Study Notes: Digital Currency (0478 Computer Science)
Hello IGCSE Computer Scientists! In this chapter, we step into the exciting, modern world of digital money. You will learn about digital currency, which is essentially money that exists only on the internet, and the powerful technology called Blockchain that keeps it secure and trustworthy.
This topic connects directly to our study of the internet because digital currencies rely entirely on distributed networks to operate, making it a crucial part of "The internet and its uses" section. Let's dive in!
5.2.1 Understanding Digital Currency
A digital currency (sometimes called cryptocurrency, though the syllabus uses the broader term) is a form of money or asset that only exists electronically.
Think of it this way: When you use a debit card, you are using digital money, but that money is ultimately controlled by a central bank or financial institution (like your standard bank account balance). A true digital currency, like Bitcoin, is usually decentralised, meaning no single bank or government controls it.
Key Concept: What defines a Digital Currency?
- It exists only electronically; there are no physical coins or notes.
- It uses computers and the internet for its existence and transfer.
- It aims to transfer value securely between users, often without needing traditional banks.
How Digital Currencies are Used
Digital currencies are primarily used for:
- Transactions: Buying goods and services online, or sending money to another person globally.
- Investment/Storing Value: Users hold the currency hoping its value will increase.
- Tracking Ownership: They record who owns what, using a shared digital record.
Quick Review: A digital currency is electronic-only money used for transactions and storing value.
5.2.2 The Process of Blockchain
Digital currencies need a secure way to ensure that the money is not spent twice and that transactions are accurately recorded. This is where Blockchain comes in.
What is Blockchain?
The syllabus defines a Blockchain as a digital ledger.
- A ledger is simply a book or record where financial transactions are permanently stored.
- The "digital" part means it is stored across many computers on a network, not in one place.
Crucially, the Blockchain is a time-stamped series of records that cannot be altered. This property is what makes digital currency transactions trustworthy.
Analogy Alert! The Public Journal
Imagine a standard bank uses a private diary (a central server) to record your transactions. If someone hacked the bank, they could easily change the entry.
A Blockchain is like a massive, public journal held by thousands of people globally. Every time a transaction happens, it's written on a new page (a Block), dated (time-stamped), and then securely stapled to the previous pages (the Chain). If one person tries to secretly edit a page, the other thousands of people holding the journal immediately see the mismatch, making the edit impossible.
Breaking Down the Components
The name "Blockchain" explains itself:
- Block: A collection of new transaction data. Once enough transactions occur, they are bundled together into a new block.
- Chain: Blocks are linked together sequentially and chronologically using complex mathematics (a cryptographic hash). This link ensures that if you change one block, the link breaks, proving tampering has occurred.
How Blockchain Tracks Digital Currency Transactions
Tracking digital currency (like confirming who sent money to whom) happens through a secure, multi-step process:
Step-by-Step: Adding a Record to the Ledger
- Transaction Request: A user requests a transaction (e.g., Alice wants to send 5 units of currency to Bob).
- Verification and Grouping: The request is broadcast to a network of computers. These computers (called 'nodes') verify that Alice actually owns the 5 units she wants to send. Many verified transactions are grouped together to form a new Block.
- Time-Stamping and Sealing the Block: The block is permanently marked with the current time and date (time-stamped). A unique digital code (a cryptographic key/hash) is calculated for this block, which links it securely to the last block in the chain.
- Distribution of the Ledger: The newly secured block is then added to the existing Chain. Every computer on the network receives a copy of this updated ledger.
- The Record is Final: Once the block is added, it cannot be altered. Because the block is linked to the previous one using a unique code, changing any detail in the new block would require recalculating the codes for every single block that came after it across the entire network—a practically impossible task.
Did you know? (Accessibility Tip)
The core requirement that the record cannot be altered is the single most important function of the Blockchain for tracking currency. It guarantees trust without needing a central authority like a bank!
Key Takeaway: Blockchain is a distributed, time-stamped digital ledger that links transaction blocks securely. This process ensures the records are immutable (cannot be changed), providing a trustworthy system for tracking digital currency ownership.