Blockchain technology

Table of contents

What is a blockchain?

A blockchain is a decentralized, distributed ledger that records transactions across a network of computers, or nodes. Each transaction is grouped into a cryptographically secured block, which is linked to the previous one — forming an immutable, chronological chain. Because each block references the hash of the one before it, altering historical data would require changing every subsequent block across the entire network, making tampering computationally impractical.

Blockchains allow participants to verify and record transactions without relying on a central authority — enabling transparency, auditability, and trust in data integrity.

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How it works

Transactions are stored in blocks: Data is bundled into timestamped blocks and secured with cryptographic algorithms
Blocks are linked sequentially: Each new block includes the cryptographic hash of the previous block, forming a tamper-evident chain
The network is decentralized: Multiple nodes maintain identical copies of the ledger and validate transactions through consensus mechanisms (e.g. Proof of Work, Proof of Stake)

Key characteristics

Decentralized: No single entity controls the system, reducing single points of failure and enhancing resilience
Transparent: Transaction histories are publicly visible. However, wallet addresses are typically pseudonymous, not tied to real-world identities by default.
Immutable: Once confirmed and added to the chain, blocks cannot be altered without majority consensus — which is highly unlikely in large, distributed networks
Secure: Cryptographic validation and distributed consensus mechanisms protect the integrity of the data

Common applications

Cryptocurrency networks (e.g. Bitcoin, Ethereum)
Supply chain traceability
Digital identity management
Healthcare record sharing
Real estate and land title transfers
Voting systems and audit trails

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How do blockchains work?

A blockchain processes and records transactions through a series of steps designed to ensure accuracy, security, and network-wide agreement. These steps vary slightly depending on the blockchain protocol, but generally follow the structure below:

1. Transaction broadcast

A user initiates a transaction and sends it to the network. Participating nodes verify that it is properly formatted, signed, and valid (e.g. sufficient balance, correct inputs).

2. Mempool

Validated transactions enter a temporary queue known as the mempool. Transactions wait here until they are selected for inclusion in a new block.

3. Block creation

A miner (in Proof of Work) or validator (in Proof of Stake) selects transactions from the mempool and packages them into a block. Each block includes a timestamp and the hash of the previous block.

4. Hashing

The new block’s data is processed through a cryptographic hash function, producing a unique identifier. This hash links the block to the one before it, helping detect any tampering.

5. Consensus

The network uses a consensus mechanism to determine which block to add next. This ensures all nodes share the same version of the blockchain.

6. Confirmations

Once added, a block becomes part of the permanent record. Each subsequent block reinforces its validity — increasing confidence that the transaction is final and tamper-evident.

Consensus mechanisms

Proof of Work (PoW)

Miners compete to solve a complex mathematical puzzle. The first to solve it adds the next block and earns a reward. This method offers strong security but requires significant energy and computing resources.

Proof of Stake (PoS)

Validators are selected to add blocks based on the amount of cryptocurrency they “stake” as collateral. PoS significantly reduces energy use and relies on economic incentives to discourage dishonest behavior.

‍‍Blockchains are not anonymous — they are pseudonymous. While transactions do not display real names, they are recorded publicly under alphanumeric wallet addresses. This means the activity is permanently visible and can be traced. With blockchain intelligence and attribution tools, transaction patterns can be analyzed and, in some cases, linked to real-world entities — especially when supported by off-chain data or legal process.

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Types of blockchain networks

Different blockchain network architectures offer varying levels of access, control, and governance. In regulated environments, the choice of network directly impacts compliance requirements, auditability, and data management standards.

Public blockchains

Open-access networks where anyone can participate, read data, or validate transactions. These are commonly used in cryptocurrency ecosystems and decentralized applications.

Compliance considerations:

Limited control over network participants, data residency, and transaction flow
Visibility is high, but enforcement of data handling policies is limited
Most appropriate for use cases requiring transparency and verifiable public records, assuming appropriate monitoring tools are in place

Private blockchains

Networks operated by a single entity that controls access, validation rights, and data visibility. Participation is restricted to internal or approved users.

Compliance considerations:

Centralized control over data permissions and transaction processing
Strong alignment with internal governance frameworks
Suitable for use cases requiring confidentiality, regulatory oversight, and internal audit capabilities

Permissioned blockchains

Networks where participants must be approved before joining. Access is managed through role-based permissions, often combining features of both public and private systems.

Compliance considerations:

Enables identity verification, enforceable access rules, and detailed logging
Supports fine-grained control over data visibility and participant behavior
Frequently used in enterprise, financial, or public-sector applications where trust and traceability are required

Consortium blockchains

Shared networks governed by a group of pre-approved organizations. Governance, access, and validation are distributed across trusted members.

Compliance considerations:

Joint control helps reduce single-point-of-failure risks and promote transparency
Commonly used in cross-institutional collaboration, reporting, or settlement networks
Supports interoperable compliance across entities with shared regulatory obligations

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What are the key features of blockchain technology?

Blockchain technology offers several unique features that make it valuable for various industries:

Decentralization: No single entity controls the entire blockchain network, reducing the risk of manipulation or single points of failure.
Transparency: All transactions are visible to network participants, enhancing trust and accountability.
Immutability: Once a transaction is recorded, it cannot be altered without consensus from the network, ensuring data integrity.
Security: Cryptographic techniques protect the data stored on the blockchain, making it highly resistant to hacking and fraud.

Benefits and limitations

Benefits

Transparent, time-ordered records: Each transaction is recorded in chronological order on the blockchain, enabling reliable tracing across large datasets — even years after the activity occurred.
Immutable audit trail: Once confirmed, blockchain data cannot be altered without detection. This supports evidentiary integrity and reinforces trust in the accuracy of the historical record.
Global data availability: Distributed networks replicate the ledger across multiple nodes, reducing the risk of single points of failure and improving long-term data durability.
Verifiability for investigators: Open-source blockchain data can be independently validated, supporting cross-agency collaboration and multi-jurisdiction investigations.
Enhanced insights with TRM: TRM’s blockchain intelligence tools — including cross-chain analytics, clustering, attribution, and behavioral tracing — help investigators follow activity even when threat actors attempt to obfuscate their movements across multiple networks.

Limitations

Energy consumption (Proof of Work): Some Proof of Work blockchains — including Bitcoin — consume large amounts of energy. Annual estimates vary but often range between 80 and 130 terawatt-hours, depending on methodology.‍
- Mitigation: Adoption of Proof of Stake systems and increased use of low-carbon energy by miners are reducing environmental impact.‍
Transaction throughput: Base-layer public blockchains process fewer transactions per second (TPS) than centralized systems. Bitcoin averages 5–7 TPS, and Ethereum ranges from 10–30 TPS without scaling solutions.‍
- Mitigation: Layer 2 networks, transaction batching, and off-chain settlement improve throughput while preserving traceability.‍
Data storage and scalability: Full blockchain nodes can require hundreds of gigabytes to multiple terabytes of storage, depending on the protocol. This can introduce infrastructure overhead for some operators.‍
- Mitigation: Pruned nodes, lightweight clients, and standardized archival solutions reduce storage requirements.‍
Pseudonymity and attribution: Wallet addresses are not inherently linked to real-world identities, which can complicate investigations.‍
- Mitigation: TRM enables identity-relevant insights through clustering, sanctions screening, cross-chain tracing, and integration of off-chain context — supporting attribution within regulatory and legal frameworks.

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What are the most common use cases for blockchain technology?

Financial services: The most familiar application of blockchain technology today is in financial transactions. Blockchain technology enables faster and more secure transactions, and has revolutionized banking and wealth building.
Supply chain management: Blockchain technology provides transparency and traceability in complex supply chains.
Healthcare: Blockchain technology can be used to securely store and share patient records.
Voting systems: Blockchain technology has the potential to make voting systems more secure and transparent.
Smart contracts: Blockchain technology enables the use of self-executing contracts, automating and streamlining various business processes.

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What are the key challenges and opportunities blockchain technology presents for compliance teams?

For crypto compliance teams, blockchain technology presents both opportunities and challenges:

Enhanced traceability: The transparent nature of blockchain allows for better tracking of transactions, potentially making it easier to detect and prevent money laundering and other financial crimes.
KYC/AML procedures: Blockchain can streamline Know Your Customer (KYC) and anti-money laundering (AML) processes, but it also requires adapting traditional compliance systems to meet the unique characteristics of blockchain transactions.
Risk assessment: Compliance officers need to develop robust risk assessment frameworks that take into account the specific risks associated with blockchain-based assets and transactions.

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What are the key challenges and opportunities blockchain technology presents for law enforcement?

Challenges

Complexity: Blockchain technology's intricacy requires specialized knowledge and tools to effectively navigate and interpret blockchain data.
Cross-border nature: The global reach of blockchain technology necessitates increased international cooperation among law enforcement agencies — as well as private sector crypto businesses.
Data overload: The sheer volume of blockchain transaction data can be overwhelming, requiring advanced tools to distill actionable intelligence.
Privacy concerns: For consumers, the anonymity and pseudonymous nature of the blockchain are major draws. But as crypto-enabled crime becomes more prevalent, public and private sector teams will need to work together to balance investigative needs with data protection laws and individual privacy rights.

Opportunities

Transaction tracing: Unlike transactions involving fiat currency (which can be nearly impossible to trace, particularly when it moves overseas), cryptocurrency transactions leave a digital trail on the blockchain. This enables investigators to follow the flow of funds using blockchain analysis tools like TRM Labs, helping them track suspicious transactions and identify potential criminal activities on the blockchain.
Evidence gathering: The immutable nature of blockchain helps investigators deliver reliable evidence for legal proceedings.
Cross-border cooperation: The global nature of blockchain technology necessitates increased international cooperation among law enforcement agencies to combat crypto-related crimes effectively.
Identifying actors: Blockchain intelligence enables investigators to visualize the flow of funds from one wallet to another, allowing them to follow the movement of funds from a starting point to a destination wallet that ultimately helps them identify the owner.
Revealing suspicious behavior: The timing and coordination of transactions on the blockchain can demonstrate intent, especially when a suspect quickly moves funds to obfuscation services after a hack or fraud.

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Security and privacy best practices

Organizations that build or interact with blockchain systems must implement robust security and privacy controls. These practices help protect digital assets, reduce operational risk, and support investigators and compliance teams who rely on accurate, tamper-evident data.

Identity and access management (IAM)

Enforce least-privilege access for internal and external users
Use hardware security modules (HSMs) or secure wallet infrastructure for key storage and management
Require multi-factor authentication (MFA) for administrative and sensitive actions
Maintain detailed access logs to support audits and investigative workflows

Smart contract security

Conduct independent audits of contract code prior to deployment
Implement continuous monitoring for upgrades, changes, or anomalies
Use formal verification tools, where feasible, to identify logic flaws
Apply role-based permissions within contracts to restrict unauthorized actions

Privacy-enhancing technologies

Use zero-knowledge proofs (ZKPs) to validate sensitive data without revealing it
Consider selective disclosure architectures that limit data exposure while preserving auditability
Monitor for misuse of privacy tools (e.g. mixers or anonymizing features) and escalate as needed in investigative contexts

Operational safeguards

Maintain separation of duties across engineering, operations, and compliance functions
Develop incident response plans with blockchain-specific procedures
Test disaster recovery workflows, including node failures and data corruption scenarios
Ensure logging, traceability, and evidence preservation workflows meet regulatory and legal standards

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What are the key regulatory considerations for blockchain technology?

As blockchain technology continues to evolve, regulators face the task of creating scalable and appropriate frameworks as blockchains become more widely adopted and leveraged in broad arrays of use cases.

Balancing innovation and protection: Regulators must strike a balance between fostering innovation in the blockchain space and protecting consumers and the financial system.
Adapting existing frameworks: Many jurisdictions are working to adapt their existing regulatory frameworks to address the unique challenges posed by blockchain technology.
International standardization: There's a growing need for international cooperation to develop standardized approaches to regulating blockchain-based assets and services.

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What is the future outlook for blockchain technology?

The future of blockchain technology will be shaped by ongoing regulatory developments, market demand, and the balance between privacy concerns and the need for transparency in financial transactions. As the technology evolves, it will also continue to transform various industries beyond finance — including supply chain management, healthcare, and voting systems. Here are a few key developments we can expect to see:

Advanced analytics

‍More sophisticated blockchain analytics features will emerge to enhance compliance and investigative capabilities, particularly in areas of financial crime prevention and law enforcement. TRM Labs is proud to continue innovating to bring the best blockchain analytics and blockchain intelligence products to market for our clients.

Regulatory technology (RegTech)

‍There will likely be increased adoption of blockchain-based solutions for regulatory reporting and compliance monitoring, as regulators and businesses seek more efficient ways to manage the growing complexity of the crypto ecosystem.

Education and training

‍A greater focus on educating compliance professionals, law enforcement, and regulators about blockchain technology and its implications will be necessary to keep pace with rapid developments in the field. If you’re a TRM customer, be sure to check out TRM Academy to peruse our extensive collection of courses and certifications.

Cross-chain analytics

‍As the blockchain landscape becomes more diverse, tools to analyze transactions across multiple blockchain networks will become increasingly important. TRM is a pioneer in the cross-chain analytics space. We currently offer:

Automatic cross-chain tracing: TRM is the only blockchain analytics solution that allows tracing chain-hopping in a single graph.
Extensive coverage: TRM supports tracing through hundreds of cross-chain bridges.
Multi-chain entities: TRM shows activity such as counterparties and transfers across all blockchains an entity operates on.
Time-ordered approach: TRM ensures each transfer is chronologically valid, creating an accurate and defensible account of fund flows.

Privacy-preserving analysis

‍New regulatory guidelines will likely be developed, ensuring investigators can still get the insights they need while respecting user privacy.

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Frequently asked questions (FAQs)

1. How is a blockchain transaction validated and confirmed?

‍After a transaction is created, it is broadcast to the network and temporarily placed in a mempool. A miner (in Proof of Work) or validator (in Proof of Stake) selects transactions from the mempool to include in the next block. In PoW, miners compete to solve a cryptographic puzzle; in PoS, a validator is selected to propose the block, and others attest to its validity. Once a transaction is included in a block, subsequent blocks that build on top of it provide increasing confidence in its finality (e.g. six confirmations on Bitcoin typically take about one hour).

2. What’s the difference between Bitcoin and blockchain?

Blockchain is the underlying technology — a distributed ledger that records transactions in cryptographically linked blocks. Bitcoin is a digital currency that operates on a blockchain. While Bitcoin was the first major blockchain application, the technology can support many other use cases, including supply chain tracking, digital identity systems, and compliance infrastructure.‍

3. What are the main types of blockchain networks?

‍Blockchain networks differ by access, governance, and participation models:

Public: Open to anyone to read, write, or validate
Private: Controlled by a single organization, with restricted access
Permissioned: Participation requires approval, and access rights are defined by role — can be public or private
Consortium: Governed by a group of pre-approved organizations

In regulated sectors, permissioned or consortium networks are often preferred to meet compliance, data governance, and privacy requirements.

4. Is blockchain fully anonymous?

‍Most public blockchains are pseudonymous — wallet addresses are visible, but not directly tied to real-world identities. However, transaction histories are permanently recorded and traceable. With blockchain intelligence tools like TRM Labs, investigators can analyze patterns, cluster related addresses, and, when supported by off-chain data, link activity to known entities.‍

5. What are the key scalability and energy trade-offs in blockchain systems?

‍Proof of Work networks — such as Bitcoin — consume substantial energy and have limited transaction throughput (typically around 5–10 transactions per second). Proof of Stake networks offer significantly lower energy usage and higher throughput. Additional scaling solutions, including Layer 2 networks, rollups, and data sampling techniques, improve transaction speed and cost-efficiency while maintaining on-chain auditability — a critical requirement for compliance and investigations.

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Last updated: December 4, 2025