Chapter 5 The Internet And Its Uses: Unit 5.2: Digital Currency

Question 1

Define digital currency

Answer 1

Exists only in digital format
Relies on a central banking system
Way to pay for goods and services online

Question 2

What is the problem with centralisation?

Answer 2

Maintaining confidentiality and security

Question 3

Describe cryptocurrency

Answer 3

Uses cryptography to track transactions
Traditional digital currencies are regulated by central banks, however cryptocurrency has no state control and all the rules are set by the cryptocurrency community itself
Unlike existing digital currencies, cryptocurrency transactions are publicly available, therefore all transactions can be tracked
The cryptocurrency system works by being within a blockchain network which means it is more secure

Question 4

Describe blockchaining

Answer 4

Decentralised database
All transactions of networked members are stored on the database
Not connected to a central server
All transaction data is stored on all computers in the blockchain network
Transactions cannot be changed without the consent of all network members
Used in:
Cryptocurrency exchanges
Smart contacts
Research
Politics
Education

Question 5

How does blockchaining work?

Answer 5

Whenever a new transaction takes place a new block is created. This block contains data (eg. name of sender and recipient, amount of money), a hash value (unique value generated by an algorithm which acts as a fingerprint), and the previous hash value of the previous block

All blocks are connected by their hash values and previous hash values.
The first block is called the genesis block, as it does not point towards another block.
Fast recreation of blockchains are prevented by proof-of-work, which ensures that a specific time (10 min) is taken for each block before it is added to the chain.