Cryptocurrencies run on the distributed public ledger known as blockchain, where the record of all the transactions are updated and maintained by currency holders. Public ledgers derive their name from the conventional record-maintaining systems that used to hold details, such as commodity prices, analysis, and news. This ledger was present for both verification and general public viewing and usage.
The crypto-based blockchain systems rely on an almost similar public verification and record-keeping mechanism. However, it is a bit more complicated than the general or conventional public ledgers you know of. On that note, let’s get into the details of transaction records of cryptocurrencies and the hurdles faced by the public ledger called blockchain. Here we go!
How Cryptocurrency Transactions Are Recorded
Cryptocurrencies are decentralized, encrypted digital currencies that facilitate value exchanges through the secure transfer of crypto-tokens between different network participants. Blockchain, or the public ledger system in this case, works as a record maintaining system that keeps the identities of the participants in a pseudo-anonymous and secure form, along with their crypto balance and the record of every authentic transaction carried out among various network participants. Let’s simplify this with an easy example.
Suppose you are writing a check to your friend or transferring 200 bucks to their bank account through online transfers. In each of these cases, the bank records will have all the information regarding the transaction. Your account will be debited by 200 bucks while your friend’s account gets credited by the exact same amount.
The accounting system of the bank has to hold the record of the balances and make sure that your account contains enough funds. If you lack sufficient funds in the account, the online money transfer is canceled or your check bounces. If you have only those 200 bucks in your account, and you issue two checks of 100 bucks each, the order of presenting the checks determines whether your friend will get the money or his check will bounce. Hopefully, this clears up the entire scenario for you.
Verification of Transaction Details
The two participants between whom that transaction was carried out can query and verify the transaction details that are present in the bank records. In addition to that, only the appointed bank officers can access the bank records, along with the central authorities, such as the government or the tax department on the basis of necessity. Any third-party or other individuals cannot access the transaction details.
Blockchains function in almost the same manner as bank records, with a couple of differences. Same as the bank records, the two participants in the transaction can verify and seek the details of the transaction on this public ledger. But no network participant or central authority can know about the identity of these two participants. All the transactions are completed and recorded after sufficient verification of the liquidity of the sender, or else, they get discarded. Now, you might be thinking that if there is no central authority controlling or maintaining the ledger records, how is fairness getting regulated on the crypto ledgers?
Cryptocurrency Transactions Made on the Blockchain or Public Ledger
Basically, public ledgers are seen as the data storage or management systems that are similar to the database system used for bank records. As mentioned before, blockchain is a type of public ledger. In this case, it is a chain (or series) of blocks where the transaction details get recorded after substantial verification and authentication by the said network participants.
The record and storage of every confirmed transaction on the public ledgers starts at the creation and beginning of any cryptocurrency. After a block gets completely filled with all the transaction details, there are new blocks mined and included in the blockchain by a group of network participants known as miners. Choose network participants, usually known as full nodes, keep a copy of the complete ledger on the devices that remain interconnected to the crypto network. Based on the interest of the participants and their distribution across the world, this public ledger is spread as participants can connect and contribute to the network activities of the blockchain to keep it functional and agile.
As thousands of such participants across the world keep a copy of that ledger, they know about the actual state of the network regarding who keeps the crypto-tokens, the number of tokens they hold, and if transactions are recorded and authentic to stop misusage, such as double spending. A strong combination of different intrinsic characteristics of the public ledger like the reward mechanisms, encryptions, and consensus algorithms make sure that the identities of the participants remain protected. Thus, the network holds only authentic transaction details and nothing else.
An Example of Cryptocurrency Transaction and Recording
Let's say that Amy has to send a Bitcoin to Bill. In order to complete the transaction, she has to broadcast the wallet addresses (encrypted account numbers) for herself and Bill, along with the transaction amount of a Bitcoin. Based on the network configuration, Amy can obfuscate the amount. The internal digital signature system makes sure that only the individual with the required crypto-coins is carrying out the transaction from the accounts or wallets.
Every full node on this network can note the transaction broadcast and verify its authenticity. They can update this public ledger record on different nodes to form a part of the crypto network.
Risks Associated With Blockchain Records of Cryptocurrencies
In spite of the advantage of blockchain, concerns regarding their use for crypto transactions have always been rife for several reasons. To start with, the working mechanism of the blockchain makes it mandatory to record each transaction to ever take place on the network. It is truly challenging to balance the maintenance of the longest running detailed history and have the scaling capacity to process the increasing number of crypto transactions.
At the same time, concerns over the maintenance of public ledgers that record each transaction for eternity would also let security agencies, governments, and hackers track public records and network participants. It can put the privacy and anonymity of the participants of blockchain at risk – a highly crucial aspect of crypto usage. As a matter of fact, there is an American security organization already accused of trying to track the Bitcoin users. In addition to that, all public ledger dependent cryptocurrencies remain vulnerable to varied hacking attempts, stealing crypto-coins, and network jamming by hackers.
Being a data storage container, this public ledger is the backbone of the cryptocurrency by keeping information after authentication. While the usage is being adopted widely, it is important to configure this public ledger using the right parameters to maintain anonymous and decentralized features to ensure easy transactions using crypto-coins.
Hopefully, you are all updated about crypto transactions and their recordings. It is a stable and safe network that has been in use around the world. So, you can invest in crypto without worries.