With the advent of blockchain-based cryptocurrency systems utilizing these same principles of public record-keeping and verification, the use of public ledgers has skyrocketed in the cryptocurrency industry.
This article delves into the functioning of cryptocurrency public ledgers and the challenges they face.
What is a Cryptocurrency Public Ledger?
A cryptocurrency public ledger is a digital, public record of all cryptocurrency transactions. The ledger is constantly growing as “completed” blocks are added to it with a new set of transactions. Each block contains a cryptographic hash of the previous block, a timestamp, and transaction data.
The decentralized nature of the blockchain makes it secure and transparent. Transactions are verified by network nodes through cryptography and recorded in a public ledger that is accessible to anyone on the network.
This decentralized system eliminates the need for a central authority to oversee transactions and ensures that no single entity can control or manipulate the ledger. This makes cryptocurrency transactions secure and transparent, as all parties involved in a transaction can view the details on the public ledger.
Cryptocurrency public ledgers are commonly used for a variety of applications beyond just financial transactions. These applications include digital identity management, smart contracts, and digital voting.
How Does a Cryptocurrency Public Ledger Work
The public ledger serves as a record-keeping system, providing secure and anonymous identification of participants, recording of their cryptocurrency balances, and a history of all valid transactions between network participants.
A public ledger can be thought of as a data management system similar to a bank's database system. As a comparison from the banking sphere, when writing a check or making an online transfer, the transaction details are recorded in the bank's records. The sender's account is decreased by the amount transferred, while the recipient's account is increased by the same amount. The bank system maintains records of account balances and verifies that the sender has adequate funds before processing a transaction, otherwise the transfer will not be approved. If the sender has only $500 in their account and writes two $250 checks, the order in which the checks are cashed determines which check will clear and which will bounce.
Crypto Transactions on the Public Ledger
A blockchain is a type of public ledger, made up of a series of blocks where transaction details are recorded after authentication and verification by network participants.
All approved transactions are recorded on the public ledger from the inception of a cryptocurrency. As blocks fill with transactions, new blocks are mined and added to the blockchain by network participants called miners.
Full nodes, selected participants in the network, store a copy of the entire ledger on their devices and connected to the cryptocurrency network. The public ledger is distributed based on participants' geographic locations and interests. Other participants can also contribute to the blockchain network, helping maintain its efficiency.
As thousands of participants hold a copy of the ledger, they have a clear view of the network state, including who holds the crypto tokens, the number of tokens held, and the authenticity of transactions to prevent double-spending. The combination of consensus algorithms, encryption, and reward mechanisms in the public ledger ensure participant privacy and ensure only legitimate transactions are executed on the network.
What Risks are Involved?
Despite the benefits of public ledgers, there are growing concerns over their use in cryptocurrencies.
One issue is balancing the requirement of recording every transaction that has ever occurred on the network with the ability to scale to handle an increasing number of transactions.
There are also concerns that a public ledger that records every transaction indefinitely could be used by hackers, governments, and security agencies to track public records and network participants, compromising the anonymity and privacy that are crucial to cryptocurrency use.
The NSA has already faced accusations of attempting to track bitcoin users, and public ledger-based cryptocurrencies are always vulnerable to hacking, coin theft, and network clogging by malicious actors.
What is a Ledger Wallet?
Ledger wallets are not to be confused with crypto ledgers. They are physical devices created by the company Ledger to securely store private keys for cryptocurrency users. Unlike online storage, which makes private keys vulnerable to hacking, Ledger wallets store the keys offline on a physical device, making it harder for hackers to access.
A ledger is either a physical book or a digital computer file in which monetary and financial transactions are noted down and recorded - either as debits or credits.
Encryption is the process of converting plain data into unreadable data. A readily understood plaintext is encrypted in a basic text encryption procedure, resulting in incomprehensible ciphertext.
A private key, commonly known as a secret key, is a mathematical key used to generate digital signatures and, depending on the algorithm, to decrypt messages or...
Simply said, a node is any device that participates in a blockchain network. Nodes are typically computers or servers that perform some function for the network to which they are connected.