What is Blockchain? A Gentle Introduction - from Bitcoin Cryptocurrency to Ethereum Smart Contracts and Beyond

Even if you have not heard about blockchain, chances are that you have seen people talking about the Bitcoin cryptocurrency. Bitcoin remains a volatile and controversial asset. Yet it was the fastest asset to reach a $1 trillion market cap, and its price reached $126,080 in October 2025. What began as a fringe experiment has also entered the financial mainstream. In January 2024, the US Securities and Exchange Commission approved spot Bitcoin exchange-traded products, making Bitcoin exposure available through ordinary brokerage accounts the same way people buy a stock. Public companies have also built large Bitcoin treasuries - Strategy (formerly MicroStrategy) alone held more than 840,000 bitcoins as of July 2026. And El Salvador, which in 2021 became the first country to adopt Bitcoin as legal tender, agreed in 2025 to make Bitcoin acceptance voluntary as part of a $1.4 billion IMF program - a reminder that adoption still moves in both directions.

So what exactly is a blockchain? In one sentence: a blockchain is a shared digital ledger of transactions, maintained and verified by a network of computers rather than controlled by any single company, and extremely difficult for anyone to alter after the fact. Bitcoin is the invention that first made this idea work at scale, so the best way to understand blockchain is to walk through why Bitcoin exists and how it works - which is what the rest of this article does.

The timing for a change

It was around 2008 when the world was struggling with major financial turmoil following the subprime mortgage crisis. Fearing a collapse of the economy and a broader depression, the US government decided to bail out the distressed financial institutions after Lehman Brothers’ bankruptcy. This action was heavily criticized by a lot of people. To many, the “greed” of Wall Street institutions caused the crisis in the first place. Using taxpayer money to save them demonstrated that the financial system was broken. This brought up the question: is there a way to overhaul the financial status quo and prevent similar situations from occurring again?

Against this backdrop, Satoshi Nakamoto, a mysterious figure whose real identity remains unknown, published a paper in October 2008 titled “Bitcoin: A Peer-to-Peer Electronic Cash System”. In January 2009, the first block of the Bitcoin blockchain (known as the genesis block) was mined and the system officially went live. Bitcoin introduced an electronic payment system that substantially differs from how our traditional payment systems work.

The centralization problem with financial intermediaries

To understand how Bitcoin is different, let us first review how our traditional electronic payment system works using the example of credit card payments. When we buy something from a store using a credit card, the store charges our card a certain amount in our fiat currency - government-issued money such as US dollars. Later, we pay back that amount to the credit card company. In this process, the credit card company acts as an intermediary between us and the store to allow this electronic payment transaction without exchanging physical bills. In fact, such intermediary services exist virtually everywhere in our financial system. In a mortgage loan, for example, the bank serves as the intermediary. It processes the mortgage for a borrower, while the money it lends ultimately comes from depositors and investors, enabling a loan transaction that is essentially between parties who do not deal with each other directly.

Why do we need these intermediaries like credit card companies and banks? This is because financial transactions involve the exchange of monetary value, e.g., a certain amount of fiat currency, between different parties. It is part of our human nature to make sure these transactions occur in a trusted and verifiable way because of the associated value at stake. The intermediaries fill this “trust” gap. In the credit card case, both the buyer and the store trust the credit card company. Both of them know that if either side disputes the payment or product, the credit card company has the payment records and can step in to potentially protect their interests based on pre-defined policies about the transaction. In the mortgage case, both the borrower and lender trust the bank and are assured that the value they borrow or lend will be handled in the business terms that they agree upon. Therefore, serving as trusted intermediaries is the key function traditional financial institutions perform in our society.

Financial transactions involving the exchange of currency values are only one piece of value exchange. If we extend the definition of the transaction beyond the financial domain, every sector in the real economy involves creating and exchanging all types of valuable goods and services. For the same reason as in the financial system, intermediaries are prevalent in all parts of the economy in our society. For example, we can think of Amazon serving as a trusted intermediary for e-commerce, and Facebook serving as a trusted intermediary for social media publishing.

Because the role of trusted intermediaries in any type of value exchange is so important, these intermediaries tend to become very powerful over time. The largest ones among them grow even larger because of the network effect - the more people use them, the more valuable they are, and therefore they attract even more people. This results in a concentrated few intermediaries controlling an excessive proportion of power over the public. Many people are increasingly questioning whether these “trusted” intermediaries are indeed “trustworthy”. If the answer is no, then this “centralized” model with power concentrated in a few monopolies may not serve the best long-term interest of the public. To some extent, the bail-out of big financial institutions in 2008 is just a real-world manifestation reflecting this sentiment. Another instance is the recurring tension between big social media companies and their users over who controls user data and what gets published or removed on these platforms.

Bitcoin - The first plausible alternative for decentralization in finance

Bitcoin

Bitcoin was released at a perfect time to challenge the centralized model in the financial industry, in the wake of the global financial crisis and the mega government bailout. Under the Bitcoin system, two parties without a trust relationship may confidently make Bitcoin payments directly to each other. This is remarkable because it offered, for the first time, a plausible way to solve the “trust” problem between payment parties without the need for an intermediary. While Bitcoin was originally intended for electronic payments, the underlying mechanism has the potential to be extended to a wide range of other financial transactions. That could mean eventually eliminating the roles played by all the different kinds of today’s financial institutions, and at the extreme, even replacing the central bank-issued fiat currency altogether. That is why Bitcoin is seen as the starting point of a financial system revolution. Furthermore, the trend initiated by Bitcoin could spill over to a much broader spectrum of industries beyond the financial domain, and that is when society as a whole could experience a major transformative moment.

The Bitcoin system

The Bitcoin system consists of the bitcoin currency itself and a computer network system that processes all the bitcoin exchange transactions. (By convention, the capitalized “Bitcoin” refers to the network and system, while the lowercase “bitcoin” refers to the currency unit.) People often refer to it as a decentralized, peer-to-peer payment network. Both the terms “decentralized” and “peer-to-peer” emphasize the fact that no third-party intermediary needs to be involved in the payment process. We call such a system “trustless” because people on the network do not have to trust each other or rely on a trusted third party to be able to conduct transactions.

New bitcoins are created by the network of computers in the Bitcoin system following a set of computer cryptography-based rules and techniques. Because cryptography secures both the creation of new units and the transfer of existing ones, bitcoin is known as a cryptocurrency. The currency is also digital, which means it does not have a physical form like dollar bills or penny coins. Instead, it exists only as a digital record. That digital record is stored in a ledger maintained by the network of computers in the Bitcoin system. If the ledger shows one bitcoin belongs to Alice, then Alice owns that one bitcoin and can transfer that bitcoin to other people as payments.

But how does the Bitcoin system create a “trustless” environment for parties to conduct transactions directly? Let us go back to our earlier credit card example. Suppose Alice is the user and Bob is the store owner. Alice wants to buy goods from Bob. But now instead of paying via the trusted credit card company, Alice will pay Bob directly in bitcoin. The question for Alice is: if she pays Bob, how does she know Bob will not deny receiving payment despite actually having received it? The question for Bob is: how does he make sure that he has actually received a valid payment from Alice?

The power of the distributed ledger in the Bitcoin system

The core of Bitcoin’s magic lies in a distributed ledger that records all the confirmed transactions that have ever taken place in the Bitcoin network since the genesis of Bitcoin. That includes the creation and transfer of all bitcoins at all times. The system also makes sure that this ledger is shared and agreed upon by all the participating computers in the Bitcoin network. In other words, the network converges on a single correct version of all confirmed Bitcoin transactions in Bitcoin’s entire history. This way, every transaction is transparent and any tampering attempt can be detected by any computer in the network.

Now let’s look at how the distributed ledger solves the problem Alice and Bob faced earlier. In the Bitcoin network, Alice and Bob both have cryptography-based digital wallets that store their bitcoins. Each wallet has a secret key. Only Alice and Bob know the secret key to their own wallets, and that is the only proof of control over their respective wallets. Each wallet also has an address that is public and used to send or receive bitcoins. If Alice wants to send one bitcoin to Bob, she needs to first make sure she has at least one bitcoin in her wallet (e.g., she likely bought it from an exchange or received it from someone else). Then she can initiate a transfer of one bitcoin from her wallet address to Bob’s wallet address. To the Bitcoin network, this transaction essentially means that the bitcoin balance in Alice’s wallet should decrease by one, and consequently, the bitcoin balance in Bob’s wallet should increase by one. That is what needs to be updated on Bitcoin’s public ledger of transactions. This update then needs to be accepted into the shared ledger and propagated across the network, at which point this transaction is considered confirmed by the system. From that time on, everyone in the network will know that one bitcoin has been transferred from Alice’s wallet to Bob’s wallet. Therefore, Bob cannot claim he did not receive the bitcoin - the distributed ledger at every computer can prove the payment reached his wallet address. On the other hand, if Alice did not send the bitcoin, Bob can easily prove it because the distributed ledger does not show that transaction to Bob’s wallet address.

It should be noted that we made a number of simplifications in the above example. For instance, in reality, there is a small network processing fee that needs to be deducted during a transaction. Technically, a wallet stores the cryptographic keys that control the bitcoins rather than the coins themselves, and the network tracks spendable transaction records rather than simple account balances - but the effect is the same as the balance picture we described. Also, the distributed ledger only records Alice’s and Bob’s wallet addresses, which typically contain a random list of numbers and characters. The public only sees a transaction that occurred between two wallet addresses, not the identities of people owning those addresses. Therefore, the records on the blockchain are pseudonymous - visible to everyone, but tied to addresses rather than names. One more difference from the credit card story is worth remembering: the blockchain proves that payment happened - unlike the credit card company, it will not step in to resolve a dispute about the goods themselves.

Blockchain - the secret weapon powering the Bitcoin magic

The distributed ledger is the key enabler for Bitcoin. But how to create and maintain such a ledger? The critical mechanism for that is called “Distributed consensus”. It is a process that lets different computers on a network system work together to agree upon what transaction updates should be added to the ledger. Thus it helps keep a unified view of the transaction history.

But there is one big challenge. Bitcoin is an open system, meaning essentially anyone can join the Bitcoin network and try to submit transaction updates. There inevitably will be bad guys trying to exploit the system. With anyone free to join, how does the network decide who gets to write the next batch of records, and how does it stop bad actors from abusing that role? Bitcoin’s answer is a distributed consensus mechanism called “proof of work”. It contains two main parts - a real cost for participating and an incentive for behaving honestly.

The cost part means anyone who wants to participate in the ledger record-keeping must spend valuable resources to earn that role. In the Bitcoin system, that resource is computing power. The participants have to perform resource-intensive cryptographic computations (which cost both computing power and electricity) in order to compete for the opportunity to be a recordkeeper of the distributed ledger. Since Bitcoin transactions are transparent and every participant can verify them, if a bad guy wins the slot for updating the ledger but submits fraudulent transaction records to the network, the other computers will detect the invalid records when they verify the update and reject it. His transaction updates will not be added to the public ledger, and the computing and electricity resources he spent to win the record-keeping slot are lost without creating any value for him. The same cost also protects the ledger’s history: rewriting past records would require redoing that expensive work faster than the rest of the network combined, which quickly becomes impractical.

In addition to imposing this cost as a way to deter bad guys from misbehaving, Bitcoin uses incentives to encourage good behavior. For the network participants who spent those resources to win the ledger-keeping opportunity and submit honestly verified transaction records, the system rewards them with a certain amount of newly minted bitcoins, plus the processing fees paid by the transactions they record. This process is commonly known as mining bitcoins.

With all we have learned about Bitcoin so far, what exactly is blockchain? Well, in fact, we have already covered it! Blockchain is the name given to the technology that powers Bitcoin. Mechanisms we talked about such as distributed consensus formation are critical components of blockchain technologies. As we will see in the later sections, blockchain as a technology is not only for Bitcoin. It is a general-purpose technology that enables decentralized platforms where parties can conduct transactions directly without the need for a trusted intermediary. Bitcoin is the first well-known use case of blockchain and remains its most prominent use case today.

It is interesting to note that the original Bitcoin paper Satoshi published does not use the word blockchain. However, it does describe storing all the payment transactions in the Bitcoin network as so-called “blocks” of records. These “blocks” are further linked to form a “chain”: each new block carries a cryptographic fingerprint of the previous one, so tampering with an old block breaks every link after it. That is why the term blockchain subsequently became a popular name for the technology.

Can Bitcoin go beyond finance?

Blockchain as a technology can - but the Bitcoin blockchain itself is deliberately limited, as we are about to see. We have discussed Bitcoin and its blockchain-based trustless, decentralized payments platform. By removing payment intermediaries, this system can also remove some of the cost associated with the intermediary, with the potential to make payments more affordable and accessible - although it introduces costs of its own, such as network fees and the burden of safeguarding one’s keys.

Now it is time to re-examine a question we alluded to earlier: what about other types of centralized financial transactions (e.g., lending and borrowing, insurance, currency exchange)? Would it be possible for the Bitcoin system to also decentralize those transactions? Or even more aggressively, can Bitcoin be applied to decentralize domains beyond the financial industry, including the real economy sectors?

The answer is both yes and no. This is because the logic of an electronic payment process supported by Bitcoin is fairly simple. Essentially it is about subtracting the amount from the payer’s balance and adding it to the payee’s balance. If we want to extend it further for more sophisticated scenarios in finance or even outside of finance, we will have to insert more complicated computer code into the Bitcoin system to support the new logic. Unfortunately, the Bitcoin blockchain only allows very limited programming capability, and for good reason: as a system primarily designed for electronic payment, the inventors may not have wanted to allow more programmable manipulation than necessary, which could inevitably introduce additional security risks. In other words, even though Bitcoin supports decentralized payment transactions well, it is not meant for general-purpose decentralization use cases.

Ethereum and smart contracts - blockchain heading for the real economy beyond finance

Ethereum and smart contracts

The gap between the Bitcoin blockchain and a more general-purpose blockchain was eventually filled by a new blockchain called Ethereum, proposed by Vitalik Buterin in 2013. Ethereum is explicitly designed to enable blockchain use cases in all financial and non-financial domains. A crucial concept that helps us understand how Ethereum works is called the “smart contract”.

Let us start with what a normal contract is. A contract can be used for describing a use case we want a system to support. It defines a series of transactions among the participating parties and under which conditions each of these transactions should happen. For example, a simple payment use case could be supported by a contract that specifies a transaction transferring a certain amount of funds from Alice to Bob. A slightly more complicated use case could be borrowing and lending. Here the contract will also need to describe terms such as borrowing rate and lending rate, as well as the repayment schedule, etc. There will be multiple funds transfer transactions that fulfill the actual borrowing and lending process according to the agreements. Yet another use case can be an event prediction marketplace. For instance, a contract could let people buy tickets to bet on who will win the US presidential election. Those who turn out to be correct will get rewarded with funds. The transactions involved in such a prediction market contract include selling the betting tickets to people and sending rewards to the winners. Normally all these contracts are executed with intermediaries - Alice paying Bob through the credit card company, borrowing and lending via the bank, and betting on the election through the company operating the prediction marketplace.

So what is a “smart contract”? The term was coined by Nick Szabo back in 1994, describing computerized protocols that execute the terms of a contract, with a key goal to “minimize the need for trusted intermediaries”. Coincidentally, removing intermediaries is exactly what blockchain technology promises to deliver. Therefore, the idea is that if we have described our desired use case in a contract, and furthermore, if we can translate that contract from human language into a computer language that a blockchain could understand, then we should be able to execute the transactions defined by the contract on the blockchain. Since blockchain offers a decentralized execution platform, this process realizes the goal of smart contracts. Using the examples we described above, that means Alice will pay Bob directly, the borrower and lender can conduct the borrowing and lending process without the bank, and participants in the prediction market can buy betting tickets and receive rewards without going through an intermediary company - all these are accomplished with smart contracts on the blockchain. The prediction market example, by the way, is no longer hypothetical. Polymarket, a prediction market running on smart contracts, handled over $3.6 billion of trading on its 2024 US presidential election market alone. One thing to keep in mind: a smart contract is program code that enforces agreed rules - whether it also counts as a legally binding contract is a separate legal question.

To support smart contracts, Ethereum offers dedicated programming languages, of which “Solidity” is the most widely used. They can be used to write smart contracts for many different types of use cases. Ethereum is often described as a “World Computer” that anyone can access. Like the Bitcoin transactions, the smart contract and the transactions it conducts are all transparent and available for everyone to check. That is what makes trustless, decentralized transaction execution possible.

The Ethereum blockchain alone, however, is not always enough to fulfill the execution of a smart contract. Smart contracts contain both the transactions to be executed and the conditions on when to trigger those transactions. Ethereum provides the execution environment. But when the triggering conditions for the transactions involve events not occurring on its blockchain, the smart contract will have to rely on external services called oracles to relay the necessary information. An example of such information could be who actually wins the US presidential election in the prediction market case we mentioned before. The Ethereum blockchain will not know the result unless the presidential voting is conducted right on its blockchain (which might be technically not impossible but certainly not the case today). Therefore, the oracle is itself an important topic, and we look at it in more depth in our article on blockchain oracles and hybrid smart contracts.

Ethereum was officially launched in 2015. Today its native currency, ether (ETH), is the second-largest cryptocurrency by market value after bitcoin, at around $226 billion as of July 2026, and Ethereum is the largest smart contract platform. Numerous blockchains created over the past decade have followed Ethereum in providing smart contract capability.

What is proof of stake, and why did Ethereum switch to it?

Proof of stake is a newer way to run the distributed consensus we described earlier. Instead of asking would-be record-keepers to spend computing power and electricity, a proof-of-stake blockchain asks them to lock up a deposit in the blockchain’s own currency - the “stake”. Honest record-keepers, called validators, earn rewards on that stake. Validators who provably break the consensus rules can have part of their stake destroyed by the network, a penalty known as slashing. The economic logic is the same as in proof of work - misbehaving costs you real value - but without the energy-hungry computation race, and removing that energy cost is a major reason Ethereum made the switch.

Ethereum itself switched from proof of work to proof of stake on September 15, 2022, in an upgrade known as The Merge, cutting its energy consumption by roughly 99.95%. To become an Ethereum validator today, a participant deposits at least 32 ETH and runs the validation software. Bitcoin, by contrast, still runs on proof of work. So when you hear about “staking” crypto, it generally refers to proof-of-stake systems like today’s Ethereum - not to Bitcoin mining, which remains a competition of computing power.

Can blockchains handle real-world transaction volumes?

Blockchains can handle far more than in their early years, although speed still comes with tradeoffs. Early blockchains deliberately traded speed for decentralization and security - the Bitcoin network confirms only a handful of transactions per second, and Ethereum’s own main chain is not much faster. Two approaches have emerged to close that gap. Ethereum took a layered path: most user activity now happens on “Layer 2” rollup networks, which bundle many transactions together and settle them back to the main Ethereum chain. By 2026, rollups carry about 95% of Ethereum’s transactions, helped by a series of upgrades - starting with Dencun in March 2024 - that made posting rollup data to Ethereum much cheaper. The other approach is to build a faster base layer in the first place. The most prominent example is Solana, launched in 2020 and designed from the start for high throughput and low fees. Scaling remains an active engineering problem across the industry, and each design continues to strike its own balance among speed, decentralization, and security.

Is blockchain reaching the real economy beyond speculation?

There are real signs, though the evidence is still mixed. The most visible development is the stablecoin - a blockchain token designed to track a fiat currency like the US dollar one-to-one, combining blockchain’s fast, borderless settlement with a stable value. According to the Bank for International Settlements (BIS), stablecoins in circulation reached around $320 billion by May 2026, and gross stablecoin transaction volume in 2025 was an estimated $28 trillion - though the BIS notes that their main use today remains crypto trading rather than everyday payments, and that volume net of transfers between wallets of the same owner is far lower. Regulation is catching up: in July 2025 the United States enacted the GENIUS Act, the first federal framework for payment stablecoins, which will require permitted issuers to back every token one-to-one with liquid reserves once its implementing rules take effect. Traditional finance is also bringing conventional assets onto blockchains. BlackRock, the world’s largest asset manager, launched its first tokenized fund on Ethereum in March 2024 - a conventional investment fund whose ownership shares are represented as blockchain tokens - and its CEO Larry Fink wrote in his 2025 letter to investors that “every stock, every bond, every fund—every asset—can be tokenized.” How smart contracts reshaped finance itself, from initial coin offerings (ICOs) to decentralized exchanges and lending, is a story of its own - we walk through it in our article on blockchain in finance.

Conclusion

Bitcoin is believed to have been created in response to the 2008 financial crisis, in order to disrupt the massively centralized traditional financial system. When people exchange valuable assets, they need trust, and that trust has historically come from intermediaries. Blockchain is the technology behind Bitcoin. It offered, for the first time, a plausible solution that removes the need for that intermediary, creating a decentralized, “trustless” environment for value exchanges. While Bitcoin primarily deals with the financial payment use case, newer blockchains such as Ethereum developed support for smart contracts. Smart contracts are capable of extending “trustless” transaction execution to a large number of use cases both in the financial domain and other sectors of the real economy. That evolution is well underway: Ethereum now runs on energy-efficient proof of stake, regulated spot bitcoin investment products sit in ordinary brokerage accounts, dollar stablecoins moved trillions of dollars in gross value in 2025, and the United States has enacted its first federal stablecoin law. We look at many of these threads in more detail in our other articles, from decentralized autonomous organizations (DAOs) to how to research a crypto project.

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Special note: rethinking decentralization - removing intermediary vs. replacing intermediary

When most of us talk about intermediaries, we usually mean human or human-led intermediaries, such as today’s financial institutions or big social media companies. The call for decentralization and removing these intermediaries really comes from a lack of trust in them to make or continue to make decisions that are in the best interest of the users they serve. What users are looking for is an assurance that these intermediaries cannot arbitrarily and unilaterally change their minds and their services.

To that end, what blockchain really achieves is to replace the human-led intermediary with a network system dictated by computer code. That means it does not really remove the intermediary, but it becomes the intermediary itself. Furthermore, it is a non-traditional, non-human, emotionless machine intermediary - therefore, it assures the users that once deployed, it follows its predetermined rules rather than changing its mind at will. (How easily those rules can later be changed is itself a design choice, depending on the network’s governance and whether the deployed code was made upgradable.)

The consequence of this change is, by definition, a two-edged sword. On one side, it provides a way to relieve us of the troubles many are experiencing with human-led intermediaries in today’s centralized model. On the other side, however, since computer code is ultimately created by humans, people deploying the computer programs will have to bear more responsibility for making sure the non-human intermediary works as intended. Users of such systems will also have to pay extra attention to ensure the system does what it claims to do. A maliciously deployed decentralized platform could be much harder to remedy and cause more harm to users than a system where human intermediaries can be more explicitly prosecuted for wrongdoing.