What is blockchain and how does it work?

You’ve probably heard of cryptocurrencies like Bitcoin or Ethereum — but what actually powers them? That would be blockchain. And while it started as the tech behind digital money, it’s quickly become something much bigger.

Blockchain's now being used to improve transparency in supply chains, secure medical records, and even run digital voting systems. But how does it all work?

In this guide, we’ll break it all down: what blockchain is, how it works, and why it’s already reshaping industries around the world.

What is a blockchain?

Blockchain's a technology built to store and share information in a way that's secure, transparent, and highly resistant to manipulation or error. Think of it as a digital record book, but instead of being kept by one person or company, it's maintained by thousands of independent computers around the world, called nodes.

Blockchain works like a special kind of ledger. When someone sends a transaction, like transferring bitcoin, it’s grouped with others into a 'block.' The network nodes review and verify the block, lock it in place, and adds it to a continuous sequence of previous blocks — creating what’s called a 'blockchain'.

Most people first hear about blockchain because of cryptocurrencies like Bitcoin and Ethereum, which use it to keep track of every coin sent and received. But blockchain isn’t just about digital money. It’s a new way of storing data and making transactions without relying on third parties like banks or governments.

Let’s say you want to send money abroad. Usually, the payment would go through banks and payment processors, taking time and charging fees. Blockchain changes that by allowing people to send value directly to one another, quickly and securely.

Because of how the technology is built, it isn’t limited to finance. Blockchain can also be used to protect medical records, verify where goods come from, manage digital identities, and much more. It creates a trustworthy, open system for recording information — making it one of the widely applicable technologies in the world today.

Key takeaways

• Blockchain stores data in blocks that are connected in order
• It’s best known for powering cryptocurrencies like Bitcoin and Ethereum
• Because it’s decentralised, no single person can change confirmed data
• In public blockchains, everyone in the network can see the full transaction history, which builds trust

What does decentralised mean?

When something is decentralised, it means there isn’t one single place or authority controlling it. In a blockchain network, no single company, government, or person is in charge. Instead, thousands of computers (called nodes) all over the world keep copies of the data and work together to check that everything is accurate.

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How blockchain works

If you think of a traditional database as a centralised spreadsheet, blockchain's like a shared ledger copied across thousands of computers. Here’s how it processes transactions:

The transaction lifecycle

Here’s a more detailed step-by-step look at what happens when someone makes a transaction on a blockchain network:

1. The transaction begins: a user wants to send digital assets (like Bitcoin or Ethereum) to someone else. They do this through a digital wallet, entering the recipient’s wallet address and the amount
2. The transaction is broadcast: once submitted, the transaction is shared across the blockchain network. All the connected computers (nodes) receive a copy
3. Validation by the network: the transaction doesn’t go through immediately. Instead, it waits to be checked. Depending on the blockchain, nodes use a method called a consensus mechanism to validate it. Common types include:
   
   Proof of Work (PoW): computers solve complex puzzles to prove the transaction is valid (used by Bitcoin).
   
   Proof of Stake (PoS): validators are chosen based on the amount of cryptocurrency they’ve locked up (staked), like in Ethereum 2.0.
   
4. Block creation: validated transactions are grouped into a 'block' along with others waiting in the queue. Each block contains a list of these transactions plus a few important details like a timestamp and a reference to the block before it
5. Adding the block to the chain: once a block is ready, it’s linked to the one that came before it, forming a chronological chain. Once added, the block is locked in and can’t be changed
6. Permanent update to the network: the new block is copied across all the nodes in the network, updating everyone’s ledger. From that point on, the transaction is considered confirmed and part of the permanent blockchain history

This entire process usually takes seconds or minutes depending on the blockchain. It’s secure, transparent, and doesn’t require any third-party approval.

A closer look at hashing

In simple terms, hashing is what keeps the blockchain linked together and protected from tampering or fraud. Let’s break down how blockchain keeps data secure and blocks connected using a process called hashing.

Each block includes:

• a list of transactions
• the exact time the block was created (timestamp)
• a special code called a hash that represents the block’s contents
• a hash of the previous block

A hash is like a digital fingerprint — it's a long string of letters and numbers that uniquely represents the data inside a block. Even a tiny change to the data will create a completely different hash.

This is how the chain stays intact. Each block contains the hash of the one before it — so if someone tries to change something in an earlier block, all the following blocks would have to be changed too. That would require an enormous amount of computing power across thousands of computers at once, making it virtually impossible on large, secure networks like Bitcoin or Ethereum.

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Types of blockchain networks

Not all blockchains work the same way. Depending on who can access and manage them, there are four main types:

1. Public blockchains

These are open to anyone. You don’t need permission to participate in the network. Well-known examples include Bitcoin and Ethereum. Public blockchains are highly secure and transparent, but they can be slower and require more computer power.

2. Private blockchains

These are closed networks. Only approved participants can join, and one organisation usually manages the system. They’re faster and more efficient than public blockchains but less open and decentralised. Businesses often use private blockchains for internal operations.

3. Consortium (or federated) blockchains

Instead of being controlled by one company, these are run by a group of organisations. It’s a way for competitors or partners to share data safely while keeping some control. This model is useful in industries like banking, logistics, or energy.

4. Permissioned blockchains

These can be public or private but require permission to access certain parts of the network or perform specific actions. This setup gives businesses flexibility and control, while still benefiting from some blockchain advantages.

Transparency and traceability in blockchain

Blockchain combines transparency with traceability. Anyone can verify transactions on public chains using tools like blockchain explorers. For private blockchains, access is permissioned but still traceable.

This functionality is critical in sectors like food safety, where companies use blockchain to trace product origins.

How secure is blockchain?

Blockchain uses a mix of cryptography, distributed consensus, and immutable records to make tampering extremely difficult. Each transaction is approved by a network of independent computers (nodes) using mechanisms like proof of work or proof of stake. Once added to the blockchain, data becomes part of a permanent chain that is nearly impossible to alter.

To change even a single block in a blockchain, a hacker would need to control more than 50% of the network’s total computing power — a scenario known as a 51% attack. This is extremely difficult to pull off, especially on large, well-established blockchains like Bitcoin or Ethereum.

For example, Bitcoin's network processes data so quickly, at around 640 exahashes per second as of 2024, that any attempted hack would be left behind by the network before it could take effect. Similarly, Ethereum is secured by over 33 million staked ETH spread across more than a million validators. To manipulate the network, an attacker would need to own and control over half of that staked ETH and be selected frequently enough to influence the chain — a nearly impossible and extremely expensive feat.

However, smaller or newer blockchain networks may be more vulnerable. Security always depends on how well the system is built, maintained, and monitored.

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Blockchain vs Bitcoin: understanding the difference

It’s easy to get confused between blockchain and Bitcoin — they’re closely related, but they’re not the same thing. You might even be wondering if Bitcoin's a blockchain? Not really.

• Bitcoin: Bitcoin was the first real-world use case of blockchain, introduced in 2009. It’s a digital currency designed for peer-to-peer transactions without banks
• Blockchain: blockchain is the underlying tech. While Bitcoin uses it to record monetary transfers, blockchain can be used for a wide range of applications — identity verification, contract automation, record keeping, and more

Practical applications of blockchain

Blockchain isn’t just about crypto. It’s being used in many areas to make systems more secure, efficient, and transparent:

• Digital currencies: blockchain powers cryptocurrencies like Bitcoin and Ethereum, allowing people to send and receive digital money directly, without banks
• Healthcare: medical records can be stored on a blockchain to keep them secure and tamper-proof
• Smart contracts: these are digital agreements that run automatically when certain conditions are met. They can simplify things like insurance payouts or royalty payments, removing the need for third parties
• Supply chains: companies use blockchain to track products from the factory to the store. This helps prove where items came from and ensures everything is handled properly along the way

Advantages and challenges of blockchain

Like any technology, blockchain comes with both strengths and trade-offs. Here’s a quick overview of some of its most-talked-about pros and cons:

What are some advantages of blockchains?

• Transaction efficiency: blockchain transactions are processed quickly, and smart contracts can trigger actions automatically when conditions are met
• Global accessibility: blockchain networks work across borders, so cryptocurrencies can be sent and received anywhere in the world
• Transparency: most public blockchains are fully transparent. Anyone can view the transaction history, which reduces the chance of manipulation or fraud
• Disintermediation: blockchain lets people send money or sign agreements without needing a bank, lawyer, or central authority
• Security and reliability: thanks to encryption, consensus rules, and decentralised structure, blockchain offers a high level of trust and protection against tampering

What are some disadvantages of blockchain?

• Energy use: blockchains that use proof-of-work (like Bitcoin) require huge amounts of electricity, raising environmental concerns
• Scalability: as blockchains grow, they can become slower and more expensive to use, especially during high demand
• Unclear regulations: laws around blockchain and crypto vary between countries and are still evolving, which can create uncertainty
• Complexity: the technology can be difficult to understand and use for everyday customers and businesses just starting out

The future of blockchain

Blockchain is still in its early stages, but its long-term potential is enormous. What began as the foundation for cryptocurrencies is now expanding into nearly every sector — from finance and healthcare to logistics and digital identity.

As the technology matures, we’re likely to see more user-friendly applications, faster networks, and greater adoption by both businesses and governments. With growing interest in decentralised finance (DeFi), tokenised assets, and Web3 tools, blockchain could play a central role in how people interact online and exchange value in the future.

In short, blockchain isn’t just a trend — it’s shaping up to be one of the most transformative technologies of our time.

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The information provided is accurate as of 14 June 2025.

Not all cryptoassets carry the same risks. Before investing, read our cryptoasset specific risk summaries to make sure you understand the different risks associated with different types of cryptoassets.

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