Blockchain basics: a ledger with no single keeper

Every financial system runs on a ledger, a record of who owns what. Your bank keeps one, your brokerage keeps one, and you trust them to keep it honest. A blockchain is a ledger with no single keeper. Thousands of computers around the world each hold a copy, agree on new entries by following shared rules, and make old entries extremely hard to change.

The problem it solves

Digital things are easy to copy. If money is just a file, what stops someone from spending the same coin twice? Traditionally, the answer is a trusted middleman, like a bank, that checks every transaction. In 2008 a pseudonymous author called Satoshi Nakamoto published a paper describing another way, and in 2009 the Bitcoin network went live: the first widely used system to prevent double-spending without a central authority.

How a transaction gets recorded

1. You sign it. Your wallet uses your private key to sign a message like "send 0.1 bitcoin from my address to this address."
2. The network checks it. Computers running the network's software, called nodes, confirm that the signature is valid and the coins exist.
3. It joins a block. Valid transactions are bundled into a block, and each block carries a cryptographic fingerprint of the block before it, chaining them together.
4. It gets buried. As new blocks pile on top, rewriting your transaction would mean redoing all the work since, which quickly becomes practically impossible.

The ledger is public. Anyone can view every transaction, but addresses are strings of characters rather than names, so users are pseudonymous, not anonymous.

Consensus: who adds the next block?

Without a boss, the network needs a fair way to decide. That is the job of a consensus mechanism, and there are two main kinds.

• Proof of work (Bitcoin): miners race to solve a computational puzzle. The winner adds the block and earns new bitcoin plus fees. Cheating would require controlling most of the network's computing power, which is enormously expensive. The trade-off is heavy electricity use.
• Proof of stake (Ethereum): validators lock up coins as collateral for the right to propose and confirm blocks, and cheaters can lose part of that stake. It uses far less energy.

Bitcoin: digital scarcity

Bitcoin's rules cap its supply at 21 million coins. New coins enter circulation as mining rewards, and about every four years a halving cuts that reward in half; it started at 50 bitcoin per block in 2009 and has been halved several times since. Supporters see bitcoin as "digital gold," a scarce asset outside any government's control. Critics point to its volatility and energy use. Both views are worth understanding.

Ethereum: a programmable blockchain

Ethereum, launched in 2015, went further. Its blockchain runs smart contracts: programs that execute automatically when conditions are met. They power lending apps, exchanges, stablecoins and NFTs. Every action costs a gas fee, paid in ether, which rises when the network is busy. In 2022 Ethereum switched to proof of stake, which the Ethereum Foundation estimates cut its energy use by more than 99%.

Thousands of other cryptocurrencies, known as altcoins, run on their own blockchains or on top of networks like Ethereum. Knowing how these systems work is step one. Step two is holding them safely, which comes next in Wallets and custody.