What is Blockchain Technology and How does it Work?

What is a blockchain?

A blockchain is a distributed digital ledger, meaning that it records and maintains transaction data across multiple computers or nodes in a network. Each block within the chain contains a cryptographic hash of the previous block, along with a timestamp and transaction data, creating an immutable chain where records cannot be altered without changing all subsequent blocks.

Perhaps the most common analogy for blockchain is one of a classroom of students, each owning an identical copy of a notebook. When someone wants to add a new entry to their notebook, they must announce it to everyone. The class votes to verify whether the new entry is legitimate, and only then does everyone simultaneously write it in their own notebook. 

Once written, the entry can’t be erased or changed without everyone noticing, because each page references the previous page's unique fingerprint. Then if someone tries to cheat by changing an old entry, their notebook won't match everyone else's, and the tampering becomes obvious.

Of course, it’s more complicated than that, but for beginners this is an easy way to visualise the concept.

Bitcoin was the first real-world example, such that when a BTC owner sends some Bitcoin to another wallet, this transaction is broadcast to the network, verified by multiple participants, bundled with other transactions into a block, and then permanently added to the chain that everyone maintains.

For further context, traditional databases operate like a filing cabinet controlled by a single organisation. The database administrator has complete authority to add, modify or delete records and users must trust this central authority to maintain accurate information and access.

Conversely, blockchain databases are decentralised across many participants who collectively maintain the system, meaning that no single entity controls the data. Changes require network consensus, making unauthorised alterations extremely difficult. 

The trade-off is that traditional databases offer faster transactions, energy efficiency, larger storage capacity and easier updates – while blockchains provide transparency, immutability and eliminate the need to trust a central authority. 

Naturally, this means that blockchains will be better suited for applications where trust and transparency outweigh efficiency concerns, but that traditional databases will continue to dominate where the opposite is the case.

Consider our Blockchain Basics Guide.

How does a blockchain work?

A blockchain transaction follows an orderly process that is designed to ensure integrity and transparency. First, a user initiates a transaction by digitally signing it with their private key, creating a unique digital signature that proves their ownership. The transaction is then broadcast to the network, where it sits in a pool of pending transactions waiting for validation.

Network participants collect multiple transactions and then bundle them into a proposed block. Before adding this block to the chain, the network must verify each transaction's legitimacy, including checking digital signatures, ensuring sufficient account balances and confirming no double spending has occurred. 

Once validated, the block receives a unique cryptographic hash that mathematically links it to the previous block, creating the chain. Finally, the new block is distributed across the network, and all participants update their copy of the ledger (think back to the classroom notebook analogy).

When getting to grips with Blockchain, the key terms to understand include:

• Nodes – (the classroom notebooks) are the individual computers that maintain copies of the blockchain and communicate with other network participants. They validate transactions, store the transaction history and make sure that all network rules are followed.
• Miners – found in proof-of-work (PoW) systems like Bitcoin, compete to solve complex mathematical puzzles to earn the right to add new blocks. They invest in computational power and electricity, receiving cryptocurrency rewards for successful block creation. This mining process maintains the integrity of the network.
• Validators – operate in proof-of-stake systems like Ethereum, where they're chosen to create blocks based on their stake in the network. Rather than solving puzzles, validators are selected through algorithms that consider their holdings, among other factors.
• Cryptography – provides blockchain's security foundation through several mechanisms, including hash functions which create unique digital fingerprints for each block, and digital signatures which prove transaction authenticity by using public-key cryptography, ensuring that only rightful owners can spend their assets.
• Consensus mechanisms – make sure that all network participants agree on the blockchain's up-to-date ledger. PoW requires computational effort to add blocks, while proof-of-stake (PoS) selects validators based on economic incentives. These mechanisms prevent malicious actors from manipulating the ledger, as they would need to control the majority of network resources.

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Key characteristics of blockchain

Distributed ledger technology

Distributed ledger technology is key to blockchain's architecture, where identical copies of the transaction ledger exist across multiple computers worldwide. Unlike centralised systems where a single database holds all the records, blockchain networks distribute this information among hundreds or thousands of nodes. 

Each participant maintains a complete, synchronised copy of the entire transaction history, and when new transactions occur, all nodes update simultaneously, ensuring consistency across the network. 

This distribution eliminates single points of failure, because if some nodes go offline, the network continues operating using the remaining copies. The distributed nature also prevents data loss, as destroying the ledger would require eliminating every copy across the globe simultaneously.

Immutable records

Blockchain's immutability means that once new data is recorded and confirmed, it becomes practically impossible to alter or delete. This permanence is based on cryptographic linking (hashes) between blocks, where each block contains a hash from the previous block. 

Changing any historical record would require recalculating all subsequent block hashes, which is practically impossible in established networks with current technological limits. 

This means that there is always a permanent audit trail where every transaction remains visible and verifiable. In other words, immutability builds trust in a blockchain’s digital transactions by making sure that any agreements, transfers and records cannot be retroactively modified.

Smart contracts

Smart contracts are self-executing programs stored on the blockchain, which automatically enforce predefined conditions, without the need for intermediaries. These digital agreements contain lines of code that trigger specific actions when predetermined criteria are met. 

For example, a smart contract might automatically release payment when goods are delivered, or transfer ownership when pre-set conditions are satisfied. They eliminate the need for traditional intermediaries like lawyers or escrow services, reducing costs and execution time while increasing reliability. 

Smart contracts operate transparently on the blockchain, allowing all parties to verify the terms before agreeing to be bound by them. From a legal viewpoint, this aspect arguably makes them easier to enforce.

Transparency

Blockchain networks provide improved transparency compared to traditional ledgers, by making all transactions publicly visible and verifiable. Anyone with the right tools and know-how can access the complete transaction history, and view transfers, balances and smart contract executions in real-time. 

While personal identities remain pseudonymous through cryptographic addresses, all financial movements are traceable. This makes public auditing simple and builds trust through verifiability rather than requiring blind faith in institutions.

Decentralisation

Decentralisation removes central authorities from controlling the network, instead distributing power among all participants. It’s very hard for a single entity to unilaterally make decisions, censor transactions or manipulate records in a blockchain.

Decentralised network governance happens through consensus mechanisms where participants collectively validate changes. This structure resists censorship, reduces corruption and arguably makes sure that the network serves users rather than centralised interests, creating a more resilient financial system.

What is Proof of Stake (PoS)?

Proof of stake is a consensus mechanism where validators are chosen to create new blocks and validate transactions based on their stake in the network (the amount of cryptocurrency they lock up as collateral). 

Unlike PoW's competitive mining, PoS selects validators through algorithms that consider factors like stake size, randomisation and occasionally coin age. Validators vote on new blocks, earning rewards for honest behaviour. If they validate fraudulent transactions, they lose a portion of their staked tokens through a process called slashing, creating an economic incentive to maintain network integrity.

PoS consumes approximately 99% less energy than PoW because it eliminates the need for massive computational power and specialised mining hardware. This makes blockchain networks more environmentally sustainable, reduces operational costs and allows for faster transaction processing and lower fees.

The PoS system also scales more effectively as network growth doesn't exponentially increase energy consumption. Additionally, attacking the network requires purchasing and risking substantial amounts of cryptocurrency through the slashing process, making malicious behaviour economically irrational.

What is Proof of Work (PoW)?

Proof of work is a consensus mechanism where miners compete to solve complex mathematical puzzles to earn the right to add new blocks to the blockchain. 

Miners use specialised hardware to perform billions of calculations per second, searching for a specific numeric value called a ‘nonce’ that, when combined with transaction data, produces a hash which meets the predetermined difficulty requirements. 

The first miner to find the correct solution broadcasts their block to the network for verification. Other miners validate their solution (which is easy to verify but difficult to discover) and the winner receives cryptocurrency rewards. The network then automatically adjusts the next puzzle’s difficulty to maintain consistent block creation times regardless of total mining power.

PoW sports very strong integrity through its energy-intensive nature, making attacks economically nonsensical. This is because in order to manipulate the blockchain, malicious actors would need to control over 50% of the network's computational power, requiring massive investments in hardware and electricity that would almost certainly exceed any potential gains.

PoW also promotes decentralisation since anyone with the appropriate, if expensive, hardware can participate in mining without requiring permission or large initial stakes. This open participation model prevents the wealth concentration that tends to occur over time in stake-based systems.

Types of blockchain networks

1. Public blockchain

Public blockchains are completely open networks where anyone can participate without permission or restrictions. These decentralised systems allow any user to send transactions, run nodes and participate in consensus mechanisms.

Bitcoin and Ethereum exemplify public blockchains, offering the maximum possible transparency because all transactions are publicly visible and verifiable. Accordingly, they provide the highest level of decentralisation and censorship resistance, as no single entity controls the network. However, public blockchains typically process transactions slower and consume more energy.

2. Private blockchain

Private blockchains operate as closed networks controlled by specific organisations or groups. Access requires explicit permission from a network authority, with the controlling entity determining who can participate, view transactions or validate blocks. 

These networks offer faster transaction speeds, lower costs and improved privacy since sensitive business data can remain confidential. Banks and corporations often use private blockchains for internal processes, supply chain management and inter-organisational collaboration for obvious reasons.

3. Hybrid blockchain

Hybrid blockchains mix and match public and private blockchain elements, allowing organisations to control access while maintaining some public transparency. Certain data remains private and accessible only to authorised participants, while other information becomes publicly visible. 

This approach enables businesses to benefit from blockchain transparency for customer-facing operations while keeping sensitive internal processes confidential.

4. Consortium blockchain

Consortium blockchains are semi-decentralised networks controlled by a group of organisations rather than a single entity. Multiple companies collaborate to maintain the network, sharing control and validation responsibilities. 

This model suits industries where competitors need to collaborate, such as banking consortiums or supply chain partnerships, providing more decentralisation than private blockchains while maintaining controlled access.

History of blockchain technology

Blockchain technology has evolved through decades of cryptographic research, only recently achieving mainstream recognition. In 1991, pioneers Haber and Stornetta first proposed cryptographically secured chains of records to timestamp digital documents, before Nick Szabo conceptualized ‘bit gold’ in 1998, a precursor to cryptocurrency using proof-of-work mechanisms. 

The breakthrough came in 2008 when the pseudonymous Satoshi Nakamoto published the Bitcoin whitepaper, introducing the first blockchain that works in practice. Bitcoin's network launch followed in January 2009 with the genesis block.

Ethereum came along six years later, introducing smart contracts and expanding blockchain capabilities beyond simple transactions. The following years saw explosive growth, with thousands of cryptocurrencies joining the fray amid increased corporate and government adoption. Key milestones include the 2017 cryptocurrency boom, the launch of Tesla and MicroStrategy’s treasury policies, and Ethereum's 2022 Merge transition to PoS consensus.

Although the cryptographic foundations had already been developed over many years, Satoshi Nakamoto is widely credited with inventing modern blockchain technology through the creation of Bitcoin. Their identity remains unknown (despite Herculean efforts to uncover it) but they were the first to blend existing concepts, such as cryptographic hashing, digital signatures and peer-to-peer networking, into a fully functional, decentralised system.

Nakamoto disappeared from public involvement in Bitcoin in 2011, leaving behind a revolutionary technology that transformed digital finance.

What are the benefits of blockchain?

1. Security – blockchain’s decentralised architecture and cryptographic protections make it highly secure. Each transaction is digitally signed to ensure its authenticity, and the distributed network removes single points of failure that hackers typically target. The immutable ledger prevents unauthorised changes, creating tamper-proof records that maintain integrity over time.
2. Efficiency – automated processes and the reduction of intermediaries tend to boost efficiency. Smart contracts execute automatically when preset conditions are met, eliminating the need for manual verification and processing delays. Cross-border transactions that once took days can now settle in minutes.
3. Transparency – blockchain offers unprecedented transaction visibility through publicly accessible ledgers. Network participants can independently verify transactions, reducing fraud and building trust based on verifiability rather than blind faith. This openness enables real-time auditing and greater accountability.
4. Financial inclusion – blockchain extends financial services to unbanked populations worldwide. Almost anyone with internet access can participate without needing bank accounts, credit histories or proximity to financial centres, democratising access to financial services.
5. Reduced transaction costs – by eliminating intermediaries such as banks and payment processors, blockchain significantly lowers transaction fees. This is especially beneficial for international transfers, which traditionally incur multiple fees and currency conversion charges.
   

What are the disadvantages of blockchain?

While many crypto developers are working on the solutions, the key challenges remain:

1. Scalability issues

Blockchain networks face significant throughput limitations compared to traditional payment systems. For example, Bitcoin processes approximately 7 transactions per second, while Ethereum handles around 15. Visa's capacity stands at 65,000 transactions per second. 

As network usage increases, transaction fees rise and confirmation times extend, also creating bottlenecks that hinder mass adoption. The distributed consensus requirement means every transaction must be verified across numerous nodes, inherently limiting processing speed. 

Layer-2 solutions and newer consensus mechanisms attempt to address these constraints, but scalability remains a fundamental challenge for widespread blockchain implementation.

2. Energy consumption

Proof-of-Work blockchains consume enormous amounts of electricity for mining operations. Bitcoin's annual energy usage rivals that of some countries, raising environmental concerns about carbon emissions and sustainability. Worse from an environmental viewpoint, they are designed to reduce rewards and become more energy intensive as time goes by.

Mining operations also require specialised hardware to run continuously, contributing to electronic waste. While Proof-of-Stake systems significantly reduce energy consumption, many established networks still rely on energy intensive mechanisms.

3. Regulatory challenges

Blockchain development operates in a complex, ever shifting regulatory landscape where legal frameworks lag behind technological innovation. Governments struggle to classify cryptocurrencies and establish legal oversight, creating uncertainty for businesses and investors. 

Regulatory differences between jurisdictions complicate international operations, while potential restrictions could limit blockchain adoption. Anti-money laundering compliance and tax reporting requirements also add in operational complexity for some blockchain-based businesses.

Blockchain applications

Blockchain is revolutionising multiple applications, including:

1. Financial services

Blockchain is rapidly changing financial services through cryptocurrency payments, decentralised finance (DeFi) and streamlined banking operations. Digital currencies enable instant cross-border transfers without traditional intermediaries, hugely reducing both costs and settlement times. 

New DeFi platforms are offering lending, borrowing and trading services without centralised control, providing financial access to underbanked populations. 

Traditional banks are also increasingly adopting blockchain technology for trade finance, reducing paperwork and improving transparency in international commerce. Smart contracts are now automating insurance claims processing and loan approvals, minimising human error and processing delays.

2. Supply chain management

Blockchain creates transparent, traceable supply chains where every product movement is permanently recorded. Companies can track goods from manufacturing through to delivery, enabling the rapid identification of problem areas, from the contamination sources in food safety incidents to counterfeit products in luxury markets. For example, Walmart uses blockchain to trace produce origins within seconds, improving food safety responses.

3. Healthcare

Healthcare applications currently focus on secure patient data management and pharmaceutical supply chain integrity. Blockchain allows patients to control access to their medical records while also ensuring that their data remains tamper-proof and accessible to authorised providers. 

Blockchain also combats counterfeit medications by tracking pharmaceutical products from manufacturing to patient delivery, a critical concern where fake or mistaken drug dispersal can pose serious health risks.

4. Retail and e-commerce

Retailers are already using blockchain for loyalty programmes, customer data protection and payment processing. Blockchain-based loyalty points are now becoming transferable between some platforms and even enabling new payment methods and improved security for online transactions.

Blockchain vs Bitcoin: What’s the difference?

Blockchain is the underlying technology, a distributed ledger system that records transactions across multiple computers in a cryptographically secure, immutable chain. 

Bitcoin is a specific application of blockchain technology, representing the first successful implementation of blockchain as a decentralised digital currency. You can think of blockchain as internet infrastructure, while Bitcoin is like email (a specific and powerful use of that infrastructure). 

Blockchain technology extends far beyond cryptocurrency, powering applications in supply chain management, healthcare records, smart contracts and digital identity verification. Bitcoin simply uses blockchain's capabilities to create a peer-to-peer electronic cash system without any central authority.

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Blockchain and AI

Blockchain and artificial intelligence are synergetic technologies, as you can combine AI's analytical capabilities with blockchain's security and transparency. For example, AI algorithms can analyse blockchain data to detect fraudulent transactions, optimise trading strategies and predict market trends.

Conversely, blockchain provides secure, immutable training data for AI models while ensuring data provenance and preventing tampering. And smart contracts can automatically execute AI-driven decisions, creating autonomous systems for insurance claims, supply chain optimisation and personalised financial services. 

This marriage remains one of the more exciting spaces in the tech world.

Future outlook of blockchain

Blockchain's future centres on solving some of its remaining challenges, including improving scalability, interoperability and wider mainstream adoption. Layer-2 solutions and sharding technologies are working to address current throughput limitations, while cross-chain protocols are being developed for seamless interaction between different blockchain networks. 

Central bank digital currencies (CBDCs) are also coming down the track, representing government adoption of blockchain, though with new upsides and risks. And Web3 applications are promising decentralised internet infrastructure, giving users control over their data and digital identities.

Looking ahead, environmental sustainability is driving innovation toward energy-efficient consensus mechanisms, with Proof of Stake gaining widespread adoption. Integration with Internet of Things (IoT) devices is also creating new possibilities for automated, trustless interactions between connected devices.

Crypto.com is positioned to play a crucial role in blockchain's future by building user-friendly interfaces that bridge traditional finance and digital assets. We eventually plan to offer a one-stop-shop for all cryptocurrency needs, making blockchain technology accessible to users worldwide.

FAQs about blockchain technology

What is blockchain in simple terms?

Blockchain is a digital ledger that records transactions in a secure and transparent way. It links blocks of data together so they can’t be changed without detection.

What is blockchain mainly used for?

Blockchain is mainly used to securely record transactions and track assets in industries like finance, supply chains and healthcare. It enables trust without needing a central authority.

What are the four types of blockchain?

The four main blockchain types are: Public blockchains (open to everyone, like Bitcoin), private blockchains (controlled by single organisations for internal use), consortium blockchains (shared among specific groups of companies) and hybrid blockchains (combining public transparency with private control for certain data). Each serves different needs based on required access levels, control and transparency.

Is Bitcoin a blockchain?

Bitcoin is a cryptocurrency that runs on a blockchain network. Its blockchain records every Bitcoin transaction publicly and securely.

Is blockchain the future?

Many experts believe blockchain will transform industries by improving transparency, security and efficiency. However, widespread adoption depends on overcoming challenges like scalability and improved regulation.

Can blockchain be hacked?

The core blockchain technology is very secure due to cryptography and decentralisation. But vulnerabilities can exist in applications, exchanges or wallets connected to it.

How to invest in blockchain technology?

You can invest by buying cryptocurrencies including Bitcoin or Ethereum that run on a blockchain. Alternatively, consider buying shares in companies developing blockchain solutions, or blockchain-focused funds.

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