Exchange

Most traders consider that confirmation final if it’s on a decentralized exchange platform when a swap does occur. The trade happened. The tokens moved. Done. For most, that sense is usually correct. However, the concept of finality, which means that a transaction is finally, irrevocably settled, is more complicated than a green checkmark might imply, and it is increasingly important for trades that increase in size and for transactions which become increasingly cross-chain.

A transaction does not have or not have finality. It’s more like a confidence level that gradually rises over time; the speed at which the confidence level gets closer and closer to the certainty is different at different blockchains, depending on the type of transactions you are using.

Why Blockchain Confirmation Is Probabilistic, Not Instant

A transaction that is made to a blockchain is not permanent as soon as it is added to a block. The majority of blockchain networks are based on the idea that the latest blocks contain a small chance of being reorganized, or replaced by another version of the blockchain’s history if enough of the network’s validators or miners, temporarily, decide to follow another path in the chain of events.

This is not a flaw. It follows from the very nature of decentralized consensus, and the absence of a central authority establishing an official account of things. The longer more blocks are added on top of the one containing your transaction, the closer the chances of getting it re-organized away get to zero. That’s why traders are recommended to take a big transaction as complete only after seeing a few confirmations, especially when mining is not guaranteed even on the most stable network.

This is done in various ways by different blockchains. Some networks have consensus mechanisms that are specifically built for this purpose with the goal of making the finality of transactions faster and more deterministic, meaning that it will take no more than a single block or a few blocks to know that a transaction is mathematically certain to be unreversible, unless there is an attack on the fundamental security of the network. Other networks offer probabilistic finality that moves toward certainty over time, instead of certainty at a guaranteed point in time.

The difference in this is not so significant for small trade sizes for a decentralized trading platform but is quite significant with larger trade sizes; the cost of the reorganization to your trade will increase with the amount at stake.

What This Means for a Single Swap on a DEX

Save for the majority of trades conducted on a decentralized crypto exchange, finality is almost imperceptible. For most DeFi trading blockchains, finality is designed to be quick and trustworthy for typical day-to-day trading, and the assurances offered by the finality are robust enough for a typical trader to consider a confirmed trade to be completed.

The finality comes when there is a transaction waiting to be confirmed and it is broadcast. In that time, you have a trade in a state of uncertainty. This price is only as accurate as the time they submitted the transaction, and especially in fast-moving markets, the price shown might not be accurate on execution. Hence, the slippage tolerance parameters on all trading platforms on the DEX are essentially just a way to make slippage more tolerable and automatically cancel the transaction if the final price of the trade is too different from the price you were prepared to pay.

Knowing that a swap isn’t instantaneous will also help answer some questions that appear to be confusing from a user interface standpoint: What makes a transaction fail sometimes, even though the price has moved so drastically that it seems like it’s not even possible? What makes the transaction fail sometimes, even though it looks exactly like it succeeded? What makes a person wait for confirmation before assuming that a transaction has been successful, instead of waiting for confirmation before assuming it has been successful?

Why Cross-Chain Finality Is a Different and Harder Problem

There is a well understood, well engineered problem of finality on a single chain. The case of a finality on a cross chain decentralized exchange is much harder to understand, because the finality is as final as the least final part of the whole chain in which the transaction is made.

Whenever you cross-chain tokens, your transaction usually includes at least two different chains, every with its own consensus mechanism, finality attributes, and timeline for irrevocability. A bridge between the two chains must wait for the origin chain transaction to be confirmed as final before it is safe to confirm the action on the destination chain, or else if the origin chain transaction was somehow reversed after the destination chain action, the bridge would have created value out of nothing which would compromise the integrity of the entire system.

Hence cross-chain transactions are in most cases noticeably longer than same-chain transactions, and why that extra time is not just inefficiency to be optimized away frivolously. A cryptocurrency exchange that has to act quickly on a destination-chain transaction before the origin-chain transaction is truly “final” is running a certain risk — the risk that the origin transaction will be reversed by the time the destination chain transaction has been executed.

The cross-chain infrastructure does this, waiting for the appropriate finality level, based on the finality properties of the origin chain, before acting on the destination chain. Cross-chain settlement is faster with networks having fast and strong finality guarantees. The finality of the end of the transaction varies from chain to chain, with slower chains having more probabilistic finality, and this is one reason for the variable transaction times for different cross-chain transactions.

What Traders Should Understand About Finality Risk

In most of the daily trading, finality risk is a background risk that is quite well addressed by well-designed infrastructure and of little concern to the trader. There are a couple of instances where more careful thought must be used.

For large transactions, more patience is required for confirmation compared to small transactions. A reorganization that involves a trade costs more depending on its size, so it’s possible to wait for more confirmations than necessary before considering a large trade settled, even if the platform’s interface indicates it’s finalized after one.

It’s important to remember that cross-chain transactions require patience based on their complexity. Multiple finality checkpoints are needed for a swap that crosses two or three chains, and the seemingly long-running transaction is likely not broken; it’s just going through the right finality checkpoints. If a cross-chain transaction takes longer than expected, monitoring the transaction statuses on the block explorers for each chain involved is the appropriate way to do so, and not assuming what the problem may be.

Finality platform with transparency is more trustworthy than those with unclear transparency. A cross chain decentralized exchange with clear indication of whether a transaction is on the way to the origin chain, being settled on the bridge, or on chain on the destination chain, provides traders with the information they need to be able to differentiate between a normal cross chain transaction and one that has encountered a real issue. Knowing that a platform has a loading indicator that is spinning is not enough to build trust; platforms that do not provide any information should not be trusted.

Finality as the Foundation Beneath Everything Else

All the other characteristics that make a decentralized exchange platform trustworthy, namely verifiability, transparency and irreversibility, ultimately rely on the finality guarantees provided by the underlying blockchain being true. A verifiable transaction that isn’t truly final is not the trustworthy, on-chain record that on-chain transparency is meant to be. The quality of being final or definite.

For traders, the practical lesson is not to worry about an issue that well-designed systems correct most of the time. Instead, it is a better way to understand what is really happening from the moment you click confirm until the trade is fully settled, especially if the transaction involves transferring value across multiple blockchains. In such cases, the chain of finality must be solid at every step for the entire transaction to be truly final and settled as it appears.

What “Final” Actually Means When You Trade on a Decentralized Exchange was originally published in Coinmonks on Medium, where people are continuing the conversation by highlighting and responding to this story.