Unit 5.2 - digital currency

Question 1

What is digital currency + demand/value?

Answer 1

Any money-like asset that only exists in a digital/electronic form. There is a limited supply (defined by creators of cryptocurrency) so increase in demand increases value. Some are centralized (rely on central banking system) while others are decentralized.

Question 2

What are the pros & cons of digital currency?

Answer 2

+ anonymous, anyone can access digital currency, instant payments, no transaction costs, can’t be lost/torn, transparent transactions due to public record
- uses a lot of resources & energy, some are not widely accepted, quickly fluctuating value, susceptible to hacking

Question 3

What is cryptocurrency?

Answer 3

A decentralized, digital currency like Bitcoin, Ethereum, etc. It uses cryptographs to secure, verify and track transactions and to control the rate at which new cryptocurrency units are mined (created). When cryptocurrency funds are transferred, the transaction is recorded in a public ledger which can be verified by other users. Wallet addresses are needed to send/receive cryptocurrency.

Question 4

What is a blockchain?

Answer 4

Technology which supports cryptocurrencies by acting as a ledger (log/record of financial history) for them. When a new transaction happens, a piece of data called a block is added to the blockchain; each connecting block is chronologically linked to one another, providing a reliable record of events. Previous records cannot be deleted or changed without changing all following records.

Question 5

What does each block on the blockchain contain?

Answer 5

1. Data (transaction info, including receiver & sender wallet address, amount sent, etc.)
2. Unique hash (created from data and previous hash)
3. Hash of previous block
4. Block number (it’s position in a chain)
5. Timestamp (when it was created)

Question 6

What is proof of work/stake?

Answer 6

A process/consensus mechanism used to verify and add new blocks to the blockchain, which also protects previous blocks from being altered by making tampering computationally difficult or economically risky. Proof of work has computers competing to solve difficult puzzles to add new blocks & earn prizes (lots of energy used, slower, more secure) while proof of stake requires validators to put down cryptocurrency as collateral to be allowed to approve transactions .

Question 7

What is P2P verification & 1 pros 1 con?

Answer 7

Peer to Peer verification. Any change to the blockchain must be verified by most users in the network to ensure it is valid.
+ decentralized - not 1 person in charge
- time consuming

Question 8

What happens when a new block is added?

Answer 8

1. Its hash is calculated
2. Copy of the new block is sent to all users on the network to verify if hash is correct
3. If there is a majority consensus, it is added to the blockchain
4. If there is no consensus, it is rejected and removed from the blockchain