Digital Money: How Cryptocurrency and Blockchain Work

Imagine you mow your neighbour's lawn and they hand you a piece of paper with '£10' written on it — but they drew it themselves. You would not accept it, because real money needs everyone to trust it and agree it is genuine. For centuries, governments and banks have been the 'trusted middlemen' who guarantee your money is real. But what if you could have money that nobody controls, yet everyone can trust? That is exactly the puzzle that cryptocurrency tries to solve.

**What is cryptocurrency?** Cryptocurrency is a type of digital money that exists only online — there are no physical coins or notes. The word comes from 'cryptography', which is the science of protecting information with secret codes. Bitcoin, created in 2009, was the first widely used cryptocurrency. Thousands of others, such as Ethereum, exist today. Unlike pounds or dollars, no single government or bank issues or controls cryptocurrency. Instead, the currency is managed by a shared computer network — thousands of computers around the world that all follow the same rules. **Why is trust still possible without a bank?** This is where blockchain comes in. A blockchain is a shared digital record book — called a ledger — that stores every transaction ever made with that cryptocurrency. The ledger is not kept on one computer; copies are held on thousands of computers simultaneously. This is called a distributed network. **How does a blockchain work?** Think of the blockchain as a chain of boxes, where each box is called a block. Each block contains: • A batch of recent transactions (e.g. 'Anika sent 0.5 Bitcoin to Carlos'). • A timestamp showing when those transactions were recorded. • A unique code called a hash — a kind of digital fingerprint generated by a mathematical formula. • The hash of the previous block in the chain. Linking each block to the one before it — via the previous block's hash — creates the 'chain'. If anyone tries to alter an old block, its hash changes, which breaks the link to every block after it. All the computers on the network would instantly detect the mismatch and reject the change. This makes the blockchain extremely difficult to tamper with. **How is a new block added?** Before a new block can join the chain, the computers on the network must agree it is valid. This agreement process is called a consensus mechanism. One common method is called Proof of Work, where computers race to solve a complex mathematical puzzle. The winner adds the new block and is rewarded with a small amount of cryptocurrency — a process nicknamed 'mining'. **Key security features summary:** 1. Decentralisation — no single point of control or failure. 2. Cryptographic hashing — any tampering is immediately visible. 3. Consensus — the majority of the network must agree before anything changes.