How a Blockchain Works

Hash Functions: Digital Fingerprints

A cryptographic hash function takes any input (a word, a file, a novel) and produces a fixed-length string that looks random. SHA-256, used in Bitcoin, always outputs exactly 256 bits (64 hex chars).

Three properties make hash functions useful for blockchains:

• Deterministic: same input always gives the same output.
• One-way: from the hash, you cannot reconstruct the input (pre-image resistance).
• Avalanche effect: changing a single bit in the input flips roughly half the output bits, so you cannot "target" a desired hash.

What Is a Block?

A block is a record containing several fields. In Bitcoin-style blockchains, every block includes:

• Index: the block's position in the chain
• Timestamp: when it was created
• Data / Transactions: the payload (e.g. "Alice pays Bob 0.5 BTC")
• Previous Hash: the SHA-256 hash of the preceding block
• Nonce: a number miners adjust to solve the proof-of-work puzzle
• Own Hash: SHA-256 of all the above fields combined

The "Previous Hash" field is the structural backbone of the blockchain. It hard-codes the hash of the prior block into the current one, creating a cryptographic dependency that propagates through every subsequent block.

The Chain: Why Tampering Fails

Consider three consecutive blocks. Their hashes form a dependency chain:

If you change the data in Block #1, its hash changes completely. Block #2's "Prev Hash" field no longer matches → Block #2's hash also changes → Block #3's "Prev Hash" also breaks. Every downstream block is instantly invalidated. To commit the tampered version, an attacker must recalculate the proof-of-work for every block from the edited one to the present, while the rest of the network continues adding new blocks.

Proof-of-Work: Mining

If hashing were free (microseconds per hash), an attacker could quickly recalculate the entire tampered chain. Proof-of-Work (PoW) makes that process deliberately expensive by adding a constraint: a block's hash must start with a certain number of leading zeros.

The nonce ("number used once") is the only field miners change. There is no shortcut — they must hash-and-check billions of times per second. The network automatically adjusts the number of required leading zeros (the difficulty) every 2016 blocks (~2 weeks) so that blocks arrive every ~10 minutes regardless of how much hash-rate joins the network.

Consensus and the 51% Attack

A blockchain is maintained by thousands of independent nodes. When two miners find a valid block nearly simultaneously, a temporary fork occurs. The network follows the longest-chain rule: the chain with the most cumulative work wins, and the short fork is abandoned.

This rule creates the 51% attack: an entity controlling more than half the network's total hash-rate could, in secret, build a longer alternative chain and then broadcast it, rewriting recent history — for example, double-spending coins that were already "confirmed".

For Bitcoin, a 51% attack would require acquiring more computational power than all the world's Bitcoin miners combined, costing billions of dollars in hardware and electricity, while the attack would likely crash the coin's value before any profit could be extracted.

Smart Contracts

A smart contract is a program stored on the blockchain that executes automatically when pre-defined conditions are met — no bank, lawyer, or intermediary required. Ethereum (2015) generalised blockchains from simple value transfer to a globally-distributed computer (the Ethereum Virtual Machine, or EVM).

Example: a simple smart contract could hold funds in escrow and release them to a seller once a buyer confirms delivery — tamper-proof and without requiring either party to trust the other.

Scalability, Energy, and Trade-offs

Bitcoin processes about 7 transactions per second. Visa handles ~24,000 TPS. The blockchain trilemma (coined by Vitalik Buterin) states that a blockchain can have at most two of three properties simultaneously:

• Security — resistant to attacks
• Decentralisation — no single point of control or failure
• Scalability — many transactions per second at low cost

Layer-2 solutions (Lightning Network for Bitcoin; rollups for Ethereum) try to move most transactions off-chain while anchoring their security to the main chain's immutable record.

Beyond Bitcoin

The core structure — hash-linked records secured by consensus — has been applied far beyond cryptocurrency:

• Supply chain: IBM Food Trust tracks food from farm to shelf; a contamination recall that once took weeks now takes seconds.
• Voting: Immutable audit trail for ballots without revealing who voted for whom (using zero-knowledge proofs).
• NFTs: Proof of ownership of a digital asset — though critics note the asset itself is usually stored off-chain.
• DeFi: Decentralised exchanges, lending and borrowing protocols — existing financial instruments reimplemented as smart contracts.
• Identity: Self-sovereign identity (SSI) — you control your credentials without a centralised authority.

Try It Yourself

The sorting algorithms simulation demonstrates how computational work and comparison count change with data size — the same intuition as adjusting mining difficulty:

The encryption article covers the RSA and Diffie-Hellman algorithms that underpin blockchain key management: