What is a blockchain and how does it work?

Start with a ledger

Picture a village savings group where everyone deposits money and the cashier keeps the only ledger. The cashier could tamper with it, and if the book is lost, so is every record.

Now imagine every member has a copy of the ledger. When a new transaction happens, everyone writes it into their own copy after checking it is valid. If one person tampers with their copy, it no longer matches everyone else's and the change is caught. That is the core idea of a blockchain.

Why "block" and "chain"?

• Block: a few minutes' worth of transactions are written together on one page, a block.
• Chain: each new block contains a digital "fingerprint" (hash) of the previous block, so the blocks link together like a chain.

Change a single number in an old block and its fingerprint changes, so it no longer matches the blocks that follow. Forging history would mean rebuilding the whole chain and getting more than half the network to accept it. On a large network that is practically impossible.

Who adds new blocks?

Every blockchain has a rule for agreeing on the next block, called consensus. The two main approaches:

More detail: how Bitcoin mining works.

Strengths and limits

Strengths

• No need to trust a single organisation.
• Every transaction is public and anyone can verify it.
• Recorded data is practically impossible to alter.

Limits

• Slower and more expensive than an ordinary database.
• There is no "customer care" to reverse a mistaken payment.
• The ledger may be secure, but if your phone, password or private key is not, you can still lose everything.
• The word "blockchain" is often used to make fraudulent schemes sound credible.

Be wary of anyone pitching a "blockchain-based" scheme with guaranteed returns. Using the name of a technology does not make a project safe. See how to spot crypto scams.

Blockchain beyond crypto

Around the world, people are testing blockchains for tracing products through supply chains, issuing digital certificates and keeping land records. The Bangladesh government is also working on policy for blockchain technology. That policy leaves cryptocurrency out, as a matter for Bangladesh Bank.

Key points

• A blockchain is a ledger shared across many computers that is practically impossible to rewrite.
• A secure ledger does not protect users from their own mistakes or from fraud.
• "Blockchain" in a sales pitch is not a guarantee of safety.