With governments and corporates world over slowly realising the value in blockchain, it is indeed an exciting time in the financial world right now.
Blockchain is the new kid on the block. The term has been bandied about in financial circles and is slowly becoming a buzzword in the business world as well. Its ardent supporters laud its safety features and speak of how it will address concerns associated with security of financial transactions. So let us understand what exactly blockchain is. The shortest definition is:
Blockchain = Distributed Ledger
or list of all transactions across a peer-to-peer network. Data in a blockchain is stored in fixed structures called ‘blocks’.
Before we dig deeper, let us first understand a few concepts :
Cryptocurrency is a digital currency in which encryption techniques are used to regulate the generation of units of currency, and to verify the transfer of funds operating independently of a central bank.
Distributed Ledger is a database that is consensually shared and synchronised across the network spread across multiple sites, institutions or geographies. It allows transactions to have public "witnesses", thereby making a cyberattack more difficult.
Smart contracts are agreements that are encoded in a computer program and automatically executed upon certain criteria being met. Advantages of smart contracts include improved quality, reduced contract execution costs and increased speed. Smart contracts can be stored on the blockchain.
Hashing, in simple terms, means to take an input string of any length and give out an output string of a fixed length.
What is a blockchain?
A blockchain can be defined as an anonymous online ledger that uses the data structure to simplify the way we transact. Blockchain allows the users to manipulate the ledger in a secure way and without the help of any third party.
In case of a bank the ledger is connected to a centralised network. A blockchain is anonymous, thus protecting the identities of the users. This makes blockchain a more secure means to carry out financial transactions.
The algorithm used in blockchain reduces the dependence on the people to verify the transactions. This technology, used for recording various transactions, has the potential to disrupt the financial system.
A blockchain is a kind of transparent, independent, and permanent database coexisting in multiple locations and shared by a common community. This is also why it is referred to as a mutual distributed ledger (MDL).
Who controls blockchain?
It depends on the type of blockchain, which ranges from permissioned (where the verification blockchain is preselected by a central authority or consortium), to permission-less (where anyone can participate in the verification process). At present it is the permission-less blockchain that supports bitcoin, which has caught media’s attention.
Why are financial services companies excited about it?
Cryptocurrencies have been in existence since Bitcoin was launched in 2008. But the concept of blockchain has really taken off over the past 12 months, as it can help to:
- Reduce or eliminate the need for certain intermediaries
- Automate manual tasks;
- Security: It is secure as any interference with transactions on the blockchain is extremely difficult, and every participant in the blockchain can view any of the changes made.
- Distributed ledger stores the entire ownership history of an asset.
The many uses of the blockchain are explored in the areas of:
- Know Your Customer (KYC),
- Anti-Money Laundering (AML),
- Trade surveillance,
- Smart contracts,
- Collateral management,
- Settlement and clearing,
- The ability to capture historical and current ownership of high-value items.
Cryptocurrency exchanges are websites where you can buy, sell or exchange cryptocurrencies for other digital currency or traditional currency like US dollars or euros. Some of the reputed cryptocurrency exchanges are Coinbase, Kraken, Cex.io, ShapeShift, Poloniex, Bitstamp, CoinMama, Bitsquare, LocalBitcoin, Gemini, Bitsane, and Bittrex.
Applications of blockchain:
- This year, the Australian Securities Exchange (ASX) announced that it would move Australia's equities clearing and settlement system onto blockchain.
- Nasdaq, in October 2015, unveiled Linq, a solution that enables private companies to digitally represent share ownership using blockchain-based technology.
- The land records have been put on a public ledger by the Honduras government. The minute there is a change in ownership, it immediately gets recorded publicly.
- Sony is seeking blockchain patent for User Authentication System as the Japanese technology major filed a patent application for a blockchain-based, multi-factor authentication system (MFA).
- Cargo security is one fantastic application for blockchain; it could help prevent identity theft and 'fictitious pickups'.
- As per a patent application released by the US Patent and Trademark Office, Verisign is considering using blockchain technology as part of a potential new DNS Security Extension (DNSSEC) project.
- Blockchain courts will offer effective dispute resolution in smart contracts where issues are resolved by a panel of jurors on a decentralised arbitration system on the blockchain. Users on this platform can create deals and have them registered on the blockchain as immutable and transparent smart contracts. This enables every fact and detail of the deal to be available and traceable in case of any dispute. To settle eventual disputes, judges are chosen randomly from a pool, unless the involved parties unanimously select a particular judge over themselves whose decision will be binding over the issue at hand.
However, it is not a rosy picture all around. A significant drawback of blockchain is that their distributed nature demands constant computational power at multiple locations, and all the ongoing accumulated (electrical) power entails massive amount of usage of power.
Nevertheless, if experts are to be believed blockchain architecture can significantly bring down the costs and reduce inefficiencies in the financial sector. The next 4-6 years will be very exciting in the financial sector. Technology, if treaded carefully, will transform the way we use currencies, and usher in a new era in the financial world.
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)
- Digital currency
- Smart contract
- Distributed ledger