Blockchain, Explained: Bitcoin, Ethereum, and What a Shared Ledger Is Actually Good For

Not investment advice. This piece explains a technology and its history. Nothing here is a recommendation to buy, sell or hold any crypto-asset, and I am not a licensed financial adviser. Prices in this piece are there to show how violent the swings have been, not to predict the next one.

Eighteen years ago today, on 31 October 2008, someone calling themselves Satoshi Nakamoto posted a link to a nine-page paper on a cryptography mailing list. Its title was Bitcoin: A Peer-to-Peer Electronic Cash System. Nobody knows for certain who wrote it. The author dropped out of public view around 2010, leaving behind, by analysts' estimates, about a million mined bitcoins.

Out of that paper came a currency that, on the day this was written, had a combined market value of about $1.56 trillion, an industry that has produced some of the largest frauds of recent years, a second network that runs programs instead of just payments, a new kind of dollar now regulated by law, and an argument that is still going on about whether any of it was worth the electricity.

How Money Was Invented made the case that money is a shared story about trust. Cryptography showed how one-way maths lets strangers keep secrets and prove who they are. This piece puts the two together. By the end you'll have built a small blockchain with your own thumbs, broken it, repaired it, and mined a block. You'll also know the strongest arguments for and against the whole idea.

Part 1 — The problem: spending the same money twice

A digital file can be copied perfectly. That is wonderful for a photo and fatal for money. If a coin is just a file, what stops you from sending the same file to two different shops? Computer scientists call this the double-spending problem, and for most of the history of digital money there was only one answer: a trusted middleman who keeps the master list.

Your bank is that middleman. When you tap a card, nothing physical moves. The bank subtracts a number from your row in its ledger and adds it to someone else's. You can't spend the same £20 twice because the bank's database says you no longer have it. That works very well. It also means the bank (and behind it, the central bank and the state) can freeze your account, reverse a payment, charge a fee, or see everything you buy.

Nakamoto's paper starts exactly here. It defines an electronic coin as "a chain of digital signatures": each owner signs the coin over to the next. Anyone can check those signatures. What they can't check is whether one of the owners quietly signed the same coin to two people. The usual fix, the paper says, is "a trusted central authority, or mint, that checks every transaction for double spending." The goal of Bitcoin was to get rid of the mint.

The whole point of a blockchain is one sentence: get thousands of strangers who don't trust each other to agree on one list of who paid whom, with nobody in charge.

The trick is to replace trust in a person with trust in three things anyone can check:

1. Signatures, so only the owner of a coin can move it (the public-key idea from the Cryptography piece).
2. A public, append-only record, so everyone sees every transaction and can spot a coin spent twice.
3. A rule for agreeing on the order of events, so that when two conflicting payments appear, everyone ends up accepting the same one. This is the hard part, and it's where proof of work comes in.

Computer scientists had been working on the third item for decades under the name "Byzantine fault tolerance": how a group of computers can agree when some of them may lie. The classic solutions assumed you knew who the participants were. On the open internet you don't. Anyone can create a thousand fake identities (a "Sybil attack") and outvote the honest members. The paper's answer is in a line worth quoting: "Proof-of-work is essentially one-CPU-one-vote." You can fake identities for free. You can't fake computing work.

Part 2 — The precursors, and an eight-reference paper

Bitcoin is often described as if it fell from the sky. It didn't. The computer scientists Arvind Narayanan and Jeremy Clark traced its pedigree in a 2017 article and concluded that nearly every component came from earlier academic work. What was new was the combination, and the decision to pay people to run it.

Nakamoto's paper has only eight references. Three of them are by Haber and Stornetta, which makes the pair the most cited authors in it. Others are Wei Dai's b-money, Adam Back's Hashcash, Ralph Merkle's work on hash trees, and a probability textbook by William Feller. A company built on Haber and Stornetta's method has, according to a 2018 report in Vice, been publishing hashes of its records in The New York Times since 1995, so you could argue the oldest working blockchain has been sitting in a newspaper for three decades.

The first block of the network is dated 3 January 2009. That block, the "genesis block," contains a line of text that its creator chose to embed forever: "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks." You can read it today in the raw data of that block. It's a timestamp (proof the block wasn't made earlier) and, most people assume, a comment on the bank bailouts of the financial crisis. Nine days later Nakamoto sent ten bitcoins to Hal Finney in the first transaction between two people. On 22 May 2010 a programmer named Laszlo Hanyecz paid 10,000 bitcoins for two pizzas, the first well-known purchase of real goods.

Contested credit

Three honest complications. First, nobody knows who Satoshi Nakamoto is. Journalists have named several candidates over the years; none has been proven. One man, Craig Wright, claimed for years to be Satoshi. In March 2024, after a five-week trial, a judge in the High Court in London ruled that he is not, and the written judgment found that documents he had submitted were forgeries. Second, how much credit belongs to the precursors is a live argument. The computer scientist Alan Sherman reported in 2019 that Chaum's 1982 dissertation already described nearly every part of a blockchain except proof of work. Third, the word "blockchain" isn't in the paper at all. Nakamoto wrote about a "chain of blocks." The single word caught on later.

Part 3 — Hashes and chains

Everything in a blockchain rests on one tool: the cryptographic hash function. Bitcoin uses one called SHA-256. It was designed by the US National Security Agency and published as a standard in 2001. It takes any input (a word, a book, a movie) and produces a 256-bit fingerprint, written as 64 hexadecimal characters. Three properties make it useful:

• Same input, same output, every time. Anyone can check a hash.
• Tiny change, totally different output. Change one letter and roughly 60 of the 64 characters change. This is called the avalanche effect.
• One-way. Given a hash, there's no known shortcut to find an input that produces it. You can only guess and check.

Try it. The box below runs a real SHA-256, written out in plain JavaScript inside this page and checked against standard test values, so it works offline.

Now chain them. A block is a bundle of transactions plus the hash of the block before it. Because each block includes its predecessor's fingerprint, changing anything in an old block changes its hash, which no longer matches what the next block recorded, which changes that block's hash, and so on to the end. History becomes tamper-evident.

That alone isn't enough. If rewriting the chain were cheap, a cheater could just recalculate every later hash. So the rule adds a cost: a block only counts if its hash starts with a certain number of zeros. In this demo, three zeros. Each block has a nonce, a number you can change freely until the hash happens to come out with the required zeros. All five blocks below have already been "mined."

A blockchain doesn't make the past impossible to change. It makes changing it expensive, and makes the change visible to everyone.

One more piece of plumbing. A real block doesn't hash every transaction directly into the header. Transactions are paired up and hashed, the results paired and hashed again, until one fingerprint is left: the Merkle root, named after the cryptographer Ralph Merkle. That lets a phone prove a payment is in a block by downloading a few dozen hashes rather than the whole block. The paper calls this "simplified payment verification," and it's why a light wallet on your phone doesn't need to store the entire chain.

Part 4 — Proof of work, mining, wallets and keys

Finding a nonce is pure guessing. Each extra zero you demand makes the job about 16 times harder, because each hexadecimal digit has 16 possible values. This is proof of work: a valid block is a receipt showing that someone spent real computing effort to make it. Try it at different difficulties.

Bitcoin plays the same game at a scale that's hard to picture. The network adjusts the difficulty every 2,016 blocks so that, however much computing power joins, a new block appears about every ten minutes. At block 974,063, mined in the early hours of 1 November 2026 (UTC), the difficulty implied that the world's miners were computing roughly 1,060 quintillion hashes per second (about 10²¹). That's done by specialised chips that do nothing else.

Why would anyone spend that money? Because the first transaction in every block pays the miner newly created bitcoin plus the fees of the transactions inside. The paper compares it to "gold miners expending resources to add gold to circulation." The reward halves every 210,000 blocks, roughly every four years, which is why total supply can never pass 21 million.

By the end of October 2026 about 20.1 million bitcoin had been issued, roughly 96% of the eventual total. The last fractions will trickle out around the year 2140. After that, miners will be paid by fees alone, and whether fees will be enough to keep the network secure is one of the genuine open questions about Bitcoin's long-term design.

The longest chain wins

Sometimes two miners find a block at almost the same moment, and the network briefly splits. The rule is simple: honest nodes follow the chain with the most accumulated work. Whichever branch gets the next block first becomes the longest, and the other is abandoned. That's why a payment is usually considered settled after it has a few blocks on top of it. To reverse an old payment, an attacker would have to redo the work of that block and every block after it, then outrun the whole honest network. With a majority of the network's computing power (the famous "51% attack") that becomes possible. Without it, the attacker's chances fall off exponentially with each block, which is what Nakamoto's probability section calculates.

Wallets and keys

Here's the part most people get wrong: a crypto wallet doesn't hold coins. The coins exist only as entries in the shared ledger. What your wallet holds is a private key, a huge random number. From it, software derives a public key and from that an address you can share. To spend, your wallet signs a message saying "move these coins to that address," and every node can check the signature against your public key without ever learning the private one. That's the public-key idea from the Cryptography piece, though Bitcoin uses elliptic-curve signatures (ECDSA, and since the 2021 Taproot upgrade also Schnorr signatures) rather than RSA.

The consequences are stark. If someone gets your private key (or the 12 or 24 "seed words" that generate it), they can take everything, and no one can reverse it. If you lose it, the coins are stuck forever. There's no "forgot password" link. That's why most people don't hold their own keys at all. They use an exchange that holds keys on their behalf, which quietly reintroduces the trusted middleman the system was built to remove. Several of the disasters in Part 6 happened exactly there.

Be your own bank, and you also become your own security department, fraud team and complaints desk.

Part 5 — Ethereum, smart contracts and the Merge

Bitcoin's ledger records one kind of thing: who owns which coins. Its scripting language is deliberately limited. In 2013 a young programmer named Vitalik Buterin, a co-founder of Bitcoin Magazine, proposed something broader: a blockchain whose ledger records the state of programs. He circulated his white paper in late 2013 (ethereum.org dates the published version to 2014), and the network, Ethereum, launched on 30 July 2015.

On Ethereum, you can deploy a smart contract: code that lives at an address on the chain and runs exactly as written whenever someone sends it a transaction. The usual analogy is a vending machine. Put in the right coin and the snack drops out. No cashier needed. Contracts can hold money, issue new tokens, run auctions, lend and borrow, or settle bets. Every node runs every contract and must get the same answer, so every computation costs a fee called gas, paid in Ethereum's currency, ether (ETH).

"Code is law" sounds clean until the code has a bug. In 2016 a crowdfunded investment fund called The DAO, built as a smart contract, was drained of more than 3.6 million ETH through a flaw in its code. The community faced a hard choice. On 20 July 2016, at block 1,920,000, most of the network adopted a change that moved the funds back, in effect rewriting the outcome. A minority refused on principle, arguing that a ledger which can be edited when the majority dislikes the result isn't really immutable. They kept the original chain running as Ethereum Classic. Both still exist. The argument about whether that fork was wise has never been settled.

Proof of stake

Ethereum also used proof of work at first. On 15 September 2022, in an upgrade called the Merge, it switched to proof of stake. Instead of burning electricity to earn the right to add blocks, participants called validators lock up ether as a deposit, at least 32 ETH for your own validator. The protocol picks validators to propose and vote on blocks, pays them for honest work, and can destroy part of their deposit ("slashing") if they cheat. Attacking the chain means acquiring a huge amount of staked ether and then risking it.

The energy effect was enormous. Ethereum's own site puts the drop at about 99.95%, and the Crypto Carbon Ratings Institute study it cites puts it at more than 99.98%, estimating that the whole network now uses about 0.0026 terawatt-hours (2,601 megawatt-hours) a year.

Ethereum keeps changing through named upgrades. Recent ones include "Pectra" (May 2025), which reworked staking, and "Fusaka" (December 2025). Since the original white paper, Ethereum has also come to rely on "layer 2" networks that bundle many transactions and post a compressed summary to the main chain, a way to raise capacity without making every node do everything.

Enthusiasts see Ethereum as a neutral, global computer that nobody owns, on which anyone can build financial services. Sceptics point out that hacks of smart contracts have repeatedly cost users large sums, that most activity has been trading and speculation, and that a fee-charging shared computer is a slow, expensive way to do what an ordinary database does in microseconds. Both descriptions are accurate. Which one matters more depends on how much you value not having an owner.

Part 6 — Booms, busts and collapses

Crypto's history so far has been a series of manias followed by crashes. The pattern is worth seeing laid out, because each crash had a different cause.

Notice what failed. In most of these cases the Bitcoin and Ethereum ledgers themselves kept working exactly as designed. What broke were the businesses built around them: exchanges and lenders that held other people's coins, mixed them with their own, and lied about it. That's the old financial failure, a bank run on an unregulated bank, in new clothes. Terra is the exception. There, the design itself was the weakness: a promise of stability backed by nothing but confidence.

The ledger rarely broke. The middlemen did, again and again, because people handed them their keys.

Two readings of this history compete. Enthusiasts say every boom left real infrastructure behind, that each crash flushed out frauds, and that bitcoin has recovered from drops of 75–85% several times. Sceptics say that's survivorship bias: the base asset survived while millions of ordinary buyers lost money on the way, and an asset that halves on a whim doesn't do the job of money. Both camps agree on one practical point. Crypto has become a magnet for scams, because payments are fast and can't be reversed. The FBI's Internet Crime Complaint Center reported that in 2024, victims of cryptocurrency investment fraud lost more than $6.5 billion, the largest category of losses it recorded. Every lever in How to Not Get Scammed applies here. Urgency, secrecy, a stranger who wants payment in crypto: stop.

Part 7 — Stablecoins and central bank digital currencies

A currency that can halve in a year is a poor way to pay rent. Stablecoins fix that by pegging a token to an ordinary currency, usually the US dollar. The biggest ones are run by companies that hold dollars, US Treasury bills and similar assets in reserve and promise to redeem each token for $1.

They have quietly become the busiest part of crypto. According to the data site DefiLlama, dollar-pegged stablecoins in circulation totalled about $299 billion on 1 November 2026. The two largest, Tether's USDT (about $180 billion) and Circle's USDC (about $72 billion), make up most of it. A smaller share is "crypto-backed," like Dai, which is backed by other crypto locked in smart contracts at more than face value.

Lawmakers have moved in. The European Union's Markets in Crypto-Assets regulation (MiCA) has applied in full since 30 December 2024, and the transition period for existing firms ended on 1 July 2026. In the United States, the GENIUS Act was signed into law on 18 July 2025. It requires payment stablecoins to be backed 100% by liquid assets such as dollars or short-term Treasuries, with monthly public disclosure of the reserves.

Supporters say regulated stablecoins are simply better plumbing: dollars that move across borders in minutes, any hour, for low fees, usable by anyone with a phone. The central banks' own club, the Bank for International Settlements (BIS), is far cooler. Its 2025 annual report argued that stablecoins fail three tests of sound money: "singleness" (every dollar accepted at par everywhere), "elasticity" (supply that can expand when the economy needs it), and "integrity" (resistance to financial crime). It sees their future role, beyond being a gateway into crypto, as unclear.

Central bank digital currencies

Central banks have their own answer: a CBDC, digital cash issued directly by the central bank. A CBDC doesn't need a public blockchain; it can run on a ledger the central bank controls. The Atlantic Council's tracker, updated in May 2026, counted 146 countries and currency unions exploring one, up from 87 in May 2022. Only three have fully launched: the Bahamas, Jamaica and Nigeria, all with slow uptake. China's e-CNY is by far the largest pilot. By December 2025 it had processed more than 3.4 billion retail transactions worth about 16.7 trillion yuan. The European Central Bank is preparing a pilot of a digital euro in 2027 and aims to be ready for a first issuance in 2029, if the EU passes the necessary law in 2026.

The United States has gone the other way. An executive order of 23 January 2025 set a policy of prohibiting the establishment, issuance, circulation and use of a CBDC in the United States. Defenders of CBDCs argue that as cash use falls, citizens should still have access to public money that isn't a claim on a private company. Opponents, from privacy campaigners to many US lawmakers, warn that a central bank ledger of every payment would give governments unprecedented power to watch and control spending. It's a real values disagreement, not a technical one, and different democracies are landing in different places.

Part 8 — Energy, real uses, hype, and the state of things in 2026

Energy

Proof of work is deliberately costly, and the cost is electricity. The Cambridge Centre for Alternative Finance runs the most widely cited estimate, the Cambridge Bitcoin Electricity Consumption Index. On 31 October 2026 its best guess for Bitcoin's power demand was 19.74 gigawatts, equal to about 173 terawatt-hours a year, within a plausible range of roughly 89 to 333 TWh. On the index's own comparison page, that's about 0.68% of the world's electricity consumption, using 2022 world totals, and sits between the United Arab Emirates and Egypt in a country ranking.

Defenders make three arguments. Miners chase the cheapest power, which often means energy that would otherwise be wasted (flared gas, remote hydro, curtailed wind). Mining can switch off instantly, so it can act as a flexible load that helps balance grids. And the energy is the security: it's what makes rewriting history ruinously expensive. Critics answer that much mining still runs on fossil fuels, that specialised chips become electronic waste within a few years, and that the energy buys a payment system that handles far fewer transactions than card networks. Even the Cambridge team warns that comparisons like these mix apples and oranges. What's not in dispute is the design: Bitcoin ties its security to energy spent, and changing that would mean changing what Bitcoin is.

Real uses and hype

For several years "blockchain" was pitched for nearly everything: shipping, voting, medical records, diamonds, food. Most of those projects quietly ended. The best-known example is TradeLens, a blockchain shipping platform built by the shipping giant Maersk and IBM. When they shut it down in November 2022, Maersk said that "the need for full global industry collaboration has not been achieved." The lesson most engineers drew: if a group of known companies already trust each other enough to share a database, an ordinary shared database is cheaper and faster. A blockchain only earns its cost when participants won't trust any single operator.

The uses that have survived mostly fit that test. Bitcoin as a scarce digital asset that no government issues. Stablecoins as dollars that cross borders without a correspondent bank. Ethereum as a platform for tokens and lending markets that run without a company in the middle. Even the BIS, while rejecting stablecoins as the core of the monetary system, now argues for a "tokenised unified ledger" for central bank money, bank deposits and government bonds. That's a programmable shared ledger run by trusted institutions, which tells you the idea has outlived the hype even among its critics.

The state of affairs, as of late October 2026

• Mainstream finance plugged in. On 10 January 2024 the US Securities and Exchange Commission approved exchange-traded products holding bitcoin itself. Its chair at the time, Gary Gensler, stressed that the SEC was not endorsing bitcoin, calling it "primarily a speculative, volatile asset."
• Governments split. El Salvador made bitcoin legal tender in 2021. After a loan agreement with the IMF, its Bitcoin law was amended in early 2025 so businesses no longer have to accept it. In March 2025 a US executive order created a "Strategic Bitcoin Reserve" from bitcoin the government already held through forfeitures.
• Prices are still wild. On 31 October 2026 bitcoin was around $77,400, about 39% below its October 2025 record, with a market value near $1.56 trillion. Ether was near $2,270, under half its August 2025 peak.
• The networks keep running. Bitcoin passed block 974,000 with no central operator. Ethereum has run on proof of stake for more than four years.
• Open questions remain. Will fees keep Bitcoin secure once block rewards dwindle? Will quantum computers, as the Cryptography piece explained, eventually threaten today's signature schemes, and can these networks agree to upgrade in time? Will stablecoins make payments cheaper or simply move risk out of the banking system? Will CBDCs protect public money or erode privacy?

Here are both cases at their strongest. The enthusiast's: for the first time, a group of strangers can hold and move value with no one able to freeze, debase or censor it, and that matters most to people whose governments and banks have failed them. The sceptic's: a decade and a half in, the main uses are speculation, a few niches and a great deal of fraud, at a large energy cost, while ordinary payment systems have kept getting faster and cheaper. You don't have to pick a side to understand the machine. Now you do.