Understanding blockchain

With countries like China and India trying to regulate the sale of bitcoins and their issuance through blockchain, more people including netizens seem to have become interested in the technology. However, not many including bankers are aware of the technology and their implications on the society. The technology is very new and is still underfunded.

What are Blockchains?

Blockchains are a new data structure that is secure, cryptography-based, and distributed across a network. The technology supports cryptocurrencies such as Bitcoin, and the transfer of any data or digital asset. Spearheaded by Bitcoin, blockchains achieve consensus among distributed nodes, allowing the transfer of digital goods without the need for centralized authorisation of transactions. The present blockchain ecosystem is like the early Internet, a permissionless innovation environment in which email, the World Wide Web, Napster, Skype, and Uber were built.

The technology allows transactions to be simultaneously anonymous and secure, peer-to-peer, instant and frictionless. It does this by distributing trust from powerful intermediaries to a large global network, which through mass collaboration, clever code and cryptography, enables a tamper-proof public ledger of every transaction that’s ever happened on the network.

A block is the “current” part of a blockchain which records some or all of the recent transactions, and once completed, goes into the blockchain as permanent database. Each time a block gets completed, a new block is generated. Blocks are linked to each other (like a chain) in proper linear, chronological order with every block containing a hash of the previous block.

How is it different from current payment systems?

Blockchain technology allows for instant recognition of the exact size of the block by all transacting parties in the chain since the block is simultaneously updated on all their databases, and has unique security features that do not allow tampering with the definition of the block.

In addition, each block’s movements across the chain have the ability to be verified by all parties in the chain since the block carries with it the digital imprint, or ‘signature’, of wherever it has been.

Therefore it creates instant trust without having to rely on a series of trustworthy banks to clear cheques. Here, various parties transacting regard their reputation as being more important than reneging on it. Unlike traditional banking system, cash transactions here are undertaken immediately.

Benefits of blockchain technology:

As a public ledger system, blockchain records and validate each and every transaction made, which makes it secure and reliable.

All the transactions made are authorized by miners, which makes the transactions immutable and prevent it from the threat of hacking.

Blockchain technology discards the need of any third-party or central authority for peer-to-peer transactions.

It allows decentralization of the technology.

Some telecom firms in places such as India and Kenya are already using their networks to help people settle cash transactions, but these are proprietary and meant largely for poor and underbanked areas with considerable mobile penetration.

Concerns associated:

Blockchain is still a (relatively) new technology and is not without its problems. For a start, there are ongoing concerns about privacy in the settlement and storage of securities – blockchain providers are working hard to address.

Banks are also at threat with blockchain, since more and more firms (using their IT service providers from India and elsewhere) will build systems that can create and exchange ‘blocks’ with one another completely legally, without ever having to use the banks as a financial intermediary.

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