Digital Currency

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Notes

What is Digital Currency?

**Digital currency** exists only in digital form; there are no physical banknotes or coins.
Currency is stored in **digital wallets** or accounts and can be exchanged online for goods/services or international transfers.
Digital currency can be **centralised** (controlled by a single authority like a bank or government) or **decentralised** (no single authority, relies on a network of users).
**Cryptocurrency** is a type of digital currency; it can be highly **volatile**, making investment risky.
All cryptocurrency transactions are publicly available and tracked using **cryptography**.
Examples include **Bitcoin** and **Ethereum**.

Blockchain Fundamentals

A **blockchain** is a digital ledger that records every transaction made with a particular digital currency.
Transactions are **time-stamped** and added permanently and unalterably to the blockchain.
Blockchain is **decentralised** – every participant (node) has a copy of the ledger and can verify transactions independently.
The blockchain consists of **blocks** of transactions linked together in a **chain** using cryptographic algorithms.
Each block stores a **unique hash** and the **previous block's hash**, linking blocks together.
Changing any block invalidates every block after it, making tampering immediately detectable.

Transaction Verification

Each transaction must be **verified by multiple participants** (nodes) in the network.
Verification ensures the transaction is legitimate and prevents **fraudulent activity**.
Once verified, the transaction is added to a block and broadcast to the network.
Nodes compare their copies of the ledger to detect any inconsistencies or tampering.

Key Properties of Blockchain

**Security**: Cryptographic hashing and the chain structure make it tamper-proof.
**Transparency**: All transactions are publicly visible.
**Decentralisation**: No single point of control or failure.
**Immutability**: Once recorded, data cannot be altered without detection.

Blockchain structure showing linked blocks with hashes.

Practice questions

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1.What is digital currency?
Easy
- ACurrency that exists only in digital form
- BCurrency that is only used for online banking
- CCurrency that is backed by gold
- DCurrency that is printed by the government
2.Which of the following is a type of digital currency?
Easy
- ABitcoin
- BDollar
- CEuro
- DPound
3.What is a blockchain?
Easy
- AA digital ledger that records transactions
- BA type of digital wallet
- CA centralised database
- DA physical chain of blocks
4.Which of the following best describes a decentralised digital currency?
Medium
- AControlled by a single authority
- BNot controlled by any single authority
- CControlled by the government
- DControlled by a bank
5.How are transactions in a blockchain verified?
Medium
- ABy a single central authority
- BBy multiple participants in the network
- CBy the government
- DBy the user who made the transaction
6.What makes a blockchain tamper-proof?
Medium
- AEach block stores a unique hash and the previous block's hash
- BAll transactions are private
- CIt is controlled by a central authority
- DOnly one copy of the ledger exists
7.Why is cryptocurrency considered a risky investment?
Hard
- AIt is highly volatile
- BIt is backed by gold
- CIt is controlled by the government
- DIt cannot be exchanged online
8.What is the role of cryptography in cryptocurrency?
Hard
- ATo track transactions publicly
- BTo make transactions private
- CTo create physical coins
- DTo centralise control

More questions

9.Which of the following is an example of a centralised digital currency?
Medium
- ABitcoin
- BEthereum
- CDigital pound controlled by a central bank
- DLitecoin
10.What happens if a block in a blockchain is altered?
Hard
- AOnly that block is affected
- BAll subsequent blocks become invalid
- CThe blockchain becomes faster
- DThe transaction is reversed
11.What is stored in a digital wallet?
Easy
- APhysical coins
- BDigital currency
- CBanknotes
- DCredit cards
12.Which of the following is true about cryptocurrency transactions?
Medium
- AThey are private and anonymous
- BThey are publicly available and tracked
- CThey are reversible by the sender
- DThey are processed by a central bank
13.A new digital currency is developed that uses a centralised ledger. Which of the following is a likely characteristic of this currency?
Medium
- AAll transactions are verified by a network of users
- BA single authority controls the currency and its transactions
- CThe ledger is publicly available and cannot be altered
- DThe currency is not controlled by any single entity
14.Which of the following is an example of a cryptocurrency?
Easy
- ABitcoin
- BUS Dollar
- CGold
- DEuro
15.In a blockchain, each block contains a hash of the previous block. What is the primary purpose of this feature?
Hard
- ATo speed up transaction verification
- BTo ensure that blocks are added in chronological order and tampering is detectable
- CTo encrypt the transaction data within the block
- DTo reduce the size of the blockchain
16.A company is considering using a digital currency for international transactions. Which of the following is a potential advantage of using a decentralised cryptocurrency over a centralised digital currency?
Medium
- ATransactions are controlled by a single government, ensuring stability
- BTransactions can be verified without relying on a central authority
- CThe value of the currency is guaranteed to be stable
- DTransactions are private and cannot be seen by anyone
17.A blockchain contains the following blocks: Block 1 (hash: A1B2), Block 2 (previous hash: A1B2, own hash: C3D4), Block 3 (previous hash: C3D4, own hash: E5F6). If someone alters the data in Block 2, what will happen to the hashes?
Medium
- AOnly the hash of Block 2 will change
- BThe hashes of Block 2 and Block 3 will both change
- CThe hashes of all three blocks will remain the same
- DOnly the hash of Block 1 will change
18.A new cryptocurrency claims to be 'tamper-proof' because it uses a blockchain. Which of the following best explains why a blockchain is considered tamper-proof?
Hard
- AAll transactions are encrypted and cannot be read
- BThe blockchain is stored on a single secure server
- CAny change to a block would require recalculating all subsequent hashes, which is detectable by the network
- DTransactions are verified by a central authority before being added
19.Which of the following is a risk associated with investing in cryptocurrency?
Medium
- ACryptocurrencies are backed by governments, so they are always stable
- BThe value of cryptocurrencies can fluctuate rapidly
- CCryptocurrencies cannot be used for online transactions
- DCryptocurrencies are only used for illegal activities
20.Digital currency that is not controlled by any single authority is known as:
Easy
- ACentralised digital currency
- BDecentralised digital currency
- CFiat currency
- DDigital wallet
21.In a blockchain network, how are transactions typically verified?
Hard
- ABy a single central server
- BBy multiple participants in the network independently
- CBy the sender of the transaction only
- DBy the receiver of the transaction only
22.A company wants to create a digital currency that is controlled by the company itself. Which type of digital currency should they create?
Medium
- ADecentralised cryptocurrency
- BCentralised digital currency
- CBlockchain-based currency
- DPeer-to-peer currency
23.Which of the following is used to track all transactions made with a particular digital currency in a permanent and unalterable way?
Easy
- AA digital wallet
- BA blockchain
- CA central bank
- DA cryptocurrency exchange
24.In an experiment to compare transaction verification times between a centralised ledger and a decentralised blockchain, which variable would be the independent variable?
Medium
- AType of ledger (centralised vs decentralised)
- BTime taken to verify a transaction
- CNumber of transactions
- DAmount of currency transferred
25.A student claims that if a block in a blockchain is altered, only that block's hash changes. Is this claim correct?
Hard
- AYes, because each block only contains its own hash.
- BNo, because the next block's hash also changes since it stores the altered block's hash.
- CYes, because the previous block's hash remains unchanged.
- DNo, but only the block after the altered one is affected.
26.Which of the following is a practical method to verify that a blockchain ledger has not been tampered with?
Medium
- ACompare the ledger with a single central copy.
- BCheck that the hash of each block matches the hash stored in the next block.
- CEnsure all transactions are encrypted with the same key.
- DCount the total number of blocks.
27.What is the term for a digital currency that is not controlled by any single authority?
Easy
- ACentralised digital currency
- BDecentralised digital currency
- CCryptocurrency
- DDigital wallet
28.A company wants to create a digital currency that can be tracked permanently and transparently. Which technology should they use?
Medium
- ACentralised database
- BBlockchain
- CDigital wallet
- DEncryption algorithm
29.In a blockchain, each block contains a hash of the previous block. If Block A has hash 'X' and Block B stores previous hash 'X', what happens if Block A is altered?
Hard
- AOnly Block A's hash changes to a new value.
- BBlock A's hash changes, making Block B's stored previous hash invalid.
- CBoth Block A and Block B become invalid, but subsequent blocks are unaffected.
- DThe entire chain remains valid because hashes are recalculated automatically.
30.Which of the following best describes the role of cryptography in cryptocurrency?
Medium
- AIt creates physical coins.
- BIt secures transactions and controls the creation of new units.
- CIt centralises control of the currency.
- DIt allows users to remain anonymous to other users.
31.A blockchain network has 100 nodes. When a new block is added, how many nodes verify the transactions in that block?
Hard
- AOne central node
- BA majority of nodes (at least 51)
- CAll 100 nodes
- DOnly the node that created the block
32.In a blockchain, what is the purpose of linking blocks using cryptographic hashes?
Medium
- ATo make the blockchain faster
- BTo ensure that once a block is added, it cannot be altered without detection
- CTo allow anyone to edit previous blocks
- DTo store the currency itself
33.Which of the following is a characteristic of centralised digital currency?
Easy
- AIt is controlled by a single authority
- BIt is controlled by a network of users
- CIt is not controlled by any single authority
- DIt is anonymous and untraceable
34.In a blockchain, how are transactions verified?
Medium
- ABy multiple participants in the network
- BBy a single central authority
- CBy the transaction sender only
- DBy the digital wallet provider
35.Why is a blockchain considered tamper-proof?
Medium
- AChanging any block invalidates every block after it
- BBlocks are stored in a central location
- CTransactions are encrypted but can be altered
- DOnly the owner can change a block
36.What makes cryptocurrency investment risky?
Medium
- AIts value can fluctuate rapidly
- BIt is backed by governments
- CIt is always increasing in value
- DIt cannot be traded online
37.In a blockchain, each block contains a hash of the previous block. If a block is altered, what happens?
Hard
- AIts own hash changes, breaking the link with the next block
- BOnly the altered block's data changes, but the chain remains valid
- CThe previous block's hash is recalculated to match
- DThe alteration is automatically accepted by the network
38.A new digital currency uses a centralised ledger. Which of the following is true?
Hard
- AA single authority controls the ledger
- BAll participants have a copy of the ledger
- CTransactions are verified by multiple nodes
- DThe ledger is tamper-proof by design
39.A new digital currency, 'EcoCoin', is created. Its transactions are recorded on a blockchain that is stored on every user's computer. Which of the following best describes EcoCoin?
Medium
- ACentralised digital currency
- BDecentralised digital currency
- CCentralised cryptocurrency
- DDecentralised fiat currency
40.In a blockchain, block 1 has hash 'A1B2', block 2 stores previous hash 'A1B2' and its own hash 'C3D4', block 3 stores previous hash 'C3D4' and its own hash 'E5F6'. If a hacker alters block 1, which of the following will happen?
Hard
- AOnly block 1's hash changes
- BBlock 1's hash changes, and block 2's previous hash becomes invalid, but block 3 remains valid
- CBlock 1's hash changes, making block 2 and block 3 invalid
- DAll blocks become invalid, but the chain can be repaired by recalculating hashes

Slides

What is Digital Currency?

Digital currency exists only in digital form, with no physical banknotes or coins.
It is stored in digital wallets and can be exchanged online for goods, services, or international transfers.
Digital currency can be centralised (controlled by a single authority) or decentralised (no single controller).

Which of the following best describes digital currency?

Physical coins and notes stored in a bank vault
Currency that exists only in digital form, with no physical equivalent
Any currency that can be used online
A type of currency that is always decentralised

Cryptocurrency and Volatility

Cryptocurrency is a type of digital currency that uses cryptography to secure transactions.
Cryptocurrencies can be highly volatile, meaning their value can change rapidly.
Examples include Bitcoin and Ethereum.

Which of these are true about cryptocurrency?

Cryptocurrency is a type of digital currency.
Cryptocurrency values are always stable.
Bitcoin and Ethereum are examples of cryptocurrencies.
All digital currencies are cryptocurrencies.

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 permanently and unalterably.
It is a decentralised technology: every participant has a copy of the ledger and can verify transactions independently.

What is a blockchain?

A centralised database controlled by a bank
A digital ledger that records transactions in a permanent and unalterable way
A type of cryptocurrency
A digital wallet for storing currency

How a Blockchain Works

The blockchain is made up of 'blocks' of transactions linked in a 'chain' using cryptographic algorithms.
Each block stores a unique hash and the previous block's hash, linking them together.
Changing any block invalidates every block after it, making tampering detectable.

In a blockchain, each block stores a unique ____ and the previous block's ____.

Transaction Verification

Each transaction in the blockchain must be verified by multiple participants (nodes) in the network.
This verification ensures the transaction is legitimate and prevents fraud.
Because every node has a copy of the ledger, any tampering is immediately detectable.

How are transactions verified in a blockchain?

By a central authority like a bank
By multiple participants (nodes) in the network
By the person who created the cryptocurrency
By a single government regulator

Key Features of Blockchain

Decentralised: no single entity controls it.
Transparent: all transactions are publicly available.
Secure: cryptographic algorithms make it tamper-proof.
Permanent: once added, transactions cannot be altered.

Which of these are features of a blockchain?

It is controlled by a central bank.
Transactions are permanent and unalterable.
All participants have a copy of the ledger.
Transactions are private and not publicly visible.

Digital Currency vs Cryptocurrency (Exam Tip)

In the IGCSE exam, 'digital currency' and 'cryptocurrency' are treated as the same thing.
In real life, not all digital currencies are cryptocurrencies (e.g., central bank digital currencies).
For the exam, you can use the terms interchangeably.

According to the IGCSE exam, how should you treat 'digital currency' and 'cryptocurrency'?

They are completely different concepts.
They are the same thing.
Cryptocurrency is a subset of digital currency.
Digital currency is a subset of cryptocurrency.

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