How Blockchain Works

Before blockchain, digital record-keeping required a trusted central authority: a bank holds your balance, a company holds your data, a government maintains the register. Centralised records are efficient but create single points of failure — they can be hacked, corrupted, or manipulated by…

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How Blockchain Works

The Problem Blockchain Solves

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A blockchain is a distributed ledger: a record of transactions that is maintained simultaneously across thousands of independent computers (nodes), with no single point of control. Changes to the ledger require agreement from the network — making fraud or tampering extremely difficult.

The Block-and-Chain Structure

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Transactions are grouped into blocks. Each block contains:

A set of validated transactions
A timestamp
A cryptographic hash of the previous block

The hash of the previous block is the crucial element. A cryptographic hash is a fixed-length string generated from input data by a one-way function — changing any part of the input completely changes the hash. By including the previous block's hash, each new block mathematically chains to all prior history. Altering any historical transaction would change its block's hash, which would change all subsequent block hashes — making tampering immediately detectable.

Consensus Mechanisms

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For a distributed network to agree on which transactions are valid and in what order, it needs a consensus mechanism:

Proof of Work (PoW): used by Bitcoin. Miners compete to solve a computationally expensive mathematical puzzle; the winner adds the next block and receives a block reward. The difficulty of the puzzle prevents a single actor from controlling the chain without owning 51% of the network's total computing power — extremely expensive on Bitcoin's network. PoW requires significant energy consumption.

Proof of Stake (PoS): used by Ethereum (since the 2022 "Merge") and many newer blockchains. Validators are chosen to create blocks based on the amount of cryptocurrency they "stake" (lock as collateral). If they validate fraudulent transactions, they lose their stake. PoS requires far less energy than PoW.

Immutability and Its Implications

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Once a transaction is confirmed and buried under subsequent blocks, reversing it would require rewriting the entire chain from that point — computationally infeasible on large networks. This immutability is simultaneously a security feature and a usability challenge: there is no customer service for a misdirected transaction.

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Quiz me on this

What role does the cryptographic hash of the previous block play in blockchain security?

It encrypts the transactions within each block to prevent unauthorised viewing
✓ It creates a mathematical chain: altering any historical block changes its hash, which changes all subsequent block hashes, making tampering immediately detectable by the network
It provides the computational puzzle that miners must solve to add a new block
It links each block to its creator's identity, providing accountability for block producers

What is the key difference between Proof of Work and Proof of Stake consensus mechanisms?

Proof of Work is used for financial transactions while Proof of Stake is used for data storage applications
✓ Proof of Work requires miners to expend computational energy solving puzzles to validate blocks; Proof of Stake requires validators to lock up cryptocurrency as collateral, with block rights allocated based on stake — PoS uses far less energy
Proof of Work produces immutable records while Proof of Stake records can be reversed by validators
Proof of Stake requires government licensing while Proof of Work operates entirely outside any regulatory framework

Why is blockchain's immutability described as simultaneously a security feature and a usability challenge?

Immutability makes blockchains secure but means they cannot be updated with software improvements
✓ Because once confirmed, transactions cannot be reversed — this protects against censorship and tampering but eliminates recourse for user errors (wrong address, accidental transactions), which in traditional finance can be resolved by contacting a bank
Immutability creates security because only the original block creator can modify their entries later
The immutability of blockchains means they cannot scale to high transaction volumes, limiting their utility

What does the 51% attack vulnerability in Proof of Work mean?

If a miner solves 51% of daily block puzzles, they receive 51% of all block rewards
✓ If a single entity controls more than 50% of the network's total mining power, they can theoretically rewrite recent transaction history and double-spend — but this is extremely difficult on Bitcoin due to the enormous cost of acquiring that much computing power
A 51% attack occurs when 51% of nodes simultaneously disconnect, causing the network to halt
The 51% vulnerability refers to 51% of Bitcoin's total supply being held by fewer than 100 addresses