Digital Currency (Cambridge International IGCSE Computer Science)

Spec point — 5.2.1 · "1 Understand the concept of a digital currency and how digital currencies are used"

Digital Currency

What is digital currency?

• Digital currency is one that only exists in digital form

• Currency is stored in digital wallets or accounts; there are no physical banknotes or coins

• It can be exchanged online to pay for goods and services or to transfer money internationally

• Digital currency can be either centralised or decentralised

  • Centralised digital currency is controlled by a single authority, such as a bank or government
  • Decentralised digital currency is not controlled by any single authority; it relies on a network of users instead

• Cryptocurrency is a type of digital currency

• Cryptocurrencies can be highly volatile, meaning their value can fluctuate rapidly in a short period of time

• This makes cryptocurrency investment risky

• All transactions made using cryptocurrency are publicly available and tracked using cryptography

• Examples include

  • Bitcoin
  • Ethereum

Exam Hint In the IGCSE exam digital currency and crypto currency are the same thing, although in real life they are not strictly the same thing.

Blockchain

Spec point — 5.2.2 · "2 Understand the process of blockchain and how it is used to track digital currency transactions"

Blockchain

What is a blockchain?

• A blockchain is a digital ledger that records every transaction made with a particular digital currency

• Transactions are time-stamped and added to the blockchain in a permanent and unalterable way

• A blockchain is a decentralised technology, meaning that it is not controlled by a single entity or authority

  • Instead, every participant in the network has a copy of the ledger and can verify the transactions independently

• The blockchain is made up of "blocks" of transactions that are linked together in a "chain" using cryptographic algorithms

  • This creates a secure and tamper-proof record of every transaction made with the digital currency
  • Each block stores a unique hash and the previous block's hash, which is how blocks link together
  • Changing any block invalidates every block after it, so any tampering is immediately detectable when nodes compare their copies of the ledger

• Each transaction in the blockchain must be verified by multiple participants in the network

  • This verification process ensures that the transaction is legitimate and prevents any fraudulent activity