5.2 Digital Currencies Flashcards
What is a digital currency?
A currency that exists purely in a digital form
It has no physical form unlike a fiat currency e.g. £, $
What is cryptocurrency?
A form of digital currency that uses a chain of decentralised computers to control and monitor transactions
Describe the main features of a cryptocurrency?
- Cryptocurrency is a form of digital currency
- It is decentralised (has no central bank)
- It uses cryptography to track transactions
- All transactions are publically available and can be tracked
- A secure blockchain network is used
- Sending and receiving digital currency is anonymous (no central bank verifying the identity of users)
What is meany by decentralisation when talking about cryptocurrency?
- Transactions are tracked by an open network that no single person owns
- Most transactions take place on ‘nodes’, which are essentially computers spread around the world.
- The nodes verify transactions and make a note of these transactions on an open, decentralised record known as the blockchain
What are some advantages of cryptocurrencies?
- Increased security
- Anonymous
- Cannot be manipulated by large organisations
- Increased speed and efficiency transferring moneyNo ‘middle man’ taking a cut of transactions
- Anyone can access digital currency
What are some disadvantages of cryptocurrencies?
- Uses a lot of resources to compute the hashes required
- Some digital currencies are not accepted widely
- Not a traditional bank – users who are not tech savvy may find it difficult
- Investors have turned digital currency into a commodity
- Value tends to fluctuate over short and long term
Sending and receiving digital currency requires …
…a digital wallet from which to send money and a wallet address to send it to
Explain the process of sending a digital currency as payment
- Sign up to a digital currency exchange e.g. Coinbase
- Purchase digital currency using traditional currency
- Once purchased, it resides in the user’s own digital wallet (which has a unique address)
- Digital currency can then be sent to another digital wallet using that wallets unique address
What is cryptography?
The protection of data/information by use of coding; it usually involves encryption and decryption
What is the blockchain?
- A decentralised database (digital ledger)
- Consists of a number of interconnected computers (nodes) ….
- … which are not connected to a central server
- All transactions of members are stored on the blockchain
Explain why transactions stored on the blockchain are secure?
Each transaction is stored on all nodes in the blockchain network
…which means transactions cannot be changed without the consent of all members
… which removes the risk of hacking
Describe the process of blockchain in digital currency
It acts as a ledger
… by tracking each transaction
It keeps a series of time-stamped records
… that cannot be altered
What is meant by a blockchain timestamp?
A digital record of the date and time that a data block is created in blockchain networks
When a new transaction takes place a new block is created and added to a chain of transactions blocks. What is contained in each block?
- Hash Total(Value) - a unique id for the block created using the previous blocks hash and the data of this block
- Previous Hash Value - a reference to the previous block in the chain
- Timestamp (date and time of the transaction)
- Sender ID (unique wallet address)
- Receiver ID (unique wallet address)
- Amount sent
Explain how blocks are added to the blockchain?
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```* A new block is added and its hash is calculated from its own data and the previous block’s hash.
* A copy of the new block is sent to all nodes on the blockchain network.
* Each node calculates the hash of the new block to verify it. If there is a majority consensus, the new block is accepted and added to the blockchain.
* If there is no consensus, the new block is rejected and removed from the block chain.
