How Does Blockchain Work? Mining and Staking Explained Simply

Short answer: a blockchain is a shared record of transactions that many computers keep at the same time. New transactions are grouped into blocks, and each block contains a fingerprint (hash) of the previous one, which links them into a chain. Changing an old entry would break every link after it, so the network would reject it. Mining (proof of work) or staking (proof of stake) decides who may add the next block.

The notebook analogy

Imagine a group of friends who share expenses. Instead of trusting one person to keep the notebook, everyone keeps an identical copy. When someone pays, they announce it, everyone checks that the payer actually has the money, and everyone writes the same line in their own notebook. If one person secretly edits their copy, it no longer matches the others and the group ignores it.

A blockchain does the same thing with computers and mathematics. The “notebook” is the ledger, the “friends” are nodes, and the rules for agreeing on the next page are called consensus.

The building blocks

Transactions

A transaction is a signed message such as “send 0.01 BTC from address A to address B”. It is signed with the sender’s private key, which proves ownership without revealing the key. More on keys in our guide to crypto wallets.

Blocks

A block is a batch of transactions plus a header. The header includes a timestamp, a summary of all the transactions in the block (a Merkle root) and the hash of the previous block. On Bitcoin a new block arrives about every 10 minutes. On Ethereum it is every 12 seconds.

Hashes

A hash function turns any data into a short fixed length fingerprint. Bitcoin uses SHA-256. Change a single character in the input and the output changes completely, and there is no practical way to work backwards from the hash to the data. Because each block stores the previous block’s hash, editing one old transaction would change that block’s hash, which would break the link in the next block, and so on to the end of the chain.

Nodes

Nodes are computers running the blockchain software. Each full node stores a copy of the ledger and independently checks every transaction and block against the rules. Anyone can run one, which is what makes public blockchains hard to censor or control.

What happens when you send crypto

1. Your wallet creates and signs the transaction.
2. It is broadcast to nearby nodes, which check it and pass it on. Valid transactions wait in a queue called the mempool.
3. A miner or validator picks transactions from the queue, usually preferring those that pay higher fees, and builds a block.
4. The block is shared with the network. Nodes verify it and add it to their copy of the chain.
5. Your transaction now has one confirmation. Each later block adds another. Exchanges set their own confirmation requirements before crediting deposits.

Consensus: who adds the next block?

In a network with no boss, there must be a fair way to decide who writes the next page, and a cost for cheating. The two most common methods are proof of work and proof of stake.

Mining (proof of work)

In proof of work, used by Bitcoin, miners compete to find a number that, combined with the block’s data, produces a hash below a target value. The only way to find it is trial and error, billions of times per second, on machines called ASICs. The first miner to find it publishes the block and earns the block reward plus fees.

• Difficulty adjustment. Bitcoin adjusts the difficulty every 2,016 blocks (about two weeks) so blocks keep arriving about every 10 minutes, no matter how many miners join or leave.
• Why it is secure. To rewrite history, an attacker would need to redo the work for the changed block and all blocks after it, faster than the rest of the network. That would require more than half of all mining power, known as a 51% attack, which on Bitcoin would cost enormous amounts of hardware and electricity.
• The trade off. Proof of work uses a lot of electricity. Supporters argue the energy is what makes the ledger expensive to attack. Critics point to the environmental cost.

Staking (proof of stake)

In proof of stake, used by Ethereum since 2022 and by many newer blockchains, there are no mining machines. Validators lock up coins as a security deposit. The protocol randomly picks a validator to propose the next block, and other validators vote (attest) that it is valid.

• Rewards. Validators earn new coins and part of the fees for honest work.
• Slashing. Validators who cheat, for example by signing two conflicting blocks, lose part of their stake and are removed.
• Finality. Ethereum marks blocks as “finalized” after about 13 minutes. Reversing them would require destroying a huge amount of staked ETH.
• Energy. Proof of stake uses a tiny fraction of the electricity of proof of work.

As a regular user, you can usually stake through an exchange or a staking service without running a validator. Rewards are not guaranteed, your coins may be locked for a period, and you take on the risk of the provider. Under EU rules, staking offered by a company is part of its crypto service, so check that the platform is authorised.

Proof of work vs proof of stake

Public vs private blockchains

Public blockchains such as Bitcoin and Ethereum let anyone read the ledger, send transactions and run a node. Private or permissioned blockchains are run by a known group of companies, for example for trade finance. They can be faster, but they rely on trusting those operators, which removes much of what makes public crypto different.

What blockchain does not do

• It does not make data true. If wrong information is entered, the chain records it faithfully.
• It does not make every coin a good investment. The technology working is not the same as a token rising in price.
• It does not protect you from scams or from losing your keys. Most losses happen outside the chain, see how to avoid crypto scams.
• Transactions are final. There is no customer service that can reverse a payment.

Next steps

If you want to try it in practice, start small. Compare platforms in our exchange comparison (BingX is #1 and OKX is #2 in our overall ranking), learn how stablecoins work, and download our free beginner guide on choosing a safe exchange in the EU.

Frequently asked questions

Not financial advice. This article is for education only. Crypto prices are volatile and you can lose all the money you invest. Check the rules in your country before you buy.