What is digital currency?
Digital currency is money that exists only in electronic form. There are no physical coins or notes to hold; balances are stored as data and moved between accounts over a network. Many everyday payments already use digital forms of ordinary money, but some currencies, such as cryptocurrencies, are digital by design and are not issued by any central bank.
A key challenge is trust. With physical cash you can see and hold the note. With digital currency the system must prove that the money is genuine and that the same unit has not been spent twice. Traditional systems solve this with a trusted central organisation, such as a bank, that keeps the master record of every balance.
Blockchain
Blockchain is a way of recording transactions without a single central authority. Transactions are grouped into blocks. Each block contains a list of transactions, a time stamp and a digital fingerprint (hash) of the previous block, which links the blocks together into a chain.
Key idea
Because each block stores the hash of the block before it, changing one old transaction would change every following block. The record is therefore tamper-evident: any alteration is easy to detect.
Copies of the blockchain are held on many computers in the network at the same time. To add a new block, the computers must agree that the transactions are valid. This shared checking removes the need to trust one single organisation and makes fraud very difficult.
Example
If Ali sends 5 units of a digital currency to Bina, the transaction is broadcast to the network, checked, and added to a new block. Every copy of the chain is updated, so anyone can confirm Bina now owns the units.
Remember
- Digital currency has no physical form.
- Blockchain is a shared, linked list of transaction blocks.
- Each block holds the previous block's hash, making the chain tamper-evident.