What Is Blockchain Technology? Beginner’s Explanation

Blockchain is a linked list of transactions (a digital ledger) stored on a network of computers.

Instead of being stored in one place, the data is spread across many computers and that is what makes it decentralized, hard to change and almost impossible to hack.

When a transaction is added to the digital ledger known as blockchain, anyone can see details such as which address sends money to another, what is being bought, or what action takes place, whether that is staking, claiming rewards, or minting*, the date and exact time of the action, etc.

| *Minting = creating a new digital asset and recording it on the blockchain. This term will be further explained in future editions of the #CryptoBasics article series. In the meantime, you can read more about the action of minting here.

Shortly put, as you will more often than not hear, Blockchain is immutable, decentralized and transparent.

• Decentralized because transactions are on the network of computers (called nodes)
• Immutable because transactions can’t be altered once committed.
• Transparent because the onchain actions (transactions) can be viewed by anyone.

Blockchain works through Blocks and Consensus Mechanisms

Think of blockchain like a shared notebook. Every time someone writes a new entry (a block), the network first agrees that the entry is valid (consensus). Then, the update is automatically recorded across the copies of that notebook network(nodes). Once written, no one can erase it, and everyone sees the same version, which builds trust.

How does a network agree that an entry is valid? Who checks if the transaction is real and based on what rules?

The network relies on nodes (independent computers) to check every transaction. Each node follows the same set of rules programmed into the blockchain. The rules ensure the sender has enough funds for the transaction, the digital signature is correct, etc. Once a transaction passes these checks, it can be grouped into a block. The network then uses a consensus mechanism to make sure all nodes agree that the block is valid. Only after this agreement is reached does the block get added to the blockchain.

Understanding Nodes: the Independent Computers that Validate and Relay Blockchain Transactions

Nodes are independent computers scattered globally that validate and relay blockchain transactions. Continuing from the previous example, they are like volunteer librarians who each keep a complete copy of the blockchain "book" and help verify that new pages (blocks) are legitimate before adding them.

Many blockchain networks offer incentivized programs that reward these volunteers for participating by maintaining a copy of the blockchain ledger. By providing a node, these participants help validate and propagate transactions and blocks throughout the network, earning rewards for their contribution to the system's security and functionality.

Understanding Blocks: The Building Blocks of Blockchain

Blocks resemble data packages. They contain transaction information for a specific time period. These blocks are virtually "stacked" on top of each other, with each block dependent on the one before it, forming a continuous chain - hence the name "blockchain” (a chain of blocks).

Each block contains three components:

• A list of transactions with all the activity that happened during that time period
• A unique hash, which is a long string of random characters that serves as the block's fingerprint, making it unique and identifiable
• The hash of the previous block which creates the "link" that connects all blocks together in an unbreakable chain

This linking system is what makes blockchain so secure. If someone tries to change information in an old block, its hash would change, breaking the chain and immediately alerting the entire network to the tampering attempt.

How can I create a block?

Only miners (in Proof of Work networks) or validators (in Proof of Stake networks) can create blocks.

Consensus Mechanisms: How the Network Agrees

Consensus mechanisms are the process by which the network agrees that a new entry (block) is valid before it gets added. They're like the rules of a democratic vote that help the entire network reach agreement. Here are the two most common types:

Proof of Work (PoW): The Original Consensus Method

In Proof of Work systems, transactions are collected and grouped into blocks by specialized nodes called miners.

Transactions made on the network are collected and grouped into a block by very specific nodes (called miners). It involves miners collecting transactions into a block and then solving a complex mathematical problem by repeatedly hashing the block’s data until they find a hash that meets a set criteria. After which, other nodes check if the block is valid. If it is, the miner is rewarded cryptocurrency and the block is added to the blockchain. If it’s not, the miner wasted their time and energy.

This process requires significant computational power and energy, making it expensive to attack the network maliciously.

Proof of Stake (PoS): The Energy-Efficient Alternative

Proof of Stake works differently and consumes far less energy through the use of validators.

Specific Nodes (called validators) stake some cryptocurrency, meaning they lock up a certain amount of tokens as collateral. Validators with more tokens stakes are more likely (but not guaranteed) to be selected to process the transaction and create a block. Other validators check if the block is valid. If it is, all participating validators earn a transaction fee. If it’s not, the validator that created the block might lose their stake.

This system incentivizes honest behavior because validators have "skin in the game" - they risk losing their own money if they try to cheat the system.

If you are curious and want to understand how this Blockchain Technology works in detail, TOKERO Academy offers step-by-step courses designed for beginners. You’ll learn the basics of crypto and how blockchain is shaping the digital future.

Learn more