I have understood the sha256 algorithm example . But how does a node in a network decide if a transaction is valid or not .


Proof of work has nothing to do with transaction validity.

Transaction is valid when it meets certain simple rules:

  1. You do not spend more ether than you have.
  2. Index number(nonce) of the transaction follows previous transaction of your address.

All valid transactions go in a block. And that's where Proof of Work comes.

Imagine it like finding a needle in a haystack. All miners start to do it in the same time. The one who finds it becomes the creator of the block. It used to verify that miner used a lot of computing power. The reason for this is to prevent malicious users from creating long chains which may compromise whole blockchain.

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