5.2.2 DIGITAL CURRENCY

Topics from the Cambridge IGCSE (9-1) Computer Science 0984 syllabus 2023 - 2025

OBJECTIVES​
5.2.2 Understand the process of blockchain and how it is used to track digital currency transactions
Blockchain, in its basic form, is a digital ledger, that is a time-stamped series of records that cannot be altered.

ALSO IN THIS TOPIC
5.1.1 - 5.1.3 THE INTERNET AND THE WWW
5.1.4 WEB BROWSERS
5.1.5 WEB PROTOCOLS
5.1.6 COOKIES AND SESSIONS
YOU ARE HERE | 5.2.1 - 5.2.2 DIGITAL CURRENCY
 5.3.1 CYBER SECURITY
5.3.2 KEEPING DATA SAFE
TOPIC 5 REVISION CARDS
TOPIC 5 KEY TERMINOLOGY (CIE)
TOPIC 5 ANSWERS
TOPIC 5 TEACHER RESOURCES

DIGITAL CURRENCY

5.2.2 BLOCKCHAIN

​Blockchain is a digital ledger technology that is used to track and record transactions in a decentralized and distributed way. It is the underlying technology behind digital currencies such as Bitcoin.

The process of blockchain involves creating blocks of transactions, which are then added to a chain of blocks (hence the name "blockchain"). Each block contains a number of transactions, as well as a unique code called a "hash" that links it to the previous block in the chain. This creates a secure and unchangeable record of all transactions that have taken place on the blockchain.

In order for a new block to be added to the blockchain, a consensus mechanism is used to ensure that all participants in the network agree on the contents of the block. This process is called "mining" and it is carried out by special nodes on the network called "miners." Miners use complex mathematical algorithms to solve a cryptographic puzzle, and the first miner to solve the puzzle is rewarded with a small amount of digital currency.

Once a new block is added to the blockchain, it is replicated across the entire network, making it virtually impossible to alter or delete any of the transactions recorded in the blockchain. This makes blockchain technology highly secure and resistant to fraud or hacking.

In the case of digital currency transactions, each transaction is recorded as a block on the blockchain. The sender's digital wallet sends the transaction to the network and the transaction is verified by the miners. Once the transaction is verified, it is added to the blockchain and recorded in the next block. The new transaction is then replicated to all the nodes in the network, and the sender's and receiver's digital wallets are updated accordingly.

In summary, blockchain is a digital ledger technology that is used to track and record transactions in a decentralized and distributed way. It creates a secure and unchangeable record of all transactions by creating blocks of transactions and adding them to a chain of blocks, using a consensus mechanism called mining, which ensures all the nodes in the network are in agreement, making it virtually impossible to alter or delete any of the transactions recorded in the blockchain. This makes it useful for digital currency transactions where it keeps a record of the sender, receiver and the amount sent with a unique code called a hash.

DECENTRALISED

​Decentralization refers to the distribution of power, decision-making authority, and responsibilities away from a central authority or entity. In a decentralized system, power is distributed among multiple entities, rather than being concentrated in the hands of a single entity. This can be contrasted with a centralized system, in which power and decision-making are held by a single entity or group.

In the context of blockchain technology, decentralization refers to the distribution of the network and its nodes across multiple locations and participants, rather than being controlled by a single entity. This means that no single person or organization has control over the network or the information stored on it, and all participants have equal access to the information and can validate transactions. This eliminates the need for intermediaries or trusted third parties and creates a more secure, transparent and equitable system.

A decentralized system is more resilient to failures and attacks because there is no single point of control or vulnerability. It also provides greater privacy and security, as personal information is not held by a single entity that could potentially be hacked or misused. Additionally, because there is no central authority, it can be more difficult for governments or other organizations to regulate or control the system, providing greater freedom and autonomy to users.

A LEDGER

​​A ledger is a systematic and comprehensive record of financial transactions or other data that is maintained in a secure and organized manner. Ledgers are used to keep track of a variety of information, including financial transactions, legal documents, medical records, and many others. The information stored in a ledger is usually organized into rows and columns, and can be searched, sorted, and analyzed as needed.

In the context of blockchain technology, a ledger refers to a decentralized and distributed database that records transactions in a secure, transparent, and permanent way. The ledger is maintained by multiple participants in the network, rather than by a single central authority, and is designed to provide a secure and trustworthy record of all transactions that take place on the network. Each block in the chain contains information about recent transactions, and once a block is filled, it is added to the chain, forming a permanent record that is extremely difficult to alter.

The use of a ledger in blockchain technology provides several advantages, including increased transparency, security, and efficiency. Transactions are recorded in a secure and tamper-proof manner, and the decentralized nature of the ledger ensures that there is no single point of control or vulnerability. Additionally, the use of a ledger in blockchain technology can reduce the need for intermediaries and increase trust in transactions, as all participants can validate transactions and view the history of the ledger.

A BLOCK

​In the context of blockchain technology, a block refers to a unit of data that contains information about recent transactions. Each block in a blockchain is linked to the previous block, forming a chain of blocks that make up the entire ledger. This makes it possible to create a permanent, secure, and transparent record of all transactions that take place on the network.

A block typically contains several pieces of information, including a unique block header that identifies the block, a list of transactions that have taken place since the last block, and a cryptographic hash that links the block to the previous block in the chain. The hash is created using complex mathematical algorithms and ensures the integrity and security of the blockchain, as any attempt to alter the contents of a block will result in a change to the hash, making it immediately apparent that the block has been tampered with.

The blocks in a blockchain are typically created by nodes in the network through a process known as mining or validation, in which they compete to validate the transactions in a block and add it to the chain. Once a block is added to the chain, its contents cannot be altered, providing a secure and transparent record of all transactions that have taken place on the network. The use of blocks in a blockchain enables the network to maintain a complete and accurate record of all transactions, even as new transactions are added over time.

BLOCKCHAIN ADVANTAGES AND DISADVANTAGES

Advantages of blockchain technology include:

• Security: Blockchain uses cryptographic algorithms to secure transactions, making it difficult for anyone to alter the information stored on the network. This makes it an ideal solution for applications that require secure record-keeping.
• Transparency: All transactions on a blockchain are visible to everyone on the network, providing a level of transparency that is not possible with traditional centralized systems.
• Decentralization: Blockchain eliminates the need for intermediaries and trusted third parties, as all participants in the network have equal access to the information and can validate transactions.
• Immutability: Once a block is added to the blockchain, its contents cannot be altered, providing a permanent and tamper-proof record of all transactions.
• Increased efficiency: Transactions on a blockchain are processed much faster than traditional systems, as there is no need for intermediaries to validate transactions.

However, there are also some disadvantages to consider, including:

• Scalability: As the number of transactions on a blockchain increases, the network can become slower and more congested, leading to scalability issues.
• Lack of regulation: Because blockchain is decentralized and operates outside the control of governments and other organizations, it can be more difficult to regulate and enforce laws and regulations.
• Technical complexity: Implementing and using blockchain technology can be complex and requires a certain level of technical expertise.
• Initial setup costs: Creating a blockchain network can be expensive and time-consuming, requiring significant investment in technology, resources, and expertise.
• Limited use cases: While blockchain has the potential to transform many industries and processes, it is not suitable for all applications and may not be the best solution for every use case.

Blockchain technology offers several benefits, including increased security, transparency, and efficiency. However, it is not a perfect solution and must be carefully considered and evaluated in the context of each individual use case, taking into account its limitations and drawbacks as well as its benefits

BLOCKCHAIN USES

There are several current and potential uses of blockchain technology, including:

• Cryptocurrencies: One of the most well-known uses of blockchain technology is as the underlying technology for cryptocurrencies such as Bitcoin.
• Supply chain management: Blockchain can be used to track the movement of goods and materials through the supply chain, providing greater transparency and accountability.
• Digital identity: Blockchain can be used to create secure and decentralized digital identities, allowing individuals to control their personal information and giving them more control over how it is used.
• Healthcare: Blockchain can be used to securely store and manage sensitive medical information, such as patient records and test results.
• Voting: Blockchain can be used to create secure and transparent voting systems, reducing the risk of fraud and ensuring the accuracy of election results.
• Real estate: Blockchain can be used to securely store and manage property records, streamlining the property transfer process and reducing the risk of fraud.
• Finance: Blockchain can be used to securely store and transfer financial assets, such as stocks, bonds, and other securities.
• Internet of Things (IoT): Blockchain can be used to securely manage and track the large amounts of data generated by IoT devices, providing greater transparency and accountability.

As the technology continues to evolve, it is likely that new and innovative uses will emerge, further expanding the impact of blockchain on a variety of industries and processes.

SUMMARY

Blockchain is a decentralized digital ledger technology used to securely record transactions. It structures data in blocks, each containing transaction details and a unique "hash" code that links it to the previous block, forming an immutable "chain." This setup ensures data security, as altering a block would disrupt the entire chain. Blockchain operates through a consensus mechanism, where "miners" solve cryptographic puzzles to validate and add new blocks. This system underpins digital currencies like Bitcoin.

Key Features:

• Decentralization: Power is distributed across network participants, enhancing security and transparency.
• Ledger: A distributed and secure record of transactions without a central authority.
• Block Structure: Blocks include transaction data and hashes, ensuring data integrity.

Advantages:

• Enhanced security, transparency, and efficiency.
• Decentralized, eliminating the need for intermediaries.
• Immutable records that cannot be altered.

Challenges:

• Scalability issues, lack of regulation, technical complexity, and high setup costs.

Applications:

• Cryptocurrencies, supply chain management, digital identity, healthcare, voting, real estate, finance, and IoT.

​Blockchain continues to innovate, finding applications across various industries where security, transparency, and efficiency are crucial.

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DIGITAL CURRENCY COACH

Class Activity: Investigating Cryptocurrencies through AI-Driven Trading Simulation (3 Lessons)

Objective
The purpose of this activity is to give students a hands-on experience in cryptocurrency trading by utilizing Artificial Intelligence (AI) for making trading decisions. This project is designed to be educational and is NOT financial advice.

Duration
1 Week/3 lessons (Three 50-minute class sessions)

Required Materials
A computer with internet access for each student
Practice accounts on a simulated cryptocurrency trading platform (e.g., TradingView Paper Trading, Niffler.co, or Investopedia Simulator)
AI trading software or toolkits (e.g., Backtrader, AlgoTrader, or AI plugins on trading platforms)
Spreadsheet software (Google Sheets or Microsoft Excel)

Day 1: Introduction and Setup (50 minutes)

• Introduction to Cryptocurrency (10 mins)
• Briefly discuss what cryptocurrencies are and their significance in financial markets.
• Introduction to AI in Trading (10 mins)
• Discuss how AI algorithms can be used in trading for predictive analysis.
• Platform Setup (20 mins)

SETUP

• Setting up a practice account on a free trading simulation platform. (e.g., TradingView Paper Trading, Niffler.co, or Investopedia Simulator)
• Review AI tools available for trading on the platform. (e.g., Backtrader, AlgoTrader, or AI plugins on trading platforms)

Day 2: AI Trading & Documentation (50 minutes)

• Initiate AI Trades (20 mins)
• Students initiate trades in their practice accounts based on AI recommendations.
• Documentation (20 mins)

Document the AI's trading suggestions, reasons provided by the AI, and the outcomes. This will be noted in a spreadsheet.
Group Discussion (10 mins) to briefly sharing of initial observations and thoughts.

Day 3: Analysis & Conclusion (50 minutes)

• Conclude Trading (10 mins)
• Stop all trading activities and prepare their records for analysis.
• Data Analysis (20 mins)

Analyse the outcomes, document the effectiveness of the AI suggestions, and look for patterns.
Class Discussion (15 mins) Discuss the results, effectiveness, and ethical considerations of using AI in trading.
Wrap-up (5 mins) Summary of what was learned and how it applies to real-world scenarios.

Assessment
30% Participation and engagement in the activity
40% Quality of documentation (detail, accuracy, completeness)
30% Analysis of AI recommendations and trading outcomes

Deliverables
A spreadsheet containing all trade data, AI suggestions, and outcomes.
A one-page summary analysis discussing what was learned from the activity.

Note
Remember that this project is for educational purposes only and should not be considered as financial advice. And students should not trade with real money.

Enjoy the activity and happy trading!

ALSO IN THIS TOPIC

5.1.1 - 5.1.3 THE INTERNET AND THE WWW
5.1.4 WEB BROWSERS
5.1.5 WEB PROTOCOLS
5.1.6 COOKIES AND SESSIONS
5.2.1 - 5.2.2 DIGITAL CURRENCY
5.3.1 CYBER SECURITY
5.3.2 KEEPING DATA SAFE
TOPIC 5 REVISION CARDS
TOPIC 5 KEY TERMINOLOGY (CIE)
TOPIC 5 ANSWERS
TOPIC 5 TEACHER RESOURCES