Frequently Asked Questions

A blockchain is a distributed digital ledger that records transactions across many computers. Each "block" contains a group of transactions and a cryptographic hash linking it to the previous block, forming an unbroken chain. This structure makes it difficult to alter past records without detection. The concept was first described in a 2008 whitepaper by the pseudonymous author Satoshi Nakamoto, though the underlying cryptographic techniques had been explored by researchers for decades prior.

A distributed ledger is a database that is shared and synchronised across multiple locations, institutions or geographies. All blockchains are distributed ledgers, but not all distributed ledgers use a blockchain structure. Some use alternative data architectures such as directed acyclic graphs (DAGs). The key distinction from a traditional centralised database is that no single entity has sole control over the data, and changes must typically be agreed upon by multiple participants.

A traditional database is usually managed by a single organisation and stored on centralised servers. In contrast, a blockchain distributes copies of the ledger across a network of independent nodes. Traditional databases allow administrators to edit or delete records, while blockchains are designed to be append-only, meaning that once data is recorded it is extremely difficult to modify. Each approach has trade-offs: traditional databases tend to be faster and more flexible for general use, while blockchains are designed for environments where transparency, auditability and resistance to tampering are priorities.

A block is a container for data within a blockchain. Each block typically includes a list of transactions, a timestamp, a reference (hash) to the previous block, and a unique hash of its own contents. Blocks are added sequentially, and because each block references the one before it, they form a chain. The size and contents of a block vary between different blockchain protocols.

A node is a computer that participates in a blockchain network by maintaining a copy of the ledger. Full nodes store the entire transaction history, while light nodes store only a subset of data. Nodes validate new transactions and blocks according to the protocol's rules. A network with more nodes is generally considered more resilient, because there is no single point of failure.

No. Blockchain is the underlying technology, a type of distributed ledger. Cryptocurrencies are one application built on top of blockchain technology. Blockchain has many other applications beyond digital currencies, including supply-chain tracking, identity management, academic credentialing and data sharing. Equating blockchain with cryptocurrency is a common misconception.

A hash function is a mathematical algorithm that converts input data of any size into a fixed-size output (the "hash"). A small change in the input produces a completely different hash, making it useful for detecting data tampering. In blockchain, hash functions link blocks together and verify data integrity. Common hash functions used in blockchain protocols include SHA-256 (used by Bitcoin) and Keccak-256 (used by Ethereum).

A private key is a secret cryptographic code that allows you to sign transactions and prove ownership of tokens on a blockchain. It is essentially a very large, randomly generated number. Whoever controls the private key controls the associated assets. Losing a private key typically means permanent loss of access, because there is no central authority that can recover it. Keeping private keys secure is one of the most important aspects of interacting with blockchain technology.

A public key is a cryptographic code derived from the private key using a one-way mathematical function. It can be shared openly and is used to generate a blockchain address. Others can use your public key to verify your digital signature, confirming that a transaction was authorised by the holder of the corresponding private key. Critically, it is computationally infeasible to determine the private key from the public key.

A digital wallet is software (or hardware) that stores the cryptographic keys needed to interact with a blockchain. A "hot wallet" is connected to the internet, making it convenient for frequent use but potentially more vulnerable to online attacks. A "cold wallet" is stored offline, offering greater protection against remote threats. Wallets can also be custodial (managed by a third party, such as an exchange) or non-custodial (controlled by the user directly). Each type involves different trade-offs around convenience, security and control.

In the United Kingdom, the Financial Conduct Authority (FCA) is the primary regulator for crypto-asset activities. Firms dealing with certain types of digital assets must be registered with the FCA under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017. HM Treasury has also published consultation papers on the broader regulation of crypto-assets, and the regulatory landscape continues to evolve. In October 2023, the FCA introduced rules requiring firms to include risk warnings in crypto-asset promotions. Individuals should always check the latest FCA guidance at fca.org.uk before making decisions related to digital assets.

Digital assets are subject to significant price volatility, regulatory uncertainty, technology risks (such as smart-contract bugs, network attacks, or protocol failures), and the potential for total loss. There is typically no consumer protection scheme equivalent to the Financial Services Compensation Scheme (FSCS) covering digital-asset activities. Scams and fraudulent schemes targeting digital-asset users are common. Users should research thoroughly, understand the specific risks of any technology they interact with, and be aware that past performance of any asset is not indicative of future outcomes.

Web3 is a broad term describing a proposed future version of the internet built on decentralised protocols, including blockchain technology. Proponents argue it could give users more control over their data and digital identities, reducing reliance on large centralised platforms. Critics point to scalability challenges, user-experience barriers, environmental concerns related to certain consensus mechanisms, and the potential for new forms of centralisation and regulatory uncertainty. The concept remains under active development and debate within the technology community.