What is a blockchain? A plain explanation

A blockchain is a shared record of transactions that thousands of independent computers keep identical copies of. New transactions are grouped into blocks, each block carries a fingerprint of the one before it, and the computers agree by fixed rules on which block comes next. Changing an old entry would mean redoing every block after it faster than the rest of the network, which is what makes the record so hard to alter.

Blocks and hashes

A hash is a short fingerprint computed from any amount of data: change one character of the data and the fingerprint changes completely. Every block contains the hash of the block before it. So if someone edits a transaction in an old block, that block's hash changes, which breaks the link in the next block, and the next. Every other node still holds the original and rejects the edited copy.

Nodes: who keeps the copies

A node is a computer running the network's software and keeping a full copy of the chain. Each node checks every new block against the rules itself — valid signatures, no coin spent twice, no more new coins than allowed — and rejects any that break them. Nobody has to trust anybody else's copy, which is the point: the record has no owner who could quietly change it.

Consensus: who adds the next block

Proof of work, used by Bitcoin: miners compete to find a number that gives the new block a hash below a target, which takes enormous computation. The winner adds the block and earns new coins plus fees. Rewriting history would need more computing power than the rest of the network combined.

Proof of stake, used by Ethereum since September 2022: validators lock up coins as a deposit and take turns proposing blocks. One who cheats loses part of the deposit. It uses a small fraction of proof of work's energy, and its security rests on the value at stake rather than on computation.

Public and private

On a public blockchain like Bitcoin or Ethereum, anyone can run a node, send a transaction or read the whole history. That openness has a cost worth knowing: every transaction an address ever made is visible to anyone who knows the address. Names are not on the chain, but once an address is linked to you — by an exchange withdrawal, a payment, a post — its history is linked too.

What blockchains are good and bad at

• Good at: moving value between people who do not trust each other, without a bank in the middle; keeping a record nobody can quietly edit; running on its own rules around the clock.
• Bad at: speed and volume — a single public chain processes far fewer transactions than a card network, which is why layer-2 networks exist (network fees explained); storing large data; undoing mistakes, since a transaction sent is final.

The first and best-known blockchain is Bitcoin's — what Bitcoin is is the natural next read. Stablecoins, which carry dollars on a blockchain, are in USDC vs USDT.

This guide explains how things work. It is not financial, investment or tax advice. Something wrong? Write to hi@perly.io and we will correct it.