What is Blockchain?

A blockchain is a distributed ledger that records transactions in blocks linked together by cryptography, and that is maintained by many computers following shared rules rather than by a single company or institution. When a new block is added, every participant’s copy is updated, and quietly rewriting an old entry becomes practically impossible.

The first major blockchain was Bitcoin, which went live in 2009. Ethereum, Solana and hundreds of other networks now use the same basic idea with different designs.

What problem does blockchain solve?

Digital files are easy to copy, and digital money inherits that problem: the risk that one balance gets spent twice, known as double spending. In traditional finance, a bank solves this by keeping the master ledger. A blockchain reaches the same outcome without a central bookkeeper, because the network agrees collectively on which transactions are valid and in what order.

If Alice tries to send the same coins to both Bob and Carol, the network accepts whichever transaction lands first and rejects the other. That turns copyable data into value that can only be spent once.

How does a blockchain work?

Roughly, a transaction makes it onto the chain like this:

1. The user enters a recipient and amount, and the wallet signs the transaction with a private key.
2. The transaction is broadcast and waits in a pool of pending transactions (the mempool).
3. Nodes check the signature and confirm the balance is sufficient.
4. A miner or validator packs valid transactions into a new block.
5. The rest of the network verifies the block and adds it to the chain, giving the transaction its first confirmation.

Trades on a centralized exchange usually never touch the chain; the exchange just updates balances in its own database. On-chain transactions mostly happen when you deposit or withdraw.

How are blocks linked together?

Each block contains the hash of the block before it. A hash is a fixed-length fingerprint of data: change a single character and the hash changes completely. Altering an old block changes its hash, which breaks the link to every block after it.

Hashes alone aren’t what keep the chain secure, though. What matters is how expensive it is for an attacker to produce an alternative history. On Bitcoin, that cost is accumulated computing power; on Ethereum, it’s the ETH that validators have at stake. The rules that govern this are called the consensus mechanism.

Nodes, miners and validators: what’s the difference?

• Node: any computer running the network software. A full node independently checks every transaction and block against the rules.
• Miner: in Proof of Work networks, spends computing power to find new blocks and earns the block reward.
• Validator: in Proof of Stake networks, locks up collateral to propose blocks and vote on them.

Running a Bitcoin full node earns no reward, but it lets you verify your own transactions without trusting anyone. When judging how secure a network is, look at how independent the participants are, not just how many machines there are. A thousand servers run by one company are still one decision-maker.

Types of blockchain: public vs permissioned

Public blockchains let anyone send transactions, read the ledger and take part in validation by following the rules. Bitcoin and Ethereum are public. Permissioned blockchains restrict who can write or validate records to approved organizations, and are used for things like interbank settlement or supply-chain tracking. Chains run jointly by a group of organizations are often called consortium chains.

A company saying it “uses blockchain” doesn’t mean its system is as open or decentralized as Bitcoin. The useful questions are who can change the records, and whether outsiders can verify them independently.

Is blockchain secure?

On large public chains, rewriting history is possible in theory but extremely expensive. An attacker would need a majority of the total hash power on a Proof of Work network, or a majority of the staked collateral on a Proof of Stake network. This is known as a 51% attack. On a network the size of Bitcoin the cost is prohibitive, but smaller chains with little hash power have been hit by such attacks in the past.

Most losses users actually suffer don’t come from the chain itself breaking. They come from stolen recovery phrases, signatures given to phishing sites, buggy smart contracts and bridge hacks. A secure chain doesn’t make every app built on it secure.

What is blockchain used for?

• Cryptocurrencies and payments: Bitcoin, stablecoins and cross-border transfers.
• Smart contracts: programs that run swaps, loans and votes automatically. See our explainer on smart contracts.
• Tokenization: putting traditional assets, such as Treasury bill funds, on-chain.
• Records and traceability: supply chains, certificates and document verification.

What are the limits of blockchain?

A record that can’t be changed isn’t necessarily a record that’s true. If a product’s origin is entered incorrectly, the blockchain will faithfully preserve the mistake. Apps that need real-world data depend on oracles to supply it.

On public chains every transaction is visible, so privacy is limited, and there’s no customer service desk to reverse a payment sent to the wrong address. There are also trade-offs between speed, cost and decentralization. For a database that lives inside a single company, a blockchain often adds complexity without much benefit.

Confirmation vs finality

Getting into a block isn’t the final step everywhere. On Bitcoin, each additional block makes reversal less likely, and six confirmations is the common standard for large amounts. Ethereum has a separate finality step based on validator votes, which takes around 13 minutes. Exchanges also set their own confirmation requirements for deposits, which vary by network.

Sources

• Bitcoin: Technical operation of the blockchain
• Ethereum: Consensus mechanisms
• Ethereum: Smart contracts