Some money has no notes or coins at all: it exists only as data. To trust it, everyone needs a record of who paid whom that nobody can secretly change. That record is a blockchain.
A digital currency is one that only exists electronically: there are no physical notes or coins. It is used to pay for goods and services and to transfer money between people over the internet. Many digital currencies (cryptocurrencies) track every transaction with a blockchain: a digital ledger, that is a time-stamped series of records that cannot be altered. Each block stores its transactions, a timestamp, its own hash and the hash of the previous block, and copies of the chain are held by every computer in the network.
Fig. 1: each block is linked to the one before by storing that block's hash
Section 01
Digital currency.
You may already pay by card or phone, but a digital currency goes further: the money itself is only ever data.
Only electronic: a digital currency has no physical form; it exists only as records held on computers.
How it is used: to buy goods and services online or in shops that accept it, and to send money directly to another person, anywhere in the world, over the internet.
Digital wallet: users hold their currency in a digital wallet, an app or program that stores the keys needed to spend it.
Cryptocurrency: a digital currency, such as Bitcoin, that uses cryptography and is not controlled by a central bank; its transactions are recorded on a blockchain instead.
Examiner trap
Do not describe a digital currency as "money paid with a bank card". The key point is that the currency only exists electronically.
Section 02
How a blockchain works.
In the lab, look at the chain of blocks and their hashes. Then edit an old transaction and watch what happens to every block after it.
Block: each block holds a group of transactions (who paid whom, how much), a timestamp, its own hash and the hash of the previous block.
Hash: a value calculated from all the data in a block. If any of the data changes, the hash changes.
Chain: because each block stores the previous block's hash, the blocks are linked in time order back to the very first block.
Distributed ledger: every computer (node) in the network holds a copy of the whole blockchain, so there is no single central copy to attack.
Stage 1 · Learn
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What is a digital currency?
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In the lab, what happens when you edit a transaction in an early block?
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What does each block in a blockchain store?
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Who holds a copy of the blockchain?
Section 03
Why it cannot be altered.
The syllabus describes a blockchain as records that cannot be altered. This is how a new transaction is added and why a change is detected.
1. A new transaction is requested, e.g. A sends 2 units to B.
2. It is broadcast to the computers in the network, which check it is valid (for example, that A has 2 units to send).
3. Valid transactions are put into a new block with a timestamp and the hash of the last block in the chain.
4. The new block is added to the end of every copy of the chain. The transaction is complete and is now a permanent record.
Tampering: if someone edits an old block, its hash changes, so it no longer matches the "previous hash" stored in the next block. The chain is broken, and the altered copy also disagrees with all the other copies, so the change is rejected.
Worked example Tracing a change
Block 1 has hash 7a3f and Block 2 stores previous hash 7a3f. A criminal changes the amount in Block 1. Explain what happens.
The data in Block 1 has changed, so its hash is recalculated and is no longer 7a3f.
Block 2 still stores previous hash 7a3f, which no longer matches Block 1.
The link is broken, so every block after Block 1 becomes invalid, and the copy no longer matches the copies held by the other computers.
Answer: The change is detected and rejected; the ledger cannot be altered unnoticed.
Examiner trap
Blockchain does not stop transactions being made, and it is not encryption of the money. It makes the record of transactions tamper-evident and permanent.
Stage 2 · Exam
Exam-style questions
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Which best describes a blockchain?
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Why can a past transaction in a blockchain not be changed without detection?
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What is a blockchain used for in a digital currency?
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What is a hash in a blockchain?
Skill unlocked
Digital currency and blockchain, mastered.
This skill is now recorded on your profile. Keep the chain going.