What Is a Cryptocurrency Public Ledger? How It Works and Risks

What Is a Cryptocurrency Public Ledger?

A cryptocurrency public ledger is a distributed record-keeping system used to record cryptocurrency transactions. Because anyone can participate, they generally use cryptography in their programming to secure the ledger, but the transactions are publicly viewable.

This article explores cryptocurrency public ledgers, how they work, and the challenges faced by developers and users.

How Cryptocurrency Public Ledgers Work

A cryptocurrency is a decentralized cryptographic token that can be transferred between network participants, facilitating the exchange of value. The public ledger is used to maintain participants' identities, balances, and transactions in a secure and pseudo-anonymous form by automatically:

• Recording all transactions and verifying that participants have the tokens to transfer
• Securing the ledger using distributed consensus protocols that compare the data stored in each copy
• Removing humans from the auditing process, reducing errors or corrupt practices

Generally, a user initiates a transfer to another party through an interface or by issuing a command. The blockchain verifies the sender's public and private keys, and the recipient is given a new private key. The transaction is recorded on the blockchain in a file and becomes part of an automatic verification process.

The Recording and Verification Process

Each blockchain is programmed differently, but in general, transactions are recorded in files called blocks. These blocks contain several transactions, time stamps, and other data sent through encryption algorithms. Most blockchains send specific information from the block through a hashing algorithm (the cryptography mentioned earlier) and include the resulting hexadecimal number—called a hash—in the following block.

The next block includes that hash, creating the secured information chain. This progressive hashing builds a long chain of files that cannot be altered as long as there is enough participation.

Node Selection

Most blockchains allow one node to add a proposed block to the chain through different mechanisms. Some randomly select specific nodes or receive votes from others to produce blocks. Others use a competitive hashing mechanic. There is no particular way blocks must be produced—it is up to the imaginations of the developers and community to determine how they want the ledger network to generate and validate blocks.

Transactions

Transactions are usually automatically verified before a block is created by blockchain programming; users who do not have the appropriate amount of tokens cannot make transactions. Nodes assemble blocks through various techniques—most use a memory pool (mem pool) that stores unconfirmed transactions. These transactions tend to be sorted by how much a user paid to the nodes (via a tipping or variable fee mechanic) and are processed in that order.

Consensus

Nodes place transactions in the block they are proposing, hash the information that requires it, and broadcast it to the rest of the nodes on the network. Through various validation processes (called consensus mechanisms), the network usually reaches an agreement on the block's validity by comparing hashes. This works because any change in a block's information produces a different hash, so nodes should all generate identical hashes from one block's data.

These consensus mechanisms generally include a network's validating nodes using the same information the proposed block includes to generate a hash. If a majority of the network creates hashes from this information that match that of the proposed block, it is accepted. If the majority creates blocks that don't match, the proposed block is rejected, and the network moves to the next block.

Advantages of Cryptocurrency Public Ledgers

Because a cryptocurrency's public ledger is public, the transaction details can be queried and verified by anyone. This makes the system more transparent than traditional banking systems and methods without disclosing personal information.

Additionally, these ledgers cannot be altered by anyone, given enough network participation. Traditional banking requires trust in people—and most people are honest and well-meaning; however, the trust placed in financial institutions has been proven to be misplaced because they are money-making businesses that employ people, and people can be corrupted. Cryptocurrency public ledgers remove the need to trust people because they are automated and (in most cases) do not exist to earn profits.

Concerns About Cryptocurrency Public Ledgers

Despite public ledgers' advantages, there are concerns about their use for payment systems intended to be global in scale. Scalability, decentralization, and security must all be enhanced, but to enhance one, another must be sacrificed. Some public ledger projects claim to have solved this trilemma, but most that make this claim have not gained enough traction or adoption to offer enough proof.

The way blockchains work mandates that every single transaction that has ever occurred on the network is recorded. The more transactions that occur, the larger the blockchain grows. This means that participants must continually increase the amount of storage they provide, or developers must find ways to reduce the storage burden.

The capacity to process the growing number of transactions is generally the most significant scalability issue. Many blockchains, even the most popular ones, cannot match the speed of current payment systems. Developers are working on this, but as more people participate, transaction fees increase and processing times decrease.

For cryptocurrency public ledgers to be secure, large networks or more advanced techniques are required to maintain security. Proof-of-work blockchains that do not have enough participation can be taken over by entities with enough hashing power to propose blocks and make changes. Blockchains that use proof-of-stake can require large amounts of financial collateral to allow participants to create blocks and earn fees, theoretically centralizing the blockchain. Thus, the most significant security issue is that it must be incentivized—without incentives, it's likely there won't be as much participation, which reduces security.

The Bottom Line

As a data storage container, the public ledger forms the backbone of a cryptocurrency by automating transactions, verification, and information storage. While its uses are becoming more mainstream, configuring a public ledger with the correct parameters is essential to maintaining decentralized, scalable, secure, and anonymous features, but it is proving to be challenging for blockchain developers.

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