As discussed in the previous lesson, blockchains can be either public or private, depending on who is allowed to participate and validate transactions. Regardless of the type, the underlying mechanism remains largely the same—especially in the context of cryptocurrencies, which typically operate on public blockchains.
At the core of the system is a process that ensures transactions are verified, recorded, and permanently secured in a distributed ledger using cryptographic methods and network consensus.
Let’s walk through a simplified example of how a blockchain processes a cryptocurrency transaction:
A user initiates a cryptocurrency transaction. For example, Lucy wants to send 2 BTC (Bitcoin) to James. This request includes details such as the sender’s address, the recipient’s address, the amount being sent, and a digital signature to prove it was authorized by Lucy.
Once created, the transaction is sent (broadcasted) to a decentralized network of computers called nodes. Every node receives the transaction request and adds it to a pool of unconfirmed transactions, waiting to be verified.
Nodes independently check whether the transaction is valid. They verify that Lucy has enough balance, that the digital signature matches her public address, and that the transaction hasn’t already been spent elsewhere (to prevent double-spending).
Verified transactions are grouped together into a new block. This block contains a list of transactions, a timestamp, and a unique code called a cryptographic hash. It also includes a reference (hash) to the previous block in the chain, ensuring continuity.
The new block must be approved by the network. In public blockchains like Bitcoin, this happens through a process called mining Proof of Work (PoW), where computers solve a complex mathematical puzzle to validate the block, earning rewards in the form of new coins and transaction fees. This requires significant computing power and energy. Ethereum, since its 2022 transition to Proof of Stake (PoS), uses validators who stake coins to confirm transactions, reducing energy consumption. Once validated, the block is permanently added to the blockchain, and its data becomes immutable.
After the block is added, the transaction is considered confirmed. James now officially owns the 2 BTC, and the entire network updates its copy of the blockchain to reflect the change—the block is linked to the previous block via its hash. This hash, a unique string generated from the block’s data, ensures immutability, as altering a block would require changing all subsequent blocks, a computationally infeasible task. This transaction is now permanently recorded and cannot be altered or deleted.
The blockchain has successfully processed a cryptocurrency transaction—without needing a central bank or payment processor.
In essence, blockchain serves as the foundation for cryptocurrencies by enabling a system where trust is built through code, not intermediaries. Each transaction is verified collectively and permanently recorded, creating a transparent and immutable history without relying on centralized control. By harnessing consensus algorithms, the network ensures security and accuracy at scale. As highlighted by leading institutions like the MIT Digital Currency Initiative and the World Economic Forum, this architecture redefines how value is exchanged—offering a resilient, decentralized alternative to traditional financial systems.
With the core mechanics of blockchain in cryptocurrencies covered, the next step is to examine its broader significance, limitations, and real-world impact.
In the following lesson, Unpacking Blockchain: Why It Matters, the Challenges, and Real-World Examples, we’ll look at why blockchain plays such a pivotal role in crypto, explore the challenges it continues to face, and use real-world analogies and applications to bring the concepts into clearer focus.
Let’s shift from the technical how to the strategic why.