Digital Currencies Part 5: How Does Digital Cash Work?

Digital cash is flexible, powerful, and completely customizable.




So how is it possible to digitize money? The following figure illustrates how digital cash works.


When you use physical cash, you use coins and bills. Digital cash has the equivalent of coins and bills in the form of an information packet like the one shown in Figure 5. These information packets are your money.

As Figure 5 shows, the information packet that is your digital cash contains special cryptographic codes that give the packet its money-like features. These unbreakable codes make your digital money impossible to counterfeit, impossible to double spend, and completely private. It is because of these codes that we refer to digital cash as a cryptocurrency.

In addition to cryptographic codes, digital cash information packets have a payload. The payload is information that describes something of value. So if your currency is called SuperBucks, then the payload contains the name of the currency (SuperBucks), its denomination (for example, 20 SuperBucks), and some other data that enables the system to process this information packets.

A common question is, “If that’s all digital money is, can’t I just go in and change the denomination to something else. Couldn’t I just change a 20 SuperBucks bill to a 200 SuperBucks bill?”

The answer is no. The cryptographic codes make it impossible to alter even one bit in the information packet. If you change anything in the information packet, the entire packet becomes invalid and your money is worthless. If you attempt to spend it, the system will reject the packet instantly. Changing even one bit in this packet invalidates it completely.


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