Accounting is the cornerstone of financial management, whether that is the currency circulating in a country, the asset management portfolio of a large investment bank, or the monthly budget of a small family.
A crypto ledger, or accounting system, keeps a record of transactions safely. It is one of the unique features of the entire concept of digital currencies.
This feature alone is enough reason for us to adopt cryptocurrencies fully; however, it comes with a few challenges that need to be worked around. Let’s look at how a ledger works in the cryptocurrency space.
What Is a Cryptocurrency Ledger?
A cryptocurrency ledger is a digital system that stores information about all transactions that have ever happened in that network. This is unique to digital currencies, as there is no way to record every transaction that happens for fiat currencies.
In fact, no ledger keeps track of how a fiat currency is being exchanged. The only way to calculate transactions for a fiat currency is by looking at accounting information that people/companies using that currency have kept.
This is very different in cryptocurrencies. No matter how small or large the transaction is and whether or not you want it to be noted, it will be recorded. However, there are certain ‘standards’ that cryptocurrency ledgers adhere to so that accuracy, safety, and privacy are maintained for all anonymous users.
The first main feature of the cryptocurrency ledger is that it is a public document. All transactions within the network will be available to the public. This is very different from fiat currencies, where financial information is extremely limited, and only institutes with certain rights/privileges will have access to it.
However, this doesn’t mean you can look up financial information about cryptocurrency transactions for anyone. This information is highly encrypted, and the people involved are kept anonymous. Moreover, since this is not a privately owned currency, nor is it bound to any country or single entity, it is not answerable to or under the control of any single/central authority.
No person or institute has more of a right over cryptocurrency accounting information, so you can be sure that it will be safe and no one can gain access to it. When transactional information is stored on the cryptocurrency, it is only available to the two people involved in that transaction while remaining encrypted.
The cryptocurrency ledger is also known as a distributed ledger since the transactional information is not limited to one server or stored on one physical device. Rather, the cryptocurrency network consists of numerous nodes that collectively store all the information and serve as a massive networked database.
Some nodes in the network are known as ‘full nodes.’ They have a complete history of the transactions that have taken place within the cryptocurrency. The full nodes play a key role in helping to validate transactions, and if one node is destroyed or somehow manages to lose all its data, the other nodes serve as backups.
Public vs. Private Ledger
Crypto ledgers can either be public or private.
As the name implies, public ledgers are available to the public, and anyone can access them to view certain information.
On the other hand, private ledgers are only available to closed groups of people. For instance, institutes may choose to have their own private ledger to record information not to be shared with anyone else.
The main difference between these two forms of ledgers is cost. When transacting on a public ledger, you will have to pay for that transaction, whereas transactions on a private ledger are free of cost.
Moreover, the receiver of the amount on a public network will have to wait while the nodes confirm that it is an authentic transaction and should be processed. It takes time for the public ledgers to receive confirmation and execute the transaction.
Private ledgers are nearly instant since they do not need to wait for any confirmation. They simply process the command as it is received.
How Transactions Are Recorded
The system that records the transactions in the cryptocurrency network is known as the blockchain. This is the fundamental technology that makes cryptocurrency possible. At the core, it is simply a ledger system designed to record transactions, but how it manages to do this makes all the difference.
The blockchain consists of individual blocks, the ledger that stores the transaction data. This data is shared across a broad network of nodes, forming the chain. The full nodes on the chain can store complete information about the cryptocurrency from start to finish.
The other nodes will store certain parts of the information and share it with all other nodes on the network.
Overall, the blockchain is a distributed ledger. However, certain things make this more capable and reliable than a generally distributed ledger. One key feature that makes a blockchain superior is the requirement for proof of work when verifying a transaction. It is not owned by a single owner, nor is it stored in a central vaulting facility.
One of the standout features of the blockchain is that information about changes to the data present in the ledger system is not announced by a single source. Rather, all the nodes on the network maintain their versions of the ledger (transaction history) or that part of the ledger.
This way, each node is fully informed, and there isn’t a vertical hierarchy of power but rather a horizontal one. The next step is when the nodes will communicate the information to each other and vote on each conclusion to ensure that other nodes on the network agree.
The distributed ledger will only be updated once a consensus has been reached on a transaction. Through this process, each node always maintains an identical version of the ledger, and there is no room for discrepancy.
Hash
Among the factors that make the blockchain such a secure platform, the Hash is one of the most prominent.
Each block is assigned a unique hash, and the hash of the block prior to it is according to the encoded structure. If the data in the block is altered, the hash will also change.
It is unique and dependent on several factors, just like a thumbprint. This way, if there is any change in the data, it will be reflected in the structure of the block, and when this becomes apparent compared to other versions of that block on the network, the anomaly will be highlighted.
Conclusion
The blockchain in a cryptocurrency is the ledger. It is the database that serves the role of the ledger and also provides the cryptocurrency with all the functionality needed to remain a secure and private form of exchange.
The primary objective with cryptocurrency is that there shouldn’t be an all-powerful entity that can track and trace any transaction it wants. People should have the right to keep their financial information safe and private.
