01/05/2026

10 min read

What is a blockchain and how does it work?

Bitpanda Academy Beginners 3 What Is A Blockchain

Blockchain technology is transforming how digital transactions are processed and data is stored. Instead of central authorities, a decentralised network of nodes controls the blockchain system. This makes manipulation harder and processes more efficient. More and more industries are adopting this technology, from cryptocurrencies like Bitcoin to logistics. In this article, you will learn what a blockchain is, how it works and what it is used for.

What it is: A blockchain is a decentralised, tamper-proof database in which transactions are permanently stored in data blocks and linked together in a chronological chain.
How it works: Transactions are grouped, validated through a consensus mechanism such as Proof of Work or Proof of Stake, secured in data blocks and stored decentrally across all nodes in the network.
Areas of application: It is used in many fields, from cryptocurrencies like Bitcoin and digital contracts to traceability in supply chains or identity management.
Advantages and disadvantages: Advantages include transparency, security and decentralisation, while disadvantages can include high energy costs or legal uncertainties.

Definition: what is a blockchain in simple terms

A blockchain is a decentralised database that stores information permanently, transparently and in a way that cannot be tampered with. The term is made up of "block" and "chain": Transactions are grouped into data blocks which are connected to one another like a chain.

Each block contains, alongside the transaction data, a so-called hash function, a kind of digital fingerprint. This ensures that no block can be altered unnoticed afterwards, as every change affects the hash value and is therefore detectable.

Blockchain technology was originally developed for the cryptocurrency Bitcoin. Today, it is the foundation of many decentralised systems, not only for digital currencies but also for applications related to data processing, contracts and digital identities. In all these cases, trust does not come from a central authority but from a network that collectively determines the content of the blockchain.

Unlike traditional databases, the blockchain is not controlled by a central entity. Instead, it is distributed across many computers that communicate with each other and agree on the contents of the database.

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How do blockchains work?

A blockchain works like a continuous, digitally secured chain of data blocks. Transactions are grouped, verified, linked and stored in a decentralised manner. This creates a transparent, tamper-proof blockchain system that operates entirely without central control.

This is how a typical blockchain transaction works:

Initiating and grouping transactions

Participants initiate a transaction, for example by sending cryptocurrencies such as Bitcoin.
The network collects multiple transactions and combines them into a new data block.

Linking blocks via hash values
- Each block contains a hash value that clearly connects it to the previous block.
- The hash value is a unique code calculated from the block data that ensures its integrity.
Verification through consensus mechanism in the network
- The nodes in the blockchain network jointly verify whether all transactions in the block are valid.
- Depending on the blockchain, a consensus mechanism such as the Proof of Work mechanism is used.
- In mining, specialised computers solve complex tasks to confirm a new block.
Decentralised storage across many nodes
- The validated blockchain is updated on all nodes in the peer-to-peer network.
- Each participant stores an identical copy of the entire blockchain.
Protection against tampering through linking and validation
- Any later change to a block would invalidate all subsequent hash values.

The combination of linking, consensus mechanism and decentralised storage protects against forgery.

What types of blockchains are there?

There is not just one type of blockchain. Depending on the use case, blockchains differ mainly in who has access and who is allowed to validate transactions. The four most common blockchain types are public, private, consortium and hybrid blockchains.

Overview of the most important blockchain types:

Public blockchains

open to all participants
decentralised blockchain system without central control
Example: the Bitcoin blockchain

Private blockchains

only certain participants have access
often used in corporate settings for internal processes
more control, but less transparency for unauthorised participants

Consortium blockchains

jointly operated by multiple organisations
combine features of private and public blockchains
suitable for industry-specific collaborations

Hybrid blockchains

combine public and private areas in one system
flexibly adaptable to different requirements
used e.g. for sensitive data with simultaneous need for transparency

Application of blockchains in different industries

Blockchain technology is not only the foundation of cryptocurrencies such as Bitcoin. In some industries, it is used to store data securely, make transactions traceable, and improve the efficiency of processes. The importance of blockchain is continuing to grow.

Finance: In the financial sector, some companies use public blockchains such as Bitcoin or Ethereum for fast, transparent and cross-border financial transactions. Smart contracts (automated digital agreements) are used in this scenario as well. Private blockchains can help banks process transactions securely and traceably between different parties internally.
Logistics: In logistics and across global supply chains, blockchain systems enable the seamless traceability of goods from origin to end consumer. Consortium blockchains are often used when several companies want to jointly manage and protect data about deliveries, products or payments.
Healthcare: In healthcare, patient data can be encrypted and stored using private blockchains and made accessible only to authorised participants. This not only increases the security of sensitive information, but also simplifies collaboration between hospitals, insurers and research institutions.
Real estate: Blockchain is also used in the real estate sector. Hybrid blockchains make it possible to digitally document property rights and process property purchases more efficiently. Transactions can be tracked, contracts securely recorded digitally, and lengthy administrative processes shortened.

Advantages and disadvantages of a blockchain

Blockchain technology brings advantages, but also disadvantages that should be considered when applied. As a decentralised blockchain system, it replaces central control bodies with a network of nodes. What does this mean in practice? It makes transactions traceable, data difficult to manipulate and processes more efficient, but may also face technical, regulatory and environmental limitations.

Advantages of blockchain

Transactions are stored permanently and traceably for all participants.
Decentralisation protects the blockchain system from manipulation by individual nodes.
Hash values ensure the integrity of data blocks and make later changes visible.
Consensus mechanisms like Proof of Work create trust without a central authority.
Blockchain technology enables direct transactions between parties without intermediaries.
Crypto blockchains like Bitcoin show how digital currencies can function independently of banks.

Disadvantages of blockchain

Public blockchains often process transactions more slowly than central systems.
Energy consumption in mining is high, especially with Proof of Work-based blockchains like Bitcoin.
The database grows continuously, which may lead to scaling issues over time
Incorrect or fraudulent transactions cannot be reversed once validated.
Loss of the private key or seed phrase means permanent loss of access to your account and stored cryptocurrencies.
Legal requirements for blockchain use, e.g. in data protection or taxation, are unclear in many countries.

Future of blockchain technology: significance and development

Blockchain technology is undergoing significant development and is becoming increasingly important in the economy. According to current market forecasts, the global blockchain market could grow to around $825.93 billion by 2032. In some sectors, companies and institutions are already using blockchain solutions, for example to tokenise assets or manage digital identities.

Key developments at a glance

Interoperability between different blockchain systems is becoming more important so that networks can efficiently exchange data and value.
Tokenisation of real-world assets such as property or artworks is opening new markets and fundamentally changing financial transactions.
Regulation and governance models are being further developed so that blockchain applications can be used more reliably in businesses and financial oversight.
Sustainability and energy efficiency are increasingly in focus, especially regarding consensus mechanisms and blockchain network infrastructure.

Conclusion: Blockchains are more than just the technology behind Bitcoin

Blockchain technology is changing how digital transactions are processed, how data is secured and how trust is organised in the digital space. As a decentralised network, the blockchain system replaces central authorities with a chain of data blocks linked together by hash values.

Whether managing digital contracts, protecting intellectual property or processing cryptocurrency payments: blockchain technology is finding practical use in more and more industries. At the same time, challenges like scalability, energy consumption and legal frameworks remain.

Frequently asked questions about blockchains

We answer the most common questions about blockchain to give you a complete overview.

What is an example of a blockchain?

A classic example of a blockchain is the Bitcoin blockchain. It acts as a decentralised system that transparently records transactions with the Bitcoin cryptocurrency. Every payment is permanently stored and traceable by all participants.

Another example is the Ethereum blockchain, which represents not only transactions but also digital contracts – so-called smart contracts. It is often used for decentralised applications, for example in the financial sector or for digital identities.

What is a blockchain used for?

A blockchain is used whenever data needs to be stored transparently, traceably and securely without a central control authority. Typical use cases include financial transactions with cryptocurrencies, managing digital identities or tracking supply chains. Digital contracts, or smart contracts, also often run via a blockchain system. The big advantage: all participants in a network access the same information without needing an intermediary.

How secure are blockchains?

Blockchains are considered very secure, mainly due to their decentralised structure, cryptographic protection using hash values and collective verification by the network. Each data block is connected to the previous one, so any manipulation would be immediately obvious.

However, actual security also depends on the specific blockchain system. While public blockchains like Bitcoin are secured by thousands of nodes, private systems can be more vulnerable if only a few participants are involved. The blockchain technology itself is robust. Weak points often arise at interfaces, such as with wallets or applications.