Briefly about Blockchain

Blockchain is undoubtedly a buzzword nowadays – same as FinTech. However, it is often difficult to comprehend, and in fact, many people do not have a clue what is it all about. Being at the heart of FinTech and having very strong potential to disrupt and revolutionize the way our world functions now, the concept of blockchain definitely needs a proper understanding.

The Blockchain Begins

It all started back in 2008. Short after the Lehman Brothers’ collapse, when the world was in a global financial decay and stock markets had hit historic lows, a person or a group of persons called Satoshi Nakamoto came into the global arena to disrupt it.

The notion of blockchain materialized in the form of a white paper which described the now well-know cryptocurrency of Bitcoin and the underlying concept on which it operates. The blockchain.

The Concept

Generally speaking, the blockchain is a distributed public ledger. Instead of data being accounted and stored on a central server’s database, it is encrypted, and a copy is kept on every node connected to the network. There are as many copies of the ledgers as there are nodes connected to the network.

Where’s the Revolution?

Blockchain uses its distributed network approach to revolutionize the process of verification and transfer ownership. This provides a lot of advantages over the current centralized network systems, and here we are speaking about security and preservation of data. Basically, it cuts out the middlemen.

Nowadays, more or less everything happens via centralised networks – governments, banks, you name it (=the middlemen). They appear to be doing quite good with their job, but in case a central server’s integrity gets compromised, the data stored within can be hacked.

Yet, if the database gets distributed amongst multiple nodes, it becomes much harder to hack it. Anyone wishing to alter the data in a blockchain network would need simultaneously to modify the ledger on 51% of all the nodes on the network. If they do not get altered simultaneously, the blockchain nodes will automatically recognize that the modified copy is a forgery and correct the changes.

Also, it is important to note that each block in the blockchain is encrypted. This makes it impossible to change after it gets authenticated and chained to the previous link.

Privacy

Living in the age of Internet, privacy is often an issue. In fact, many of us do not know how often we are being monitored by various institutions (take it governmental or private ones). For example, various online services often monitor and track our usage, and later use that information for marketing or other purposes.

In case of blockchain, all transactions are identified by a code, hence, the actual user identity is kept private. Only those with the appropriate code or key can access the relevant information.

The anonymity has obvious advantages. Records cannot be stolen, and accounts cannot be frozen, as there is no central power. Because no chief command exists, nobody has the authority or access to facilitate these types of actions. Of course, this raises some underlying threats and issues as well, but let’s stick with the benefits as for now.

Benefits

Undoubtedly there are lost of benefits, applications and added value that comes with the blockchain technology. Nevertheless, I would like to put an emphasis on 3 of them regarding the financial system.

• Cost and Efficiency. Moving everything to a blockchain reduces the reliance on third party intermediaries (=middlemen), because digital transactions can clear and settle peer to peer instantly (similarly like transaction in cash).
• Inclusion and Performance. With the help of blockchain, the financial services industry could do more and be more inclusive. This might help to bring billions of unbanked people in the the economy. Savings and loans, the basics of retail banking, could become available to all.
• Transparency and Risk Reduction. Blockchain could reduce settlement risk, as well as systematic risk because regulators and central bankers will have better information and can easier respond to crisis. Also, greater transparency will force more accountability for the institutions.

Videos worth watching:

Bettina Warburg: "How the Blockchain Will Radically Transform The Economy"

Alex Tapscott: "Blockchain is Eating Wall Street"