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Blockchain is the technology that underlies cryptocurrencies like bitcoin. Bankrate explains.

What is a blockchain?

A blockchain is a digital, public ledger that records online transactions. Blockchain is the core technology for cryptocurrencies like bitcoin. A blockchain ensures the integrity of a cryptocurrency by encrypting, validating, and permanently recording transactions. A blockchain is similar to a bank’s ledger, but open and accessible to everyone who utilizes the cryptocurrency is supports.

Deeper definition

When you swipe your credit card at a store, the charge has to pass through a financial institution like a bank, which confirms the transaction, debits the cardholder’s account, and relays the charge to the retailer to complete the sale. This can be expensive — banks charge a fee for the service — and insecure for users, as recent hacks on Target’s point-of-sale systems have shown. There is also the potential for credit card fraud, which costs merchants in the U.S. hundreds of millions of dollars a year.

The blockchain fixes these issues. As it’s name suggests, a blockchain is made up of a series of “blocks.” The blockchain software records each transaction in a block without the aid of a third party like a bank or payment processor. The blockchain algorithm automatically encrypts and authenticates the transaction, which is immediately visible to all users, minimizing the possibility of fraud. The terms of the transaction do not include any personal or identifying information.

Blockchain technology was invented to govern bitcoin, the first and most popular cryptocurrency. Some newer platforms, like ethereum, employ a blockchain to provide a digital ecosystem for distributed computing, effectively using cryptocurrency to oil the works. In ethereum, blocks run what’s called a smart contract to ensure that certain conditions are met before a service is rendered.

Every blockchain user has the same copy of of the entire blockchain as everybody else. This makes it virtually impossible to manipulate: a hacker would have to harness computing power greater than that of every user to alter the blockchain in her favor. Because of this ironclad security, major mainstream institutions like Citigroup and the London Stock Exchange have embraced blockchain technology, in the hope of using it, for example, to protect intellectual property or store investment records. Blockchains may even be used by artists and musicians to secure their work and receive fair compensation from fans. It may not be long before artists forego licensing their work to a publisher, who takes a cut, when they can register it directly to a blockchain.

Banks have been slow to adopt the blockchain. In the meantime, Bankrate can help you choose the right bank to deposit your money.

Blockchain example

Asgaror, lead singer of the Norwegian black metal band Heimskringla, has seen his income dwindle ever since the band’s label increased their cut. Asgaror realizes he can increase his revenue by selling to fans directly. He decides to use the blockchain not only to register his band’s grim riffs and nefarious lyrics, but also to set up a smart contract that allows users to purchase Heimskringla’s records and merch by paying a set amount of a certain cryptocurrency. Both the registration of Heimskringla’s intellectual property and every transaction to purchase goods from the band are securely and permanently recorded.

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