Blockchain explained

A blockchain is a type of digital ledger: a list of records shared across many computers rather than held by a single organisation. Records are grouped into blocks, and each block is linked to the one before it, forming a chain. Because every participant can check the chain, and changing a past block would require redoing the work for every block after it, blockchains are designed to be very hard to tamper with.

The ledger idea

Think of a ledger as an accounts book listing who sent what to whom. A bank keeps its own private ledger and everyone trusts the bank. A public blockchain keeps the ledger out in the open: anyone can download a copy, and the network agrees on which new entries are valid. Trust shifts from an institution to rules enforced by software and economics.

The building blocks

• Transactions: instructions such as "send this amount from address A to address B", signed with the sender's private key.
• Blocks: batches of transactions, plus a timestamp and a reference to the previous block.
• Hashes: digital fingerprints. Each block contains the hash of the block before it; change anything and the fingerprint changes, breaking the chain.
• Nodes: computers that store the blockchain and check that new blocks follow the rules.
• Consensus: the method the network uses to agree on the next block.

How networks agree: consensus

Proof of work

Used by Bitcoin. Miners compete to solve a computational puzzle; the winner adds the next block and earns a reward. Rewriting history would require outspending the rest of the network on computing power. The trade-off is high energy use.

Proof of stake

Used by Ethereum since 2022 and many newer networks. Validators lock up the network's own crypto as collateral and are chosen to propose and confirm blocks. Dishonest behaviour can see part of their stake destroyed. It uses far less energy than proof of work, but critics raise concerns about wealth concentration. Staking rewards are generally assessable income for tax purposes. Read crypto tax basics.

Smart contracts

Some blockchains, such as Ethereum, can run programs called smart contracts. These execute automatically when conditions are met and underpin tokens, NFTs, stablecoins and decentralised finance (DeFi) apps such as lending and trading protocols. Smart contracts can be powerful, but code is only as good as its authors: bugs and exploits have caused major losses, and there is usually no one to reverse them.

Public, private and permissioned chains

Organisations have trialled blockchain for supply chains, settlement and record-keeping, with mixed results.

Limitations

• Scalability: public chains can handle relatively few transactions per second, and fees can spike when busy.
• Irreversibility: mistakes and frauds generally cannot be undone.
• Garbage in, garbage out: a blockchain proves a record has not changed, not that it was true to begin with.
• Bridges and apps: much of the hacking in crypto targets the services around blockchains, not the chains themselves.
• Privacy: public ledgers expose transaction history.

What this means for you

Understanding blockchains helps you see why sending crypto to the wrong address is permanent, why your private key matters so much, and why "it is on the blockchain" does not make a project trustworthy. Read crypto wallets, keys and seed phrases next.

Key terms

• Fork: a change to a blockchain's rules. A "hard fork" can split one chain into two.
• Layer 2: a network built on top of a blockchain to process transactions more cheaply, settling back to the main chain.
• Bridge: a service that moves tokens between blockchains; bridges have been a frequent target of hackers.
• Oracle: a service that feeds outside data, such as prices, into smart contracts.
• Gas: the fee paid to have a transaction processed on networks such as Ethereum.
• Finality: the point at which a transaction is considered practically irreversible.
• 51% attack: an attempt by someone controlling most of a network's mining or staking power to rewrite recent history, more realistic on small networks.
• Decentralised application (dapp): an app whose core logic runs as smart contracts on a blockchain.

The bottom line

Blockchain is a clever way to keep a shared record without a central keeper. It is the foundation of crypto, but the technology alone tells you nothing about whether a particular token or platform is safe or valuable.