Blockchain: A disruption that’s yet to be fully understood

Recently I saw a banker presenting to the management a slideshow which mentioned blockchain as one of the emerging things in banking apart from automation & bots, and then he stopped at just that without explaining WHY blockchain is an emerging thing? And most importantly WHAT is it? Maybe he himself didn’t know the WHY’s? & WHAT’s? of blockchain. Luckily, someone from the attendees asked him what is it and that was the end of him. He gave a blank look for a few seconds and then quickly covered himself by saying that Blockchain is the system on which the Bitcoin works and that it’s a disruptive technology which the bank should consider using. Nevertheless, everybody was impressed by what he said and blankly approved his viewpoint.

While the guy rightly said that Blockchain is the system on which Bitcoin works, he was still unclear as to WHY should the banking industry adopt blockchain. Is it better than the current infrastructure? Is it cheaper? Is it faster? Is it more secure? The question is WHY SHOULD THE BANKING & FINANCE INDUSTRY ADOPT BLOCKCHAIN. Just because something is unique or different or trending doesn’t mean that it should be adopted. Unless there is an inherent value addition that it offers, there is no point for banks to adopt blockchain.

This made me realize that presently there is a huge gap in understanding this technology and unless we understand it, we will never be able to explore its full potential. So I decided to research in-depth on it and came out with some interesting findings.

First things first. To begin with, we first need to know what Blockchain is using a simple example:

Batman wants to send money to Superman and he chooses to send this money through the Joker :) . But before delivering the money, the joker steals half of it and gives the remaining to Superman, or still worse, the joker keeps the entire money and gives counterfeit money to Superman.

1st problem: An unreliable platform (in this case the Joker) was used to send money

2nd problem: No record of transactions, so you couldn’t trace the real culprit. Did the Joker steal the money or is Superman lying?

3rd problem: The Joker now has got more than necessary information about Batman & Superman’s location & transactions, making him a threat to their operations.

An alarmed Batman calls up on Lucius Fox :) (his trusted technology aide) who helps him create a digital money platform which doesn’t need the Joker to deliver money every time as the same can be electronically transferred.

4th problem crops up: The Joker hacks the platform and duplicates the digital money as it is simply in the form of an electronic entry in the database and not real money. Thus, the Joker goes crazy with his hack and spends the same money multiple times by creating copies.

Fuming with anger Batman calls up the Justice league :) (a group of superheroes lead by Batman in DC comics) and asks them to get involved with Lucius Fox in making the digital money completely safe, secure & incorruptible.

This time what Fox invents is a network of verifiers (unknown to each other) who verify the authenticity of each digital transaction based on a mathematical formula before confirming the transaction. Once a transaction is verified & submitted by one verifier the others have to agree/disagree on same. If at least 51% of the large number of verifiers agree on the transaction, the transaction is registered in the ledger (record book of transactions maintained by every verifier). The rule here is that whoever in the network solves the formula first and verifies/validates the transaction is given a bonus in the form of digital currency and this is how they get paid for their work.

This is what a blockchain is and this is how Bitcoin transactions happen using Blockchain.

So finally what did Batman’s team achieve?

• Decentralized Database: There is no single computer which can be hacked by the joker as the verification is done by a network of anonymous verifiers spread across in different locations.
• Incorruptible: The records can’t be tampered with for the purpose of duplication (double spending of money) as there is no single & centralized copy of transaction records maintained anywhere. Instead the record of transactions (ledger) is separately maintained with each of the verifier and each of them updates their records only after a transaction has been mutually verified.
• Hash encryption: Every record is encrypted using hash encryption (don’t ask me what hash encryption means, because even I am not an IT wizard :)). What I have come to know is that Hash encryption is considered to be most secure form of encryption as it cannot be decrypted by anyone. As a result, every verifier in the network can see the transaction but they cannot know which transaction belongs to whom, eventually protecting the identity of the parties involved and keeping them anonymous (maybe that’s precisely why Bitcoins are used for illegal payments on the dark net).
• Proof of work: Verifiers have to solve a mathematical puzzle to confirm the authenticity of the transaction and whoever solves it first is rewarded with bitcoins (Currently, 12.5 bitcoins is the reward for verifying a block of transactions and 1 block has around 250 transactions).
• Incentive based: The first person in the network to verify/validate a block of transaction is rewarded with bitcoins. As a result, this system works on rewards for work done instead of any banking intermediary that charges hefty clearing fees.
• Cost of Hacking is higher than benefit received from it: Instead of relying on a single clearing bank which can get hacked, blockchain relies on a large number of verifies who verify each transaction and even if 51% of them agree on the authenticity of a transaction then it is added to the permanent record of transactions. As a result, the hacker won’t know whose system to hack exactly and even if he finds out, the computing power that he will require to solve the complicated mathematical puzzle involved in changing any transaction entry will be very high and time consuming too. As a result, the cost of hacking will be greater than the benefit associated with it and the hacker will instead choose to use the same computing power to verify blocks of transactions and earn bitcoins legitimately. Thus, the system is designed in such a way that it is more beneficial to be a part of the network and work for it rather than work against it.
• Instant: The transaction made are instantly verified. It takes around 10 minutes approx. to solve the mathematical formula and validate a block of transactions. As a result, we don’t need to wait for 2-3 days when we transfer money abroad as blockchain can do it instantly as compared to the present banking verification system which is fee based, time consuming as well as prone to hacking.

 The Conclusion:

Does that mean everything is GREAT & LOVELY about blockchain? NO, not at all, there has to be another side to the coin. As it is rightly said, the devil is always in the details and unless we clearly see how blockchain can add value to the current banking & finance industry without exposing the industry to any systemic risks, we cannot simply nod our heads in agreement (like those people in the meeting mentioned above did).

We need more deliberate understanding of the blockchain infrastructure and for that we need to sit with some smart IT wizards like Lucius Fox from Batman :) before we come to a conclusion.

Nevertheless, I strongly feel that blockchain has a truly unique infrastructure that has opened a whole new platform for innovators & explorers in the digital space for every industry especially finance.

Meanwhile, the Banking industry in India is already testing something called ‘BankChain’ which is a system developed using blockchain technology that aims to use the technology for making banking transactions and processes seamless & faster.

“You shouldn't do things differently just because they're different. They need to be... better.” – Elon Musk