Regardless of what you think of Cryptocurrencies, it is clear that they have staying power and will be with us for the foreseeable future. Blockchain-based ledger systems allow users to transfer value from one person to another without a 3rd party acting as an intermediary. This means that person A and person B funds quickly and anonymously, without impediment. There are many different blockchain systems, and each one is different, providing different levels of privacy, security, and payment obfuscation. Bitcoin’s blockchain allows anyone to trace payments, while privacy-focused blockchains make transactions completely opaque. Consider this new technology if you must produce financial transaction data. Ask clients if they use cryptocurrency and collect relevant data if necessary.
There is a lot of misunderstanding of how these systems work, and so collecting data from them can seem daunting, but hopefully, we can shed some light on this and make it less intimidating. When considering cryptocurrencies, remember these key things.
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Cryptocurrencies operate as an open ledger
Imagine if you and your friends went out for dinner every night. Instead of exchanging payments every day, you might keep a running record of who owes what to whom and settle debts all at once at the end of the month. Cryptocurrencies are very similar to this (this is oversimplified but the premise is true). For example, A makes a cryptocurrency payment to B, and an entry is recorded using “wallets” to validate the transaction.”Wallets” are applications used to verify payments made from person A to person B with cryptocurrency.
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Wallets hold a record of all transactions
It is relatively trivial to validate all transactions made by a wallet due to how the ledger system works. Wallets don’t so much as “remember” transactions as they confirm entries on the ledger. Keys stored in wallets validate transactions, and wallets use these keys and signatures to combine payments on the blockchain. The wallet itself can provide transaction data as it holds the necessary keys and signatures. If a user is willing to supply access to their wallet, transactions can be easily verified. This can be done without exposing the secret seed that is used by the wallet to generate the key pairs that validate transactions.
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Blockchain ledgers are append-only
Once the network confirms transaction data on transparent ledgers, it becomes impossible to tamper with. Any individual can verify transactions on transparent ledgers with complete certainty that no tampering has occurred. In many ways the blockchain is the ultimate record-keeping system and all cryptocurrencies have these qualities. Opaque ledgers obscure this beneath a layer of encryption, but it still holds true that the actual transactions cannot be tampered with or altered once they are included in the ledger.
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