How blockchain works

The technology behind most cryptocurrencies, without the jargon.

A blockchain is a shared record book. Imagine a notebook that thousands of people hold identical copies of. Whenever someone wants to add a page, everyone checks it against their own copy and only accepts it if it all adds up.

Blocks and chains

Payments are collected into groups called blocks. Each new block includes a digital fingerprint of the block before it, which links them into a chain. If someone tried to quietly change an old payment, its fingerprint would change, breaking every link after it. The rest of the network would spot the mismatch straight away and reject the tampered copy.

Who decides which block comes next?

With no central referee, the network needs rules for choosing who adds each block. The two best-known methods are:

Proof of work, used by Bitcoin. Computers, called miners, race to solve a hard puzzle. The winner adds the next block and earns a reward. The effort and electricity required make cheating very expensive.

Proof of stake, used by Ethereum. Participants lock up some of their own coins as a deposit, and are picked to add blocks. If they cheat, they can lose that deposit. It uses far less energy than mining.

Wallets and keys

Your coins don't sit in your wallet like cash. The wallet stores your private key, which lets you sign payments on the blockchain. Some wallets are apps you control yourself. Exchanges also hold coins on your behalf, which is easier, but means you are trusting them to look after your money.

Fees and speed

Sending crypto usually costs a small network fee, which rewards the people keeping the system running. Fees and confirmation times change depending on how busy the network is.

Limits to keep in mind

Blockchains are hard to alter, but the apps, exchanges and people around them are not always safe. Scams and hacks are common, so treat anything promising guaranteed returns with great suspicion. Next, read how to buy cryptocurrency.