The Fundamentals of Blockchain: How Does It Work and What Do You Need to Know?

The world of digital assets is evolving rapidly. An increasing number of individuals, businesses, investors, and financial institutions are exploring the potential of cryptocurrencies and blockchain technology.

While digital assets offer new opportunities, their underlying technology and infrastructure differ significantly from those of the traditional financial sector. To properly understand this new form of financial service, it is essential to first grasp the fundamentals of blockchain.

In this article, you will discover what blockchain technology is, how transactions are processed, the different types of blockchain networks that exist, and why public and private keys are crucial for managing digital assets.

1. What Is Blockchain Technology?

Blockchain is a technology that allows data and transactions to be recorded digitally in a shared ledger.

This ledger is also known as a distributed ledger. Instead of a single central party managing the records, multiple computers within the network maintain a copy of the ledger.

Data is collected into blocks. Each new block is cryptographically linked to the preceding block, creating a continuous chain of data: the blockchain.

You can think of a blockchain as a digital transaction ledger that is maintained and verified by multiple participants.

Key Features of Blockchain

1. Decentralization

In many public blockchains, the network is maintained by multiple independent participants. As a result, management is not dependent on a single central organization or server.

2. Transparency

On public blockchains, transactions and other recorded data can generally be viewed by anyone. The amount of information visible varies depending on the specific blockchain.

3. Cryptographic Security

Blockchain employs cryptographic techniques to secure transactions, link data together, and verify the validity of transactions.

4. Immutability

Once data has been sufficiently confirmed and incorporated into the blockchain, it is generally extremely difficult to alter it retroactively. This does not mean that manipulation is impossible under all circumstances; the level of protection depends on the structure and security of the specific network in question.

2. What is a Distributed Ledger?

A key characteristic of many blockchain networks is that records are not maintained in a single, central location.

Instead, multiple computers—referred to as nodes—can participate in the network. Depending on their specific function, these nodes may verify transactions, propagate data, and store a copy of the blockchain.

This ensures that the network is not entirely dependent on any one central computer.

The Difference Between DeFi and CeFi

In the digital financial landscape, a distinction is often made between Decentralized Finance (DeFi) and Centralized Finance (CeFi).

Decentralized Finance (DeFi)

DeFi leverages blockchain networks and smart contracts to provide financial services, often eliminating the need for a traditional, centralized financial institution.

For example, users can trade, lend, or manage digital assets directly through decentralized applications.

Centralized Finance (CeFi)

In CeFi, financial services are provided by a centrally managed organization or service provider. This entity typically oversees the user environment and may be responsible for account management, transaction processing, customer support, and additional oversight or controls. Mercury Iconex is an example of a centralized cryptocurrency exchange (CEX). Users utilize a centrally managed trading platform with integrated wallet functionality.

The key difference, therefore, is that DeFi decentralizes financial processes, whereas CeFi relies on a central service provider.

3. How does blockchain work? A simple overview

To understand how blockchain works, let’s take a Bitcoin transaction as an example.

Suppose Tony wants to send 1 BTC to John. The network must verify that the transaction is valid before it can be permanently recorded on the blockchain.

The process generally unfolds as follows:

Step 1. A transaction is created

Using his wallet, Tony creates a transaction specifying that he wants to send 1 BTC to John’s Bitcoin address.

The transaction is cryptographically signed using the required private key.

Step 2. The transaction is broadcast to the network

The transaction is distributed across the Bitcoin network, where participating nodes receive and review it.

Step 3. The transaction is validated

Nodes verify, among other things, that the transaction complies with the protocol rules and that the necessary bitcoins are available to execute the transfer.

In the case of Bitcoin, valid transactions are then added to a pool of transactions that miners can process into a new block.

Step 4. Mining and block creation

Bitcoin uses a consensus mechanism called Proof of Work (PoW).

Miners use computational power to solve a cryptographic puzzle. The first miner to find a valid solution gets to propose a new block to the network.

Other nodes then verify whether the proposed block adheres to the Bitcoin protocol rules.

Step 5. The block is added to the blockchain

Once the block is accepted by the network, it becomes part of the blockchain.

The nodes update their records, and the transaction from Tony to John receives a blockchain confirmation. As more blocks are added following a given block, the certainty of a transaction increases further.

What makes this process secure?

Blockchain combines cryptography, network verification, and consensus mechanisms to secure transactions.

In the case of Bitcoin, miners must expend significant computational power to produce new blocks. Nodes independently verify that the proposed blocks and transactions comply with the network's rules.

Consequently, a single malicious participant cannot simply alter the transaction history and have that change accepted by the network.

Resilience and immutability

Resilience

Because many blockchain networks are maintained by multiple independent nodes, the network can continue to function even if certain computers or connections fail.

Immutability

The cryptographic linkage between blocks, combined with the consensus mechanism, makes it extremely difficult to retroactively alter previously confirmed transactions.

The degree of immutability varies from one blockchain network to another, depending on factors such as the technology employed, the scale of the network, and the extent of the consensus already achieved.

Note: Blockchain transactions are generally irreversible. If you send cryptocurrency to an incorrect address and the transaction is definitively processed, those funds may be lost.

It is also important to understand that not all blockchains operate in the same way. For instance, Bitcoin utilizes "Proof of Work," whereas other networks employ different consensus mechanisms.

4. What types of blockchain networks exist?

Blockchain networks can be structured in various ways. A key distinction is the one between public and private blockchains.

4.1 Public blockchain

A public blockchain is a network that is, in principle, accessible to anyone.

Depending on the network rules, users can execute transactions, view data, and participate in certain network activities.

Examples of well-known public blockchains include:

• Bitcoin.
• Ethereum.

Public blockchains are typically maintained by a global network of independent participants.

4.2 Private blockchain

A private blockchain is a network where access is restricted to pre-authorized participants.

An organization or consortium generally determines who is granted access and what rights the various participants possess.

Private blockchains are used, for instance, within business processes, financial institutions, and collaborative ventures where controlled access to data is important.

A well-known example of technology for such applications is Quorum, which was originally developed within JPMorgan.

Which blockchain is suitable?

The choice of a blockchain network depends on the intended use case.

Public blockchains generally offer more open access and transparency. Private blockchains, by contrast, can be advantageous when organizations wish to retain control over access, data, and network management.

5. What are public and private keys?

Public and private keys are an essential component of the cryptographic security of digital assets.

They are used to manage ownership of and access to digital assets, as well as to cryptographically sign transactions.

Although both keys are linked to each other, they serve different functions.

5.1 The private key

A private key is a unique cryptographic key that allows you to demonstrate that you are authorized to sign transactions and manage digital assets. The private key must be kept strictly confidential.

If someone else gains access to your private key, they could potentially execute transactions without your consent.

5.2 The Public Key

A public key is cryptographically derived from the private key and can be used to perform certain cryptographic checks.

Depending on the blockchain protocol, a wallet address can be derived from a public key.

A wallet address is the destination you typically share with others when you wish to receive digital assets.

5.3 The Wallet Address

A wallet address is similar to a bank account number or a mailing address: it indicates where digital assets should be sent.

It is important to understand that a wallet address is not the same as a public key. The address is generated based on cryptographic data, following the rules of the specific network in question.

Always verify that you are using the correct wallet address and blockchain network before executing a transaction.

A Simple Comparison

You can think of how it works as follows:

• Wallet address: the address of your digital vault, to which others can send digital assets.
• Public key: a piece of cryptographic data that can be used to perform certain checks.
• Private key: the secret key that allows you to demonstrate ownership of your digital assets and sign transactions.

Why should you protect your private key?

Your private key grants the authority to sign transactions.

If a malicious actor obtains this key, they could potentially transfer your digital assets to another address.

If you lose your private key and do not have a viable recovery method, you may permanently lose access to your digital assets.

Important security rule: Never share your private key or recovery phrase with anyone. A trustworthy service provider will never ask you to provide this information via email, chat, or phone.

6. What is a digital wallet and how are digital assets stored?

A digital wallet—also known as a cryptocurrency wallet—is an application or tool that allows you to access your digital assets on a blockchain network.

A wallet manages the cryptographic keys required to receive, manage, and send digital assets.

The digital assets themselves are not literally stored inside the wallet; rather, the record of these assets and their associated transactions resides on the relevant blockchain network.

There are various types of wallets.

6.1 Hot wallets

A hot wallet is a wallet that is accessible via an internet connection.

Examples include:

• Wallet applications on smartphones.
• Wallet software on computers.
• Browser-based wallets.
• Wallets integrated into cryptocurrency exchanges.

While hot wallets generally offer a high level of convenience, they require robust security for your account, device, and access credentials.

Mercury Iconex provides users with an integrated e-wallet within its online trading platform.

6.2 Cold wallets

A cold wallet is a wallet in which private keys are managed offline.

A common example is a hardware wallet, such as those offered by Ledger or Trezor. Since private keys are generally not directly exposed to an internet connection, cold storage can provide an additional layer of security.

Even when using cold wallets, it remains important to keep recovery information secure and to carefully verify transactions.

How are digital assets stored at Mercury Iconex?

Mercury Iconex utilizes cold-storage capabilities to securely and responsibly store users' digital assets.

The security of digital assets relies on a combination of measures, including access management, key management, and operational procedures.

The use of cold storage serves as an important supplementary security measure.

7. Key considerations for blockchain transactions

Before receiving or sending digital assets, it is advisable to keep the following points in mind:

1. Verify the wallet address: an incorrect address can lead to the permanent loss of your digital assets.
2. Select the correct network: ensure that both the sender and the receiver are using the same supported blockchain network.
3. Account for network fees: blockchain transactions may be subject to transaction fees.
4. Wait for sufficient confirmations: it may take some time for a transaction to receive an adequate number of network confirmations.
5. Protect your access credentials: never share your password, private key, or recovery phrase.
6. Monitor the transaction: if available, use the transaction ID (TXID) to track the status of a blockchain transaction.

Conclusion

Blockchain technology forms the technical foundation for a large part of the digital asset ecosystem. By utilizing distributed ledgers, cryptography, and consensus mechanisms, blockchain networks can process transactions in a transparent and verifiable manner, without the need for a single central entity to control the entire network.

Understanding public and private blockchains, nodes, miners, wallet addresses, and cryptographic keys is, therefore, an essential first step for anyone looking to delve into cryptocurrencies and digital financial services.

At Mercury Iconex, we believe it is important that users not only have access to digital assets but also understand how this technology works and how they can manage their digital holdings responsibly.

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Updated on: 03/11/2026