Blockchain 101: How It Really Works (Step by Step)

The ultimate breakdown of how blockchain really works — from transactions to mining and validation. No jargon, just straight facts and simple explanations. You’ll finally get it, and that's a promise.

The ultimate breakdown of how blockchain really works — from transactions to mining and validation. No jargon, just straight facts and simple explanations. You’ll finally get it, and that's a promise.

SMooTH

Posted on Mar 24, 2025
Welcome back to Blockchain 101, where we’re on a mission to make blockchain as easy to understand as your favorite meme.
 
 
In our last article, we broke down what the blockchain actually is and why it matters.
We learned that the blockchain is basically a digital ledger that records transactions in a way that’s transparent, secure, and nearly impossible to alter.
Kind of like a giant notebook shared across thousands of computers where everyone agrees on every page before it gets added.
 
📚
Confused? Read our earlier tutorial(s) first!
Previous articles in the Blockchain 101 series:
 
But knowing what blockchain is doesn’t mean we know how it works.
So today, we’re popping the hood and seeing what makes this machine tick. Buckle up — it’s time to dive deeper! 🤿
 

The Building Blocks of Blockchain

We’ve already figured out what a blockchain is: a decentralized digital ledger that records transactions in chunks called blocks, all linked together like a never-ending chain.
It’s tamper-resistant, transparent, and doesn’t need a central authority to keep it running.
 
 
❔ But wait... why do we even have these blocks? Why not just store every transaction on its own?
 
Well, blockchain isn’t just about keeping records — it’s about keeping them safe and organized.
 
Think of each block as a page in a digital ledger. Instead of writing down each transaction separately and scattering them everywhere, we bundle them together. This grouping serves a few key purposes:
  1. Efficiency: Processing transactions in bulk (as a block) is faster and less resource-intensive than handling each one individually.
  1. Security: By grouping transactions, we can lock them together with a single cryptographic hash that seals the whole batch at once.
  1. Consensus: It’s easier to reach agreement (consensus, more on that later) on a whole block rather than every single transaction one by one.
 
💡
Analogy
Imagine paying your bills one at a time, versus grouping them and paying them all at once. It’s just more practical to batch them together.
 
❔ So the blockchain is basically just a bunch of online transactions, right?
 
That’s exactly right, friend — it’s a decentralized, tamper-resistant, transparent list of transactions.
 
❔ Transactions of what, exactly?
 
In our previous article, we clarified that the blockchain was originally built to support Bitcoin transactions. So let’s take a look at what doing a “transaction” on the blockchain does, exactly.
 

How Transactions Get Processed

1️⃣ - Creating the transaction

Imagine you’re sending Bitcoin to your friend to pay them back for that questionable late-night pizza. 🍕
You open your digital wallet, enter their address and the amount, and hit send. Your wallet then generates a digital signature with your private key—a cryptographic seal of approval that proves you own the funds. It’s secure, verifiable, and ensures no one can pretend to be you.

2️⃣ - Broadcasting the transaction

Once signed, your transaction gets fired off to the blockchain network.
It’s not sent to a central server – instead, it’s broadcast to a bunch of nodes (computers) around the world.
These nodes are basically gossiping to each other, spreading your transaction far and wide, to ensure that your transaction is seen by the entire network and can be verified.
 
 
🍕
Fun fact
May 22nd is known around the world in the crypto niche as the “Bitcoin Pizza Day”. 📅
Why? Because on May 22, 2010, Laszlo Hanyecz offered to pay 10,000 BTC for the delivery of two Papa John’s pizzas. The day went down in history not just as the first commercial use of Bitcoin, but because of how much those two pizzas would be worth in the years that followed. 💰
Looking back, the man ended up paying a fortune by today’s standards. 🤯
 

3️⃣ - Validation by nodes

When nodes receive your transaction, they make sure everything checks out:
  • Is the signature valid?
  • Do you actually have enough funds?
If yes, it gets placed in the mempool (short for memory pool)—a waiting area for pending transactions. If not, the transaction is rejected instead.

4️⃣ - Adding the block

Now it’s time for your transaction to make it onto the blockchain. Here’s where miners or validators come into play (more on both later).
They scoop up a bunch of transactions from the mempool to form a block.
 

5️⃣ - Confirmation

Once the block is created, it’s broadcast to the network. Other nodes verify it and, if valid, add it to their copy of the blockchain.
Awesome! Your transaction is officially confirmed, and your friend finally gets that pizza money. 🍕
 
 
❔ This sure seems like an overcomplicated way of paying a friend back. Can’t I just do a quick bank transfer or QR payment instead?
 
You’re absolutely right.
Here’s the thing, though:
  • Blockchain isn’t just about paying for pizza—it’s about removing the middleman, increasing transparency, and ensuring nobody can tamper with the records. With traditional payments, you’re trusting a central authority (like your bank) to handle your money and keep accurate records. That works fine most of the time—until you’re trying to move a large amount of money, or your account gets frozen, or the bank has an outage, or someone hacks their system,.. Plus, cross-border payments can be painfully slow and expensive.
 
Also:
  • Blockchain isn’t just about doing financial transactions. We’ve listed a few of the many blockchain use cases HERE.
 
So sure, it’s not always the most practical for small payments right now, but the real power lies in how it cuts out the middleman and secures transactions—especially for big, cross-border, or censorship-resistant transfers.
 
🔑
“Not your keys, not your coin” 🪙
A popular saying in the crypto world, meaning that if you don’t control the keys to your money (like in banks, centralized exchanges), you don’t truly own it.
 

Consensus Mechanisms: Keeping Everyone Honest

Remember how we just talked about miners and validators picking up transactions from the mempool, grouping them in blocks and putting them on the blockchain?
They are the ones who decide which transactions make it onto the blockchain and in what order.
 
❔ Why is that necessary?
 
Well, since there’s no central authority (like a bank or PayPal) keeping everything in check, blockchain networks need a way to reach an agreement on which transactions to include in the next block.
That’s where consensus mechanisms come in—the secret sauce that keeps the whole system honest and secure.

⛏️ Miners - Proof of Work (PoW)

First up: miners. These guys are part of Proof of Work (PoW) systems—like Bitcoin. Their job is to gather transactions from the mempool, group them into a block, and then solve a super complex cryptographic puzzle.
It’s like trying to guess the combination to a locked chest, and it takes massive computing power. The first miner to find the right combination (called the nonce) gets to:
  1. Add the new block to the chain.
  1. Broadcast it to the network for verification.
  1. Collect the block reward (usually paid in newly minted coins).
This whole process is called mining because it’s kind of like digging for digital gold—you invest time, effort, and energy to uncover the right solution, and then you get rewarded with money.
 
 

✅ Validators - Proof of Stake (PoS)

Enter validators. Instead of burning electricity, PoS systems (like Ethereum 2.0) rely on users staking their coins as collateral to become validators. Think of it as putting down a deposit to prove you’re serious.
Here’s how it works:
  1. Validators lock up a certain amount of crypto (their stake).
  1. The network randomly selects one to propose the next block.
  1. If the block is approved, the validator earns a reward.
  1. If they try to cheat, they lose their staked coins.
 
 
💡
PoW vs PoS
We’ll go deeper into the use cases for both these systems in our next tutorial: Bitcoin vs Ethereum.
 
❔ Why is there even a need for all this? Couldn’t this entire process of validating transactions just be done automatically?
 
It could, but the whole point of blockchain is to be decentralized and trustless.
Imagine if I could just sneak in a block saying, "You owe SMooTH 1 Bitcoin" and it got accepted without question.
The reason we need miners and validators is because they act as the guardians of the blockchain, making sure every new block:
  1. Contains valid transactions
  1. Follows the protocol rules
  1. Links correctly to the previous block
 
By having a decentralized group of people (or machines) compete or get chosen to add blocks, it ensures no single entity can tamper with the records.
 
It’s like having a whole crowd of bouncers making sure no one’s sneaking into the club with a fake ID.
 
 
Also, the reward system (like mining rewards or staking incentives) motivates people to do the work honestly rather than just leaving it all up to chance. If it were purely automated with no human involvement, there’d be no accountability or incentive to be honest.

Conclusion

Congratulations! 🎉 You’ve made it through another level of Blockchain 101. You’ll become a bona fide blockchain buff in no time. 🫡
 
Let’s quickly recap the main takeaways from today’s deep dive:
  • Blockchain transactions are grouped into blocks to make processing efficient and secure.
  • Miners (in Proof of Work systems) use massive computing power to solve puzzles and add new blocks to the chain.
  • Validators (in Proof of Stake systems) lock up their coins as collateral to be selected for block validation.
  • Both systems ensure the blockchain remains decentralized and tamper-resistant by creating incentives to play by the rules.
  • The whole process might seem complex, but it’s necessary to maintain the trustless, decentralized nature of blockchain networks.
 
Basically, blockchain technology is just a bunch of computers coming to an agreement on a shared history of transactions.
But now that we know how transactions get processed and secured, it’s time to tackle the ultimate face-off: Bitcoin vs. Ethereum. They both use blockchain, but their approaches couldn’t be more different.
We’ll break down how they work, why they’re unique, and what sets them apart in the next installment of Blockchain 101.
 
So hit that subscribe button, and stay tuned!
 
Author's avatar
Author

SMooTH

@thisissmooth

🐍 Confident Cobra 📢 Communication is my passion 🔎 Research at Pluid 🦉 Ambassador at DYLI 👍

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