New on FinoLib · Volume II: Capital Markets
I have added a new article to FinoLib, my finance education website: How Blockchain Works: Bitcoin and Proof of Work Explained, part of Volume II: Capital Markets. This page gives you the core of the topic in expert but plain language; the full article goes much deeper.
11.1 Blockchain Mechanics, Without the Hype
The idea in plain words
A blockchain is a shared ledger. Each block carries a fingerprint, called a hash, of the block before it, so changing any past record breaks every later link, like pulling one link out of a chain. On Proof-of-Work chains, finality is a matter of probability: the chance of reversal falls with each new confirmation. A blockchain pays off only where the parties will not accept a single trusted operator.
Key points
■Against a 10% attacker, reversal odds are 20.46% after one confirmation and 0.024% after six (Nakamoto, 2008).
■Six Bitcoin confirmations take about an hour; Proof-of-Stake Ethereum finalizes in about 12.8 minutes.
■Set the wait by value at risk: $1 million after one confirmation carries about $204,587 of expected loss, after six about $243.
A closer look
Volume I’s Part 0 traced money from barter through metal coins, paper receipts, and fiat currency — each step solving a specific trust problem by centralizing it in an institution (a mint, a bank, a central bank). A blockchain is, mechanically, an attempt to solve the same trust problem — verifying that a specific unit of value hasn’t already been spent elsewhere — without any single central institution at all.
Decision rule
Use a blockchain only if all three hold: several parties must write to the same record, none of them will accept one operator, and the cost of an intermediary exceeds the cost of slower, irreversible settlement. If any fails, use a database. When you accept a payment on a Proof-of-Work chain, set the wait by value at risk: pick the depth z at which reversal probability × amount is below what you would write off.
The costliest mistake
Treating one confirmation as settlement. Against an attacker with 10% of hash power, a $1,000,000 payment released after one confirmation carries a 20.46% reversal probability: 0.204587 × $1,000,000 ≈ $204,587 of expected loss. After six confirmations the figure is 0.000243 × $1,000,000 ≈ $243, about 840 times smaller, for one extra hour of waiting. On smaller chains, where an attacker can rent a large share of total hash power, the same payment needs far more depth.
Recap
A blockchain chains blocks by hash so that any edit to the past is detectable, and on Proof-of-Work chains finality is a probability that shrinks with each confirmation: 20.46% after one and 0.024% after six against a 10% attacker. Use one only where parties will not accept a trusted operator, and size the confirmation wait to the value at risk.
11.2 Bitcoin and Proof of Work
The idea in plain words
Bitcoin uses Proof of Work. Miners spend computing power to add blocks to the chain and are paid in new coins and in transaction fees. The 21 million coin cap is the end point of a halving series, because the reward for each block halves every four years. That makes the network’s security a budget, and over time fees must replace the shrinking subsidy to keep paying for it.
Key points
■The reward halved to 3.125 BTC in April 2024; issuance is 450 BTC a day, about 0.82% of supply a year.
■Difficulty resets every 2,016 blocks to keep 10-minute blocks, so more miners add security, not coins.
■At October 2026 prices the subsidy is about $14.2 billion a year; Budish (2018) argues it must stay large relative to attack gains.
Decision rule
A reading rule for any chain’s security claim: compare what it pays for security each year (miner or validator rewards, in dollars) with the value an attacker could steal or double-spend in one go. If the annual security budget is small relative to the largest payments settled on the chain, treat its finality as weak and wait longer or settle elsewhere.
The costliest mistake
Mistaking fixed supply for stable value. With supply fixed, every shift in demand goes into the price. Bitcoin closed at about $124,740 on October 7, 2025, and $58,566 on July 1, 2026: a fall of 1 − 58,566 ÷ 124,740 = 53%, with daily moves over the year annualizing to about 45% volatility. A business that parked $1,000,000 of payroll cash at the peak would have held $1,000,000 × 58,566 ÷ 124,740 ≈ $469,500 nine months later. Hold reserves in the currency of the bills you must pay.
What the full article covers
In the full article I take you through these sections:
■11.1 Blockchain Mechanics, Without the Hype
■11.2 Bitcoin and Proof of Work
It includes a look under the hood at the mechanics, a clear decision rule, the one mistake that costs people the most, a recap, a reveal-on-click quiz and the official sources behind every figure.
Volume II: Capital Markets
Read the full article on FinoLib
The complete article, How Blockchain Works: Bitcoin and Proof of Work Explained, with every worked example, diagram, quiz and source, is free to read in Volume II, Capital Markets on finolib.com.
Explore the Finance Education Series: Vol. II — Capital Markets · Vol. I — Global Economy · Vol. III — Finance Encyclopedia · Vol. IV — Finance Careers · Vol. V — Personal Finance