Think about the money in your head right now — probably notes and coins, something you can physically hold. Digital currency throws that idea out completely. It only exists as data: a number in a database, a balance in an app, a record on a ledger. There's no note to fold into your pocket and no coin to drop in a jar. It lives entirely inside digital wallets or accounts.

You use it the same way you'd use "real" money — paying for goods and services online, or sending money internationally — except every step of that transaction happens as a digital record being updated, not a physical object changing hands.

Centralised vs Decentralised — the key distinction

This is the single most important split in this whole topic, so let's slow down on it.

In a centralised system, one authority — a bank, a government, a company — has the power to create, approve, freeze or reverse transactions. They hold the master record. If that authority makes a mistake, or decides to act against you, you have limited recourse, because they control the system.

In a decentralised system, there is no single boss. Instead, control is spread across a whole network of users, all of whom hold a copy of the records and agree collectively on what's valid. This is the model most cryptocurrencies use, and it's the reason blockchain exists — you need some clever way for thousands of strangers, who don't trust each other, to agree on a shared set of facts without a referee.

Cryptocurrency

Cryptocurrency is simply one type of digital currency — the decentralised, crypto-secured kind, like Bitcoin and Ethereum. Two properties define it in the exam context:

• Highly volatile — its value can swing rapidly, sometimes within hours, which makes investing in it risky. There's no central bank smoothing out the price.
• Publicly tracked using cryptography — every transaction is visible to anyone on the network, but cryptographic techniques are what make the ledger secure and trustworthy without needing a central authority to police it.

A blockchain is a digital ledger — basically a running list of every transaction ever made using a particular digital currency. But it's not just a list sitting on one company's server. It's specifically designed to be decentralised, secure, and permanent.

How transactions get added

Every transaction is time-stamped and added to the blockchain in a way that is permanent and unalterable — once it's in, it can't be quietly edited or deleted.

Decentralisation: everyone has a copy

Because a blockchain is decentralised, no single entity or authority controls it. Instead, every participant in the network (often called a node) holds their own copy of the entire ledger and can independently verify transactions for themselves. Nobody has to "trust" a central server — they can just check the records themselves.

Blocks, chains, and hashes — how it actually links together

The blockchain gets its name from its structure: transactions are grouped into "blocks", and these blocks are linked together in a "chain" using cryptographic algorithms. This is what makes the whole system tamper-proof, so it's worth understanding exactly how the linking works.

Each block stores two important things:

• Its own unique hash — a fixed-length code generated from the block's contents.
• The previous block's hash — which is what physically "chains" it to the block before it.

This is the clever part: because each block references the hash of the one before it, if anyone tries to secretly edit an old transaction, that block's hash will change — but the next block still stores the old hash. The chain no longer matches up. Since every node has a copy of the ledger, this mismatch is immediately obvious the moment nodes compare their copies, making tampering essentially impossible to hide.

Verification — why fraud doesn't slip through

A transaction isn't just accepted because one person says it happened. Each transaction must be verified by multiple participants in the network before it's added to the blockchain. This process confirms the transaction is legitimate and prevents fraudulent activity — because a fraudster would need to convince a large portion of an entire independent network to agree with a lie, which is extremely difficult to pull off.