A public ledger derives its name from the age-old record-keeping system that was used to record information like agriculture commodity prices, news and analysis. It was available for general public viewing as well as for verification.
As cryptocurrency-based blockchain systems emerged, which also relied on a similar record keeping and public verification mechanism, the use of public ledger term gained popularity in the world of cryptocurrency. This article explores cryptocurrency public ledgers, their working, and the challenges they face.
Public Ledgers - Where Everything Gets Stored
A cryptocurrency is an encrypted, decentralized digital currency that facilitates the exchange of value by transfer of cryptotokens between network participants. The public ledger is used as a record keeping system that maintains participants’ identities in secure and (pseudo-)anonymous form, their respective cryptocurrency balances, and a record book of all the genuine transactions executed between network participants.
To draw a parallel, think about writing a check to a friend, or making an online transfer to his bank account, say for $100.
In both the cases, the details of the transaction will be updated in the bank's records – the sender’s account is debited with $100, while receiver’s account is credited by the same amount. The bank’s accounting systems keeps the record of balances, and also ensures that the sender’s account has sufficient funds, otherwise the check bounces or the online transfer is not allowed. If the sender has only $100 in his account and he issues two $100 checks, the order in which the checks are presented determines who receives the money, and whose check bounces.
The transaction's details in the bank's records can be queried and verified by the two parties between whom the transaction took place. Additionally, the bank record is accessible only by the designated bank officials and the concerned (central) authorities like the tax department or the government on need basis. No one else can have access to those details.
Public ledgers work the same way as bank records, though with a few differences.
Similar to the bank records, the transaction details on a cryptocurrency public ledger can be verified and queried by the two transacting participants. However, no central authority and other network participants can know the identity of the participants. Transactions are allowed and recorded only after suitable verification of the sender’s liquidity, otherwise, they are discarded.
Since no central authority controls or maintains the ledger records, how is fairness regulated on cryptocurrency ledgers?
How Does Public Ledger Work?
Physically, a public ledger can be viewed as a data management or storage system, similar to a database system of bank records. A blockchain is a form of public ledger, which is a series (or chain) of blocks on which transaction details are recorded after suitable authentication and verification by the designated network participants. The recording and storage of all confirmed transactions on such public ledgers start right from the creation and start of a cryptocurrency’s working. As a block is filled to capacity with transaction details, new ones are mined and are added to the blockchain by the network participants called miners.
Select network participants, often called full nodes, maintain a copy of the whole ledger on their devices that are connected to the cryptocurrency network. Depending on the participants’ interest and their spread across the globe, the public ledger becomes distributed, as they connect and contribute to the blockchain network activities to keep it agile and functional.
Since hundreds and thousands of such participants maintain a copy of the ledger, everyone knows the true state of the network in terms of who holds how many cryptotokens, what transactions are authentic to be recorded, and prevent any misuse like double spending. A combination of the various intrinsic features of the public ledger, like consensus algorithm, encryption, and reward mechanism, ensures that the participants’ identities are protected, and only genuine transactions are carried on the network.
To carry on a transaction, like Alice sending 1 bitcoin to Bob, she only needs to broadcast the information which contains her and Bob’s encrypted account numbers (wallet addresses), and the transaction amount of 1 bitcoin. Even the amount can be obfuscated, depending upon the network configuration. An internal digital signature mechanism ensures that only the person with the necessary cryptocoins is able to carry out spend transactions from their wallets/accounts. All full nodes on the network see this transaction broadcast, verify it for authenticity, and if found genuine they update the public ledger records on the various nodes that form the part of the blockchain cryptocurrency network. (See also, What does a blockchain record in a bitcoin exchange transaction?)
Disadvantages of Public Ledger-based Cryptocurrencies
Beyond the numerous advantages offered by public ledgers, there has been rising concern about the use of public ledgers in cryptocurrencies.
For instance, the working mechanism of the bitcoin blockchain mandates recording every single transaction that has ever occurred on its network. Balancing the maintenance of this long-running detailed history with the required need for scaling its future capacity for processing the growing number of transactions will pose a big challenge to keep bitcoin sustainable in the long run.
Similarly, there are concerns that maintaining a public ledger that records every transaction in perpetuity would also allow hackers, governments, and security agencies to track public records as well as network participants. It puts the anonymity and privacy of the blockchain participants at risk, the most important aspects of cryptocurrency use. In fact, American security agency NSA is already accused of attempting to track down bitcoin users. (For more, see NSA Helped Track Down Bitcoin Users, Snowden Papers Alleges.)
Additionally, any public ledger based cryptocurrency is always under the possible threat of hacking attempts, stealing of cryptocoins, and network clogging by hackers.
The Bottom Line
As a data storage container, the public ledger forms the backbone of a cryptocurrency, as it is where everything is stored after verification. While its use is being widely adopted, configuring it with right parameters is important to maintain the decentralized and anonymous features for hassle-free transactions in cryptocurrencies.