What Is Blockchain? The Technology That Powers Cryptocurrency

Blockchain technology is, essentially, a decentralized ledger that is distributed across a network of computers. It links blocks of data together in a chain (a blockchain) that forms a broader database of information. That network of information — the blockchain network — is shared across all of the participants who, in turn, validate new blocks of data, thereby maintaining and securing the overall blockchain.

Blockchain technology has many potential uses and applications, but is perhaps most well-known as being the backbone of cryptocurrencies and decentralized finance systems, projects, and operations. That, however, may not be the only potential use-case for blockchain tech.

What Is Blockchain and Who Created It?

Blockchain is a distributed, decentralized chain of information, linked together in a ledger format that effectively creates a blockchain network. Information, often transaction data as it relates to cryptocurrencies, is grouped and stored in blocks, which are connected and form a secure, transparent chain. The idea behind that format or architecture is that the data will be transparent and virtually tamper-proof since it’s distributed across a network.

So, if one participant on the network or blockchain were to change the data in a block, the other participants’ would notice the change, flag it, and restore the original entry.

Blockchain technology originated with the release of Bitcoin in January 2009, as it was the underlying technology designed to allow for peer-to-peer transactions without third-party involvement.

The Origins of Blockchain and Satoshi Nakamoto’s Breakthrough

A white paper about Bitcoin and blockchain technology was first released in 2008 by an entity known as Satoshi Nakamoto. Nothing concrete is known about Satoshi Nakamoto — whether it’s a single person, a group of people, a company, or anything else. It remains one of the most pervasive mysteries in the tech and financial spaces.

Nakamoto’s identity aside, the first functional blockchain network was developed and introduced with the launch of Bitcoin in 2009. Since then, all other cryptocurrencies, and numerous decentralized finance (DeFi) projects have likewise been released on other blockchain networks, or variations of the original.

A Step-by-Step Look at a Crypto Transaction

With the foundational concepts of blockchain in mind, here’s a step-by-step look at how a hypothetical crypto transaction could occur on a blockchain network, keeping in mind that the details will vary depending on the cryptocurrency and type of transaction involved.

Step 1: You Send Crypto to a Friend

You decide to send some crypto to a friend. You’ll both need crypto wallets to be able to send and receive the crypto, and you’ll want to share your public keys (and know your friends’, too), or crypto address, so that you know where to send it. Basically, you need the bare infrastructure in place in order to transact.

Step 2: The Transaction Is Broadcast to a Global Network of Computers

You execute the transaction, using your personal crypto wallet, an exchange, or other platform. A message is broadcast to the blockchain network that you are sending X amount of crypto to Y wallet, all of which is publicly viewable.

Step 3: The Network Verifies and Adds Your Transaction to a “Block”

The information about your transaction is grouped together with data from other transactions and stored in a “block.” That block of transactions is verified using a cryptography-based consensus mechanism, such as staking or mining. Once the block is verified, the information is recorded on the blockchain.

Step 4: The Block Is Permanently Chained to the Ledger, Finalizing the Payment

The validated block then becomes a permanent part of the blockchain, forming an immutable chain of information, and your friend receives the transaction.

Why Blockchain Is a Breakthrough for Digital Money

There are several reasons that some people consider digital assets, and blockchain, which powers it and works as their backbone, to be a breakthrough in the digital financial space. Here are some of them.

It’s Secure and Unchangeable

While not impervious to security issues, blockchain is widely regarded as secure. The blockchain itself creates a permanent record that cannot be altered (at least not without the broader network raising red flags), which could help to reduce instances of fraud, and double-spending.

It’s Transparent

As noted, one of the benefits of blockchains is that they’re transparent, allowing just about anyone to review the information and data stored on them. That means it’s possible to trace the transaction history of a specific user alias or public wallet address, or even a specific crypto token or coin. This can happen, too, somewhat anonymously, without revealing the actual names of participants.

It Removes the Middleman

Blockchain technology and the consensus mechanisms they use make it possible for cryptocurrency transactions to occur without needing a middleman. Blockchain enables peer-to-peer crypto transactions, meaning that a third party or single central authority isn’t required for cryptocurrencies to be transferred.

How Different Cryptocurrencies Use Blockchain

While functional blockchain technology was introduced alongside Bitcoin, Bitcoin is not the only cryptocurrency that uses it. In fact, they all do, and they may use blockchain in different ways.

For Digital Money and Secure Payments

Certain crypto projects, particularly those in the financial space, may use blockchain to facilitate secure payments and transactions using cryptocurrencies. Bitcoin may fit in this bucket, as could others that need automated record-keeping abilities, and more. Blockchain may also prove to be more efficient than other money transfer systems.

For Running Apps and Smart Contracts

Other projects may utilize blockchain for the running and deployment of applications and smart contracts. These applications may have a variety of uses, but are based on a blockchain network. Smart contracts essentially consist of self-executing code that kicks in when predefined conditions are met, helping automate certain tasks. For example, tokens may be created and managed through conditions specified in smart contracts.

For Proving Ownership of Digital Items

Blockchain, as a store of data and information, can also be used to help prove ownership of digital items. That’s the concept behind non-fungible tokens, or NFTs, which serve as a digital deed or proof of ownership for certain things.

For Creating Digital Dollars

Blockchain can also be used to power the creation and distribution of stablecoins, which are a form of cryptocurrency that are “pegged” to real-world assets, such as the U.S. dollar. That helps them maintain a relatively stable value, and could facilitate their use for real-world transactions, much like actual fiat currency.

Where Else Is Blockchain Used Beside Crypto?

Aside from the general finance space, there are many other potential use-cases for crypto and blockchain technology. Here are some examples.

Supply Chain Management

One potential use-case for blockchain is in supply chain management, in which organizations could use it to track goods. It’s possible this could help flag inefficiencies in supply chains or create better records that are more easily accessible, and potentially, be used in a wide variety of industries or settings.

Voting Systems

Given that blockchain is a transparent and relatively secure technology, there may be some potential uses for voting systems, which need to record and secure data. It’s important to remember, though, that blockchain may be secure, but it’s not impervious to the actions of bad-faith actors, so it’s not necessarily a foolproof option.

Digital Identity

As noted, blockchain may help create ways to prove digital ownership, and that could extend to giving individuals or entities more control over their digital identity or digital identification tokens.

What Are Blockchain’s Biggest Challenges in Crypto?

While there are many potential upsides to blockchains, there are still some lingering questions and challenges to be addressed. As it relates to the crypto space, here are some of those challenges.

The “Blockchain Trilemma”

Perhaps the highest-level issue blockchains are contending with is what’s known as the “blockchain trilemma,” which refers to the simultaneous balancing of speed, security, and decentralization. Blockchains need computing power and participants to secure and facilitate transactions or data validation, and generally, balancing all three is difficult for blockchain network creators. As such, one is typically sacrificed.

It’s similar to the old adage in the dining industry: Fresh, fast, and good. Pick two!

High Transaction Fees (“Gas Fees”) on Busy Networks

Blockchain networks get busy, and the rules of supply and demand apply. When a network is processing a lot of transactions, fees for validating those transactions increase. These are typically called “gas fees” or usage fees, and they can become higher than many participants would like during busy stretches.

The Environmental Debate Around Energy Consumption

There is also an ongoing debate about the environmental impact of crypto, specifically crypto mining. Blockchain is in the mix, too, since it powers those crypto networks. In short, mining requires a lot of resources, notably, electricity. Generating that electricity may lead to pollution. Thus, the debate about blockchain, energy consumption, and improving efficiency continues.

What’s Next for Blockchain Technology?

Blockchain is fairly ubiquitous, and its adoption and usage will likely grow in the future. That said, here are some things to watch out for.

Solving the Challenges of Speed and Energy Use

As discussed, there are some issues to iron out as it relates to energy use on blockchain networks, and latency, or network congestion problems. There may not be easy solutions to those problems, but they are on peoples’ minds, especially when these issues end up impacting the effectiveness of the blockchain network itself.

The Growth of Interconnected Blockchains

It’s also possible that we’ll continue to see the growth of interconnected blockchains, which basically means that different blockchain networks will start to work in concert or more closely together, rather than remain siloed. For instance, bridges may allow blockchains housing certain DeFi applications to interact with other blockchains to share data or information and increase efficiency — in a very broad sense. That growth will likely come as demand for these systems, by different companies or organizations working in various industries.

The Takeaway

Blockchain technology utilizes cryptography to create and validate blocks of data, linking them together to form a distributed ledger. That ledger is powered by crypto participants far and wide, who together help to secure and maintain the crypto network. Blockchain has many uses and potential uses, but many people may know it as the technology that powers the crypto space.

Though blockchain has big potential, there are still issues and challenges that the technology faces, such as slow transaction speeds or energy usage. As the technology becomes more pervasive, however, it’s possible that its list of use-cases could continue to expand.

SoFi Crypto is back. SoFi members can now buy, sell, and hold cryptocurrencies on a platform with the safeguards of a bank. Access 25+ cryptocurrencies, such as Bitcoin, Ethereum, and Solana, with the first national chartered bank to offer crypto trading. Now you can manage your banking, investing, borrowing, and crypto all in one place, giving you more control over your money.

Learn more about crypto trading with SoFi.

FAQ

How does a blockchain ensure data cannot be altered?

Blockchains’ participants validate data by solving puzzles and cementing the information in blocks. If those blocks are altered by a user or participant, the distributed nature of the ledger allows for the other participants to notice and flag the discrepancy. It’s not a completely unalterable system, but there are safeguards built into it.

What are consensus mechanisms and why are they important?

Consensus mechanisms are a sort of code of conduct among a blockchain’s users, with the two most popular being proof-of-work (PoW) and proof-of-stake (PoS) systems. Those systems allow and help participants validate data and information on a blockchain by either mining (a PoW system) or staking (a PoS system).

How secure is blockchain technology?

The blockchain technology itself is widely considered to be secure, largely due to the distributed nature of the networks, which means there’s no single point of failure, and because the information on the blockchain, once verified, is largely immutable. That said, the software and services that interact with a blockchain could be more vulnerable to hacks and acts of fraud.

How is blockchain regulated?

Decentralized blockchains aren’t regulated in the U.S. by a single federal law or agency as of late 2025. At the federal level, the SEC, FinCEN, the IRS and CFTC oversee blockchain, and blockchain transactions, and cryptocurrencies to various degrees. Many, if not most states have specific regulations related to blockchain, too. There may be some regulations related to blockchain in some parts of the world, such as the EU.

What is the difference between a public and private blockchain?

Some blockchains are public and some are private. Public blockchains are open and available to almost anyone to use or view transactions, while the information on private blockchains may be gated off from the public, and restricted to specific individuals or organizations. Some privacy cryptocurrencies, however, may be challenged by Know Your Customer (KYC) or similar laws, which are designed to help prevent criminal activities, such as money laundering.

How do blockchain nodes maintain the ledger?

Nodes work within a blockchain network’s consensus mechanism to validate and confirm data in the blocks. Nodes themselves are computers or groups of computers that pledge their resources and computing power for validation purposes.

---

About the author

---

Photo credit: iStock/Delmaine Donson

Cryptocurrency and other digital assets are highly speculative, involve significant risk, and may result in the complete loss of value. Cryptocurrency and other digital assets are not deposits, are not insured by the FDIC or SIPC, are not bank guaranteed, and may lose value.

All cryptocurrency transactions, once submitted to the blockchain, are final and irreversible. SoFi is not responsible for any failure or delay in processing a transaction resulting from factors beyond its reasonable control, including blockchain network congestion, protocol or network operations, or incorrect address information. Availability of specific digital assets, features, and services is subject to change and may be limited by applicable law and regulation.

SoFi Crypto products and services are offered by SoFi Bank, N.A., a national bank regulated by the Office of the Comptroller of the Currency. SoFi Bank does not provide investment, tax, or legal advice. Please refer to the SoFi Crypto account agreement for additional terms and conditions.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

This article is not intended to be legal advice. Please consult an attorney for advice.

SOCRYP-Q425-011