Nowadays, All major banks are experimenting with block chain technology as they can use it for money transfers, record keeping and other back-end functions. In this article we will going to learn what is block chain technology ? and how does it works ? and its advantages ?.
“The block chain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.”
What is Block Chain Technology?
- A blockchain is an anonymous online ledger that uses data structure to simplify the way we transact. Blockchain allows users to manipulate the ledger in a secure way without the help of a third party.
- A bank’s ledger is connected to a centralised network. However, a blockchain is anonymous, protecting the identities of the users. This makes blockchain a more secure way to carry out transactions.
- The algorithm used in blockchain reduces the dependence on people to verify the transactions. This technology used for recording various transactions has the potential to disrupt the financial system.
How Does It Work?
Historically, when it comes to transacting money or anything of value, people and businesses have relied heavily on intermediaries like banks and governments to ensure trust and certainty. Middlemen perform a range of important tasks that help build trust into the transnational process like authentication & record keeping.
The need for intermediaries is especially acute when making a digital transaction. Because digital assets like money, stocks & intellectual property, are essentially files, they are incredibly easy to reproduce. This creates what’s known as the double spending problem (the act of spending the same unit of value more than once) which until now has prevented the peer to peer transfer of digital assets.
Bitcoin first appeared in a 2008 white paper authored by a person, or persons using the pseudonym Satoshi Nakamoto. The white paper detailed an innovative peer to peer electronic cash system called Bitcoin that enabled online payments to be transferred directly, without an intermediary.
While the proposed bitcoin payment system was exciting and innovative, it was the mechanics of how it worked that was truly revolutionary. Shortly after the white paper’s release, it became evident that the main technical innovation was not the digital currency itself but the technology that lay behind it, known today as blockchain.
Why are banks interested?
All major banks are experimenting with block chain as they can use it for money transfers, record keeping and other back-end functions.
The block chain application replicates the paper-intensive international trade finance process as an electronic decentralised ledger, that gives all the participating entities, including banks, the ability to access a single source of information.It also enables them to track documentation and authenticate ownership of assets digitally, as an un-alterable ledger in real time.
Indian IT service providers like Infosys and TCS have been throwing their weight around blockchain technology. Both these companies are using blockchain mechanism to create core banking platforms for banks.
Where can it be used?
Use of blockchain technology is not limited to the financial sector. It is being used in many other areas. For example, Honduras government has put all land records on a public ledger – the blockchain. The minute there is a change in ownership, it gets recorded publicly.
The Australian Securities Exchange (ASX) announced this year that it would move Australia’s equities clearing and settlement system on to blockchain.
In October 2015, Nasdaq unveiled Linq, a solution enabling private companies to digitally represent share ownership using blockchain-based technology.
Is it safe?
The USP of blockchain is that it allows two parties to execute a transaction without any intermediary. Blockchain allows financial institutions to execute and verify transactions discretely without any human intervention.
The electronic ledger of transactions is continuously maintained and verified in ‘blocks’ of records. With the help of cryptography, the tamper-proof ledger is shared between parties on computer servers.
Experts believe that blockchain architecture can significantly bring down the costs and reduce inefficiencies in the financial sector.
Benefits of Block Chain Technology
- Disintermediation & trustless exchange
Two parties are able to make an exchange without the oversight or intermediation of a third party, strongly reducing or even eliminating counterparty risk.
- Empowered users
Users are in control of all their information and transactions.
- High quality data
Blockchain data is complete, consistent, timely, accurate, and widely available.
- Durability, reliability, and longevity
Due to the decentralized networks, blockchain does not have a central point of failure and is better able to withstand malicious attacks.
- Process integrity
Users can trust that transactions will be executed exactly as the protocol commands removing the need for a trusted third party.
- Transparency and immutability
Changes to public blockchains are publicly viewable by all parties creating transparency, and all transactions are immutable, meaning they cannot be altered or deleted.
- Ecosystem simplification
With all transactions being added to a single public ledger, it reduces the clutter and complications of multiple ledgers.
- Faster transactions
Interbank transactions can potentially take days for clearing and final settlement, especially outside of working hours. Blockchain transactions can reduce transaction times to minutes and are processed 24/7.
- Lower transaction costs
By eliminating third party intermediaries and overhead costs for exchanging assets, blockchains have the potential to greatly reduce transaction fees.
Challenges of Block Chain Technology
- Nascent technology
Resolving challenges such as transaction speed, the verification process, and data limits will be crucial in making blockchain widely applicable.
- Uncertain regulatory status
Because modern currencies have always been created and regulated by national governments, blockchain and Bitcoin face a hurdle in widespread adoption by pre-existing financialinstitutions if its government regulation status remains unsettled.
- Large energy consumption
The Bitcoin blockchain network’s miners are attempting 450 thousand trillion solutions per second in efforts to validate transactions, using substantial amounts of computer power.
- Control, security, and privacy
While solutions exist, including private or permissioned blockchains and strong encryption, there are still cyber security concerns that need to be addressed before the general public will entrust their personal data to a blockchain solution.
- Integration concerns
Blockchain applications offer solutions that require significant changes to, or complete replacement of, existing systems. In order to make the switch, companies must strategize the transition.
- Cultural adoption
Blockchain represents a complete shift to a decentralized network which requires the buy-in of its users and operators.
Blockchain offers tremendous savings in transaction costs and time but the high initial capital costs could be a deterrent.
Perhaps most profoundly, blockchain promises to democratize & expand the global financial system. Giving people who have limited exposure to the global economy, better access to financial and payment systems and stronger protection against corruption and exploitation.