What is a blockchain? A simple guide

A shared notebook

Imagine a notebook in which a group of people write down every payment between them. Each page lists new payments and begins with a summary of the previous page. Everyone has a copy, and when new payments happen, everyone adds them. If one person secretly rewrites an old page, their copy no longer matches the summaries on the later pages and does not match anyone else's copy. The group simply rejects it. That is the heart of a blockchain.

Blocks and hashes

A block is a batch of transactions plus some bookkeeping, including the hash of the previous block. A hash is a short fingerprint of data: change one character in the data and the fingerprint changes completely. Because each block contains the previous block's hash, altering any old block changes its hash, which would break the link in the next block, and the next, all the way to the end. To rewrite history, an attacker would have to redo all that work faster than the honest network adds new blocks. See our guide to SHA-256 hashes.

Consensus: how strangers agree

Either way, the rules make cheating expensive and honesty profitable, and everyone can check the result.

What a blockchain is good for

• A public, tamper-resistant record of who owns what.
• Transfers of value without a bank, between strangers anywhere.
• Programs that run exactly as written and whose history anyone can inspect.
• Systems that need public verification, like a lottery that publishes every ticket and result.

What it is not good for

• Speed and cost at huge scale. Base chains are slower and pricier than centralized databases, which is why layer-2 networks exist.
• Private information. Records are public by default.
• Truth about the real world. A blockchain can record that someone claimed something, not whether it is true.
• Undoing mistakes. Transactions are final.

Layer 1, layer 2 and why fees differ

The base blockchains (layer 1), such as Bitcoin and Ethereum, are secure but have limited capacity, so fees rise when demand is high. Layer-2 networks such as Arbitrum process transactions on their own and post compact summaries back to the base chain, which keeps them secure and makes fees much lower. That is why we use Arbitrum for wallet payments. See Arbitrum for beginners.

Example: tracing a payment through a blockchain

1. 1Alice sends 10 USDC to a lottery address. Her wallet signs the message with her private key and broadcasts it.
2. 2Nodes on the network check that Alice has 10 USDC and that the signature is valid.
3. 3The transaction waits in a pool and a block producer includes it in the next block.
4. 4Other nodes verify the block and add it to their copy of the chain. Alice's balance falls by 10 and the lottery's rises by 10.
5. 5As more blocks are added, the transaction becomes harder and harder to reverse. After a few confirmations it is considered final.

Reading a transaction on a block explorer

• The hash: a unique ID for the transaction, which you can search for.
• From and to: the sending and receiving addresses.
• Value and token: what was moved.
• Status and confirmations: whether it succeeded and how deeply it is buried.
• Fee: what was paid to the network.