Digital Currency and Blockchain

Digital currency is money represented electronically rather than as physical notes and coins. A cryptocurrency is a kind of digital currency that uses cryptographic techniques to support transactions. Do not assume every electronic payment or bank balance uses a blockchain.

A shared transaction record

A blockchain stores records in blocks linked in order. Each block includes a reference based on the previous block's data. Copies of the ledger can be held on multiple computers. The network follows rules for agreeing which new records to accept.

Changing an earlier record changes its derived link and conflicts with later links and other copies. This makes unnoticed alteration difficult; it does not mean every transaction is honest or every cryptocurrency has a stable value. The ledger records transfers; it does not by itself verify a seller's promise to deliver a product.

Worked example

A buyer transfers digital tokens to a seller. Computers verify the transaction under the network's rules and include it in the ledger. Other participants can check that accepted record. If someone alters an old transfer in one copy, its links and the agreed copies no longer match.

Evaluate the choice

Electronic transfers can be convenient and shared verification can avoid relying on a single ledger keeper. Risks include lost credentials, scams, price changes and the difficulty of reversing a mistaken transfer. A distributed ledger is not the same thing as anonymous or risk-free payment.

Independent explanation

A seller says “our payment is on a blockchain, therefore the goods are guaranteed”. Explain the difference between recording a payment and proving that the goods will arrive.