Digital currency

Computer Science · The internet and its uses. The idea in plain words, the rules to remember, the mistake to avoid and a worked example, written and checked by Mega Lecture.

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The idea

A digital currency is money that only exists electronically. There are no coins or notes. It is held in a digital wallet and is used to pay for goods and services by transferring an amount electronically from one wallet to another.

Many digital currencies are decentralised: no central bank or single authority controls them. To keep track of who owns what, they use a blockchain. This is a digital ledger, a time-stamped series of records that cannot be altered.

Each new set of transactions is put into a block, and the block is added to the end of the chain. Many computers hold a copy of the whole ledger, so every transaction can be tracked and checked.

Rules to remember

Digital currency: money with no physical form, held and transferred electronically.
Blockchain: a digital ledger, which is a time-stamped series of records that cannot be altered.
A block holds the transaction data, a time stamp, its own hash value and the hash value of the previous block.
The stored hash of the previous block is what links the blocks into a chain.
If the data in a block is changed, its hash changes and no longer matches the hash stored in the next block, so the change is detected.
Decentralised: copies of the ledger are held by many computers, not by one central authority.

Common mistake

Students often say that digital currency payments leave no record. The opposite is true: every transaction is recorded in the blockchain and can be tracked.

Worked example

Sara pays Omar 3 units of a digital currency. Later she tries to pay the same 3 units to a shop. Why does the second payment fail?

The payment to Omar is checked and placed in a block with a time stamp.
The block is added to the blockchain, and every computer that holds the ledger updates its copy.
When Sara tries to pay the shop, the ledger shows that she has already transferred those 3 units.
She cannot alter the earlier record, because that would change the hash of its block and be detected.

Answer: The blockchain already records that the 3 units went to Omar, so the same units cannot be spent twice.

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