How a Blockchain Works

A blockchain is a way of keeping a record, or ledger, of transactions that is shared across many computers rather than held by a single authority like a bank.

The ledger

Think of a ledger as a notebook recording who paid whom. In traditional finance, a bank keeps this notebook, and we trust it to be accurate. A blockchain instead gives a copy of the notebook to many participants around the world, called nodes.

Blocks and chains

Transactions are grouped into blocks. Each block contains:

• A list of recent transactions.
• A time stamp.
• A unique code, called a hash, that summarises the block’s contents.
• The hash of the previous block.

Because each block includes the previous block’s hash, the blocks are linked in a chain. Changing an old transaction would change that block’s hash, breaking the link with every later block. This makes the history very hard to alter.

Agreeing on the truth

Without a central authority, participants need a way to agree on which transactions are valid. This is called a consensus mechanism. The two main types are:

• Proof of work: participants, called miners, compete to solve difficult computing puzzles. The winner adds the next block and earns a reward. Bitcoin uses this method.
• Proof of stake: participants lock up, or stake, cryptocurrency as a security deposit, and are chosen to validate blocks. Dishonest behaviour can cost them their stake. Ethereum switched to proof of stake in 2022.

Why it matters

Blockchains let people who do not know or trust each other agree on a shared record without relying on a middleman. Supporters see this as useful for money, contracts and records. Critics note that blockchains are slower and costlier than centralised databases, and that many uses do not need decentralisation.