Blockchain Technology Explained

What is a blockchain, really?

At its core, a blockchain is a shared record book — usually called a ledger — that keeps a list of entries (most often transactions) in order. What makes it different from an ordinary spreadsheet or database is that an identical copy of this ledger is stored on thousands of separate computers around the world, called nodes, instead of on one company's server.

New entries are bundled together into groups called blocks. Each block is checked by the network, added to the end of the ledger, and then linked to the block before it using a bit of cryptographic fingerprinting — which is where the name “blockchain” comes from: a chain of blocks, each one referring back to the last. If you want the full walkthrough of this idea from first principles, What Is Blockchain? The Big Idea covers it step by step.

Once a block is added and enough later blocks are built on top of it, going back and quietly changing an old entry would mean redoing all the work for every block after it, on a majority of the computers holding a copy — at the same time, faster than everyone else is adding new blocks. For a well-established network, that's extremely impractical, which is why blockchain records are described as append-only: you can add to them, but changing history is deliberately made very difficult.

Why decentralisation matters

A normal database — the kind a bank or a social media company runs — has one owner. That owner can read every entry, change any entry, and decide who else is allowed to see or write to it. You trust the system because you trust the company running it, its internal controls, and the regulations it operates under.

A public blockchain flips that model. Instead of one owner, copies of the ledger are spread across many independent participants, and the rules for adding a new block are enforced by software and agreed-upon procedures rather than by a single gatekeeper. This is called decentralisation. No single node gets to unilaterally rewrite the ledger; a new block is only accepted if it follows the network's rules and enough of the network agrees it's valid.

This doesn't mean no one is in charge of anything, or that decentralised systems are automatically better than centralised ones — it's a trade-off. You gain resilience (there is no single point of failure or single party who can freeze or reverse things unilaterally) and censorship-resistance, but you lose the convenience of a central authority who can fix mistakes, reverse fraud, or quickly change the rules. Decentralisation Explained goes into much more depth on what decentralisation does and doesn't guarantee.

How blocks, transactions and validation fit together

When you send cryptocurrency, you're broadcasting a transaction to the network: a message saying, in effect, “move this amount from this address to that address.” That message gets picked up by nodes, checked against the rules (do you actually have the funds? is the transaction properly signed?), and, if valid, placed into a pool of transactions waiting to be included in the next block. How a Crypto Transaction Actually Works traces one of these transactions from start to finish.

Someone then has to actually build the next block and get the rest of the network to accept it. Different blockchains use different mechanisms to decide who gets to do this and to stop people from spamming the network with fake or conflicting blocks. The two most common approaches are proof of work and proof of stake, covered below.

Whichever mechanism is used, the result is the same shape: a new block of transactions gets proposed, the network checks it against the rules, and once accepted it's added to the chain and distributed to every node, which updates its own copy of the ledger to match.

Proof of work vs proof of stake

Proof of work is the mechanism Bitcoin uses. Participants called miners compete to solve a computational puzzle that takes real-world energy and specialised hardware to solve, but is easy for everyone else to check once it's solved. Whoever solves it first gets to propose the next block. This makes attacking the network expensive in a very tangible way — you'd need to out-compute a huge, globally distributed set of other miners. The mechanics of this, and why it's deliberately costly, are explained in Bitcoin Mining & Proof of Work.

Proof of stake, used by Ethereum and many other networks, replaces computational competition with economic commitment. Participants called validators lock up (“stake”) some of the network's own cryptocurrency as collateral. Validators are chosen to propose and confirm blocks, and if they act dishonestly — for example by approving conflicting transactions — some or all of their staked funds can be destroyed, a process usually called slashing. Instead of burning electricity, proof of stake relies on the threat of losing staked value as its deterrent. Proof of Stake & The Merge covers Ethereum's own move from one model to the other.

Neither approach is simply “better” in every respect — they make different trade-offs around energy use, hardware requirements, and how the underlying token's economics work. Both aim to achieve the same thing: making it expensive or risky to cheat, and cheap to tell the truth.

Smart contracts: programs that live on the chain

Some blockchains, most notably Ethereum, go beyond simply recording “who sent what to whom.” They can also run small programs called smart contracts: code that is stored on the blockchain itself and executes automatically when certain conditions are met, with the result recorded on the ledger just like a transaction. Despite the name, a smart contract isn't a legal contract — it's simply software that runs in a predictable, shared environment that every node agrees on, often called a virtual machine. The Ethereum Virtual Machine (EVM) explains that shared execution environment in detail, and What Is a Smart Contract? breaks down exactly what a smart contract is and what it can and can't do.

Smart contracts are what make things like decentralised lending, token swaps, and automated agreements possible without a company sitting in the middle processing every request. They also inherit the same honesty problem as any other software: a smart contract does exactly what its code says, not necessarily what its authors intended, which is why bugs in widely-used contracts have caused real financial losses in the past.

Because many blockchains can only handle a limited number of transactions directly, a family of technologies called layer 2 solutions has grown up to process transactions more cheaply off the main chain while still relying on it for final security — see Layer 2 Scaling Solutions for how that works.

Common misconceptions worth clearing up

A few ideas about blockchain get repeated so often that they're worth addressing directly:

• “It's on the blockchain, so it must be true.” A blockchain can guarantee that a record hasn't been tampered with since it was written. It can't guarantee that the information was accurate or honest when it was first entered. Garbage in, immutable garbage out.
• “Blockchain means anonymous.” Most public blockchains are pseudonymous, not anonymous — addresses are public and permanently linked to their transaction history, which can sometimes be traced back to a real identity through exchanges, patterns, or other data.
• “Immutable means infallible.” A transaction being irreversible is not the same as it being correct. If you send funds to the wrong address or approve a malicious smart contract, the blockchain will faithfully and permanently record that mistake too.
• “Decentralised means no one is in control.” Many networks still have influential developers, large holders, or concentrated mining or staking power. Decentralisation is a spectrum, not a single guaranteed state.
• “Blockchain is a get-rich-quick technology.” Blockchain is a way of keeping records without a central authority. It says nothing about whether any particular token, project, or trading strategy built on top of it is a good idea — that's a separate question entirely, and not one this page or our course answers for you.

Frequently asked questions