What’s a block in crypto? Understanding blockchain technology

If you want to understand how blockchain works, you have to start with its foundational unit: the block. When Satoshi Nakamoto created the very first block called Genesis, he started an avalanche of innovations that resulted in the reliable blockchain technology we know today.

So, just what is a block in crypto? In this article, we’ll discuss how the block functions as a record keeper and trust builder, and explain why it’s able to store digital transactions securely. This knowledge will help you navigate crypto trading and mining more successfully.

What’s a block, and how do blockchains work?

In a traditional, physical book of financial records, you would have pages filled with notes, dates, amounts, and signatures. When a page was full, a clerk would seal it and add it to the main book, so it couldn't be removed or swapped.

At a very basic level, a blockchain does the same thing. A “block” is a digital container that groups transactions or other pieces of information together, and permanently records them in the blockchain’s distributed ledger. Instead of sealed paper and bank employees, this system relies on cryptography and thousands of connected computers to keep the record secure.

Once a block is created, it needs to be validated and securely added to the chain. How that addition is made depends on the blockchain’s consensus mechanism. Here are the two most common methods:

• Proof of Work (PoW): Blocks are added when miners use computing power to solve cryptographic puzzles. This “work” makes it expensive to cheat, because an attacker would need enormous energy and hardware to outpace the network. This is the method Bitcoin (BTC) blockchain uses.
• Proof of Stake (PoS): Instead of competing with hardware, validators are chosen to add blocks based on the cryptocurrency they lock up as collateral. Their stake acts as a financial commitment, and if they try to cheat, they risk losing it. Ethereum (ETH) switched from PoW to PoS in 2022.

Why blocks matter in the blockchain

Blocks are the most important part of the blockchain engine, holding data in place and allowing the entire system to function. Here’s what they provide:

• Security: Since each block is linked to the ones before and after it, tampering with any part breaks the chain. With BTC, that kind of fraud would take enormous, practically unreachable, computing power. As for ETH, a dishonest validator risks losing their stake.
• Transparency: Transactions on blockchain are public records. Anyone can trace BTC payments or see how funds move through ETH apps. This transparency is what makes blockchain so trustworthy.
• Immutability: Once added, a block can’t be changed. This makes records and digital assets incredibly reliable.
• Decentralization: Copies of the chain “live” on thousands of computers, not one centralized server. Decentralization works as a peer-to-peer system where participants connect directly, rather than through a single authority. This keeps blockchain technology resilient and resistant to censorship.

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What’s the structure of a crypto block?

Every part of the block has a dedicated job and a design that ensures the information inside can’t be faked or changed. Here are the most important components, along with definitions for some key crypto terms.

Headers

The header functions as the block’s cover page. It doesn’t show you everything that’s inside, but it contains enough metadata to identify and secure the block.

BTC is as an example of a blockchain that uses headers, which convey the following information:

• Version number
• Timestamp
• nBits (a numerical threshold that defines whether the block is valid)
• Hash of the previous block (more on this shortly)
• Merkle root summarizing all transactions (the current block’s hash)
• Nonce (the number miners vary to solve the cryptographic puzzle)

Transaction data

Right under the header is the heart of the block: the transaction data. This is where activity is recorded, forming the detailed entries of the blockchain ledger. 

For BTC, every transaction lists the:

• Inputs it spends, which can be traced back to the addresses that held the funds
• Outputs showing where the funds are going
• Amounts involved
• Digital signatures proving the sender had the right to spend the funds

With ETH, the same core rules apply, but transactions often carry extra information. That might include code and instructions for smart contracts, or data that decentralized applications (dApps) need in order to run.

No matter what cryptocurrency you’re using, the common thread is that each transaction is digitally signed with the sender’s private key. That signature ensures authenticity and prevents tampering, making every entry trustworthy.

Hash

Each block has a unique ID called a “merkle root hash.” This ID is created by running the block’s other content (header and transaction data) through a cryptographic function – a special type of algorithm that takes all the data, processes it, and generates a string of numbers and letters. 

The string is fixed in length and the process is irreversible, so you can’t take a hash and figure out the original data. It’s also consistent, as the same input will always produce the same hash, while even a small change in the data would produce an entirely different ID.

Each new block also stores the hash of the previous block in its header. This linking system is what turns individual blocks into secure blockchain technology. If someone tries to change an old block, its hash will no longer match the reference stored in the next block. That mismatch would break the chain and expose the tampering attempt.

How blocks work in a blockchain: 4 steps

Each block goes through its own fast journey of verification, creation, and validation before it can become part of the blockchain. Once a block is locked in place, the process repeats, and the chain grows longer. Here’s how that works.

1. Transaction verification

When someone sends cryptocurrency or interacts with a dApp, the transaction is broadcast to the decentralized network. Other computers on that network, called nodes, pick up the transaction and verify it.

These nodes act like independent, decentralized accountants. They confirm that the sender has the right funds or permissions, and they make sure digital signatures match. Invalid transactions are rejected before they even reach the block.

2. Block creation

Once a batch of valid transactions is collected – usually enough to fill the available space in a block – they’re packaged into what’s called a “candidate block.” The goal is to create a block that the whole network agrees on.

With BTC, miners prepare the candidate block and then compete to solve a PoW puzzle. The first miner to solve it earns the right to broadcast their block to the network. Since the SegWit upgrade, available space in BTC blocks is measured in “weight units” rather than megabytes. This allows them to hold up to four million units of data.

For ETH, validators take turns. The system selects one user to propose a block, and others check the result before it’s accepted to the chain. ETH measures available space in “gas,” which limits how much computation a block can hold – currently around 30 million.

3. Block addition

After a block is created, it must be approved through consensus and added to the chain. Other participants review the proposed block to make sure it follows all the rules. They verify that each secure transaction is properly signed, the sender had the balance they tried to spend, and the block itself fits within the network’s size or gas limits.

In a PoW system, nodes also make sure the miner’s puzzle solution is valid. If it’s verified, the block gets accepted and passed along. In a PoS process, validators review the block and “attest” to it by casting their approval. Once enough of them agree, the block is finalized. This is how a block of data on a blockchain gets locked.

4. Chain continuation

Once a new block is confirmed and locked into place, the cycle starts over. Each block carries the fingerprint of the one before it, and the next block will do the same in turn. That’s why rewriting blockchain history is practically impossible, making this a secure method of data storage.

Turning blockchain knowledge into profit

Blocks are what make blockchain technology secure and reliable, so it’s important to understand how they work. But managing your digital assets effectively means going beyond theoretical knowledge. You need the right tools to help you bridge the gap between knowing about blockchain applications and managing your assets wisely.

Navigating the crypto world can be challenging, but CoinTracker makes it easy. With automatic tracking of over 50,000 cryptocurrencies and integration with all of the top exchanges, we bring everything into one dashboard. Sign up for free and start your crypto journey with CoinTracker.

Disclaimer: This post is informational only and is not intended as tax advice. For tax advice, please consult a tax professional.