What is a blockchain?
A blockchain is a kind of shared database (ledger) that many computers keep in sync. Transactions are grouped into “blocks,” each block is cryptographically linked to the previous one, and the network follows agreed-upon rules (consensus) to decide what gets added. These properties make tampering evident and increasingly difficult as more blocks are added.
Bitcoin’s 2008 whitepaper introduced the first working blockchain for peer-to-peer electronic cash without a central authority, solving the “double-spend” problem using proof-of-work and a chain of time-stamped blocks.
Blocks, hashes, and Merkle trees
Each block typically contains a header (including a hash pointer to the previous block) and a list of transactions. Hash functions turn data into a short “fingerprint”; changing the data changes the hash, so linking blocks by hashes helps detect tampering. Many systems also use a Merkle tree so a single root hash can summarize all transactions in the block—allowing efficient proofs that a specific transaction is included.
Consensus: Proof-of-Work vs Proof-of-Stake
In proof-of-work (PoW), miners compete to solve a cryptographic puzzle; the winner proposes the next block and earns rewards. This makes rewriting history costly. Bitcoin uses PoW.
In proof-of-stake (PoS), validators lock up (“stake”) coins and are selected to propose/attest to blocks; dishonest behavior can be penalized by slashing their stake. Ethereum uses PoS, where finality requires a supermajority of staked ETH; if the chain stalls, an “inactivity leak” helps it recover. The move from PoW to PoS also reduced Ethereum’s energy use by ~99.95%–99.99% according to ecosystem and independent analyses.
Public, private, and permissioned networks
Public (permissionless) blockchains let anyone join, read, and write transactions (subject to fees). Private and permissioned blockchains restrict participants and often suit business settings where members are known and operate under a governance model. Hyperledger Fabric is a well-known permissioned framework.
Smart contracts and tokens
Smart contracts are programs stored and executed on a blockchain. On Ethereum, they live at addresses, keep state, and run when transactions call their functions. They enable everything from simple tokens to complex apps like lending markets and games.
Wallets, keys, and addresses
A wallet is software or hardware that helps you manage blockchain accounts. It shows balances, lets you sign transactions, and can be custodial (a company holds keys) or non-custodial (you control your keys). On Ethereum, “your wallet is a tool for interacting with your account,” and you can switch providers at any time. On Bitcoin, a private key is the secret that authorizes spending; never share it. Many non-custodial wallets back up accounts with a 12–24-word recovery phrase.
Transactions, fees, and confirmations/finality
Transactions are signed messages that move value or call smart contracts. Networks charge fees to prevent spam and compensate validators/miners. On Ethereum, the fee equals gas used × gas price; you pay even if a transaction fails because computation still ran. On PoW chains, “confirmations” count how many blocks were added after the block containing your transaction; more confirmations mean stronger security. On Ethereum PoS, the concept of “finality” (a checkpoint the chain won’t revert) is reached when enough validators attest.
Scaling: Layer 1 vs Layer 2
Layer 1 is the base chain (e.g., Ethereum mainnet). Layer 2 (L2) solutions move most activity off-chain while inheriting L1 security—examples include rollups. Recent upgrades introduced “blobs” to make data posting for L2s cheaper, helping lower fees for users.
Oracles: bringing real-world data on-chain
Blockchains can’t natively read off-chain data. Oracles are services that source, verify, and relay external information (like asset prices or weather) so smart contracts can react to real-world events. Standards bodies and developer docs define oracles precisely as external data sources feeding smart contracts.
What blockchains are used for (today)
Common pilots and deployments include payments and remittances, tokenized assets, digital identity, and supply-chain traceability. For example, Walmart reported cutting mango traceability from days to seconds using a Hyperledger Fabric system built with IBM—illustrating how shared ledgers can speed audits across many firms. Development institutions like the World Bank describe similar use-case patterns for identity and supply chains.
Risks, limits, and common pitfalls
Blockchains trade off speed, cost, and decentralization. Smart-contract bugs, key loss, phishing, and scams are real risks. Consumer authorities highlight rising reports of impersonation scams and offer prevention tips; never share your recovery phrase, be skeptical of unsolicited messages, and verify URLs and senders independently. Also remember: not every problem needs a blockchain—sometimes a conventional database with clear governance is simpler and cheaper.
Quick FAQ
Is a blockchain just a database?
It is a kind of replicated ledger with strong tamper-evidence and consensus rules; that’s different from a typical single-administrator database.
What’s the difference between PoW and PoS?
PoW secures the chain with computing work; PoS secures it with economic stake and penalties. Ethereum uses PoS with explicit rules for finality.
Do smart contracts always need oracles?
Contracts can operate only on on-chain data by default; oracles are added when off-chain facts (prices, weather, results) are needed.
Are L2s separate blockchains?
Rollups are separate chains that post data to L1 and rely on L1 for security; they exist to scale throughput and cut costs.
Glossary
Blockchain: a distributed ledger of cryptographically signed transactions grouped into blocks and linked together, with conflicts resolved by rules (consensus).
Merkle tree: a tree of hashes summarizing many items with a single root hash, enabling efficient inclusion proofs.
Proof-of-work (PoW): miners expend computation to propose blocks; honest majority makes rewriting history impractical.
Proof-of-stake (PoS): validators stake assets, attest to blocks, and risk penalties for misbehavior; enables checkpoint finality.
Smart contract: code and state deployed to a blockchain, executed by network nodes.
Wallet: a tool (app/device) that manages keys and signs transactions; can be custodial or non-custodial.
Gas: the metering unit for computation/storage on Ethereum; fees = gas used × gas price.
Oracle: a source that brings off-chain data to smart contracts.
