Information, technology and finance form the supporting pillars of emerging civilizations. Connecting all three nodes can be thought of as the most successful way to build a self-sustaining model for the future. An ingenious invention – blockchain technology, aims to do exactly that. It’ll build a secure and decentralized framework for the evolving global economy. To understand Blockchain better, you may need to understand the concept of ‘Bitcoin’. While most of us are aware of bitcoins, there are many others who are intimidated by the concept.
Bitcoin: Why we felt the need for Blockchain Technology
Bitcoin is a form of digital currency that was created by an individual or a group of individuals using the mysterious name, Satoshi Nakamoto. It is not associated with any bank or government organization. It allows users to purchase goods and services and exchange money online, anonymously, without involving any third-party organization. Bitcoin is one of the first digital currencies that engages independent individuals and companies with governing computing power in a peer-to-peer technology-backed network. These individuals or organizations are called ‘miners’. And can be thought of people responsible for the credibility of the Bitcoin network.
The self-limiting system called ‘mining’ ensures that only 21 million total bitcoins will ever be allowed to exist. Of those, around 11 million Bitcoins have already mined and are in circulation currently. To mine Bitcoins, you need to engage your computer in solving computationally-intensive math problems around the clock. With possible solutions that range up to 64-digits, a regular personal computer would take around 2-3 days to solve one bitcoin problem, if engaged continuously. The earnings would thus amount to 50-75 cents (USD) in a day, minus the operational costs.
These computationally difficult puzzles are solved with a purpose to discover new ‘blocks‘ in the Bitcoin network. Blocks are files that record data pertaining to transactions carried out in the Bitcoin network permanently. It consists of a few or all of the most recent Bitcoin transactions that do not feature in any prior block. Once a block is ‘completed’, the next one in the series comes up. You could think of it as a page of a ledger, or record book that cannot be altered or removed.
What is a blockchain?
The Bitcoin network witnesses a huge amount of transactions that need to be recorded regularly. The ‘blocks’ represents the present scenario and also holds information about the past and the future. On completion of a block, the next one in the chain starts recording information, thus forming a network of data-holders that records every transaction completed in the network. This entire cyclic system, called ‘blockchain‘, records data permanently and builds links between the ‘blocks’ as it grows. A simple analogy of the same would be comparing blocks to a simple transaction payslip that the bank issues you, while the blockchain is more like the complete record of bank transactions.
Touted as one of Bitcoin’s major technological contributions, blockchain stands as a proof of all transactions that have ever been done on the network. The average rate at which a new block is appended to the chain is at around 10 minutes. Moreover, it eliminates the need for middlemen and introduces us to a probable future with better, safer and more efficient ways to manage finances. Replacing institutions and people responsible for the financial sector, with a network of computers, could possibly be the beginning of how technology revolutionizes the future of financial management.
Blockchain and the future of Financial Infrastructure
The Blockchain is characterized by its sense of consensus. It checks in with itself every 10 minutes and audits its digital value. The decentralized and distributed ledger-technology is built around concrete cryptography technology. Having said that, it accounts for an appropriate level of transparency as the data embedded within the network, by definition is publicly accessible. Moreover, altering any unit of information on the blockchain requires a huge amount of computing power to override the entire network, thus making it tamper-proof. Blockchain technology or the Distributed Ledger Technology (DLT) is efficient as it solves the issue of manipulation that often haunts financial processes and organizations.
The characteristics mentioned above will form the foundation of a new financial infrastructure. Reconciliation forms an integral process of all financial and accounting processes. Information silos drive the process and multiple such sources of data often corrupt the credibility. Being immutable, DLT provides us with a single source of truth, ruling out the need of any other enforcer of trust. Moreover, the transparency maintained by the technology would reinstate balance of information held by market participants. This would, in turn, improve the relationships between regulators and the regulated entities.
The opportunities of Blockchain in finance are endless…
The current financial model demands for a central authority to settle differences and lack of trust between counter-parties. The autonomy of Blockchain ensures that disputes are resolved and all parties come to an agreement over business outcomes. Discrete record-keeping will be deemed redundant on the advent of DLT in all spheres. By working on the information asymmetry and promoting visibility, Blockchain will quantify risk and improve accuracy in major financial decisions like pricing, investments, negotiations and transactions. Blockchain will play a pivotal role in designing the next-gen infrastructure. However, it will not do so alone. An assemblage of technologies, like IoT, Artificial Intelligence, Machine Learning and quantum computing will be supporting pillars in the reformation.
Blockchain can thus be used to record and track the details of any transaction or ownership of any asset. This includes a few or all tangible assets like real estate and even, intangible assets like intellectual property. Moreover, it will allow us to automate contracts, therefore, simplifying the process involved in creating and executing them. Some feasible applications are:
- Smart contracts
- Physical asset registration
- Trade execution and settlement
- Asset exchange
- Cash reserve management
- Supply chain management
Blockchain beyond finance!
The process of redesigning the financial infrastructure may sound dry yet mind-numbing. However, the implications are intriguing. Since financial infrastructure shapes all major day-to-day business practices and industries of the global economy, a change in the core operations would reflect in all sectors. A lot of recent technological advancements foster the same aim, to democratize technology. Reusable boosters, nano sats and other sensor-backed technologies have already made communication and technology faster, more efficient and cheaper. However, each one of these nodes are connected by the Internet which can in turn be affected heavily by the Blockchain technology.
The internet is powered by data. Blockchain offers the users with a high level of confidence that the data being used is secure and reliable. Moreover, DLT will introduce and promote the concept of a sharing economy in space, i.e. ownership of space assets and the data and communication services will then be shared between profit and non-profit based organizations. The 2 major DLTs available in the market are the ‘Blockchain’ technology and the ‘Ethereum’ chain technology. While Blockchain is making a mark in the finance-sector, Ethereum is going beyond the conventional scope to affect political spheres too.
In addition to all the above applications, Blockchain might also revolutionize the mundane aspects of everyday routine. File storage will be decentralized and distributed data management will ensure it does not get corrupted or lost. Blockchain’s ‘smart contracts’ will make automating remote systems simpler, thus giving an opportunity for sensors, software-facilities, and networks to grow. IoT, Machine Learning, and AI are hence, going to be prevalent in our daily lives.
While the DLT continues to grow block by block, a range of financial institutions and industrial conglomerates are going to spring up and flourish. Monetary issues and operations will soon be redefined and ‘blockchain’ will stand at the kernel of this development.