How does blockchain work?

5 min read

Blockchain is a revolutionary technology that allows information to be stored and transferred in a decentralized, transparent, and secure manner. Often associated with cryptocurrencies like Bitcoin, it goes far beyond that and finds applications in many sectors. Imagine a large ledger shared by thousands of people: each page (a block) is linked to the previous one by a unique digital fingerprint, making any falsification nearly impossible [1].

This article explains the basics of how it works, its key mechanisms, its concrete uses, and its current limitations, in a simple and educational way.

What is blockchain?

A blockchain is a decentralized digital ledger, maintained by a network of computers (nodes) distributed around the world. Unlike a classic database controlled by a central authority (such as a bank), it has no boss. Each participant possesses an identical copy of the ledger, which guarantees transparency and resilience [2].

Its main characteristics are:

• Decentralization: Data is distributed across thousands of machines, without an intermediary.
• Transparency: Anyone can consult the transaction history.
• Immutability: Once recorded, data can no longer be modified without network consensus.
• Security: Protected by cryptography and consensus mechanisms.

The first blockchain model dates back to the 1990s, but it was with Bitcoin in 2009 that it took off. Today, it is applied to finance, logistics, healthcare, and much more [2].

How does blockchain work? The block and the chain

Blockchain, literally "chain of blocks," relies on a simple but robust structure. Imagine a large ledger where all transactions are noted: "Alice gives 5 coins to Bob." Instead of a single ledger kept by a bank, this record is duplicated on thousands of computers.

1. The creation of a block

A block is like a page in the ledger. It groups several recent transactions, a timestamp, a unique hash (digital fingerprint), and the hash of the previous block. Transactions are verified by the network nodes before being included [1].

2. Chaining and hashing

Each block contains the hash of the previous one, forming a chain. A hash function (such as SHA-256) transforms any data into a fixed-size fingerprint. It is irreversible and sensitive to the slightest change: change a comma in a transaction, and the hash changes completely (avalanche effect). This makes the chain tamper-proof: to alter an old block, one would have to recalculate all subsequent blocks on the majority of the network's computers, which is practically impossible [2].

3. Validation and consensus

Without a central authority, participants agree via a consensus mechanism. A transaction is validated when more than 51% of the nodes approve it. The shared ledger is accessible to all, according to a secure protocol [1].

Consensus Mechanisms: Proof of Work vs Proof of Stake

Consensus allows strangers to agree on the state of the ledger. The two main mechanisms are:

• Proof of Work (PoW): Used by Bitcoin. Miners solve complex mathematical problems, which requires a lot of energy. The first one to find the solution adds the block and is rewarded. Security relies on the high cost of electricity, but it consumes as much as an entire country like Sweden [2].

• Proof of Stake (PoS): Adopted by Ethereum since 2022. Validators stake their cryptocurrencies as collateral. They are chosen randomly based on their stake. If they cheat, they lose their stake (slashing). It is eco-friendly: energy consumption drops by 99.95% compared to PoW. However, it can favor the wealthiest [2].

Other mechanisms exist, such as Proof of Authority (based on reputation) or Delegated Proof of Stake.

Cryptography: Private Keys, Public Keys, and Signatures

Security relies on asymmetric cryptography. Each user has a pair of keys:

• Public Key: Like an open padlock or an address to receive funds. Everyone can see it.
• Private Key: The unique key used to sign transactions. It remains secret.

To send money, the message is signed with the private key, producing a digital signature verifiable by the public key. This proves authenticity without revealing the private key. If the private key is lost, the funds are irrecoverable [2].

Smart Contracts

A smart contract is a computer program stored on the blockchain that executes automatically when conditions are met. Think of a vending machine: you put in 2 euros, the machine verifies and gives a can without a salesperson. Here, the code replaces the intermediary.

Concrete examples:

• Decentralized Finance (DeFi): Automatic loans on Aave or exchanges on Uniswap.
• Insurance: Instant compensation in case of flight delays via oracles.
• NFTs and royalties: An artist automatically receives 10% on every resale.
• Logistics: Temperature tracking for vaccines; payment blocked if conditions are not met [2].

They eliminate intermediaries, strengthen transparency, and guarantee execution via immutable code.

Concrete Applications and Types of Blockchains

Blockchain is used for cryptocurrencies, the tokenization of real-world assets (real estate, art), digital identity, secure voting, and supply chain traceability (medicines, food). It reduces the costs and delays of international transfers [2].

There are three types:

• Public: Open (Bitcoin, Ethereum), highly decentralized.
• Private: Managed by an organization, for internal use.
• Consortium: Hybrid, managed by several entities (e.g., logistics) [2].

Current Limitations: Scalability, Fees, Energy, and Regulation

Despite its strengths, blockchain faces the "trilemma": it is difficult to achieve security, decentralization, and scalability simultaneously.

• Scalability: Bitcoin processes ~7 transactions per second, Ethereum ~15-30, compared to 24,000 for Visa. Solutions: Layer 2 (Arbitrum) and sharding.
• Fees: Variable and sometimes high (up to 100 dollars during congestion periods), making micro-payments difficult.
• Energy Consumption: Bitcoin's PoW is equivalent to the consumption of a country like Argentina. PoS reduces this drastically (Ethereum: -99.95%). Some miners use renewable energy or recover heat.
• Security and Regulation: Smart contracts can contain bugs (theft of millions). Loss of private key = permanent loss. Legally, ambiguity persists: complex taxation, money laundering risks, variable regulations (MiCA in Europe, bans in China) [1].

Conclusion

Blockchain is transforming trust: we no longer trust a bank or a notary, but rather code and mathematics. From an unfalsifiable shared ledger to automated smart contracts, it paves the way for a decentralized economy. Although still limited by its scalability and regulation, constant advances (PoS, Layer 2) are making it increasingly accessible and green. Whether for cryptocurrencies, traceability, or digital identity, it continues to revolutionize our world. Ready to explore further?