Blockchain is a trending topic around the globe these days, yet for many, the technology remains an elusive concept. So, today in our 2nd part of Fintech series, we will learn more about Blockchain and how it works.
What is blockchain?
Currently, most people use a trusted middleman such as a bank to make a transaction. But blockchain allows consumers and suppliers to connect directly, removing the need for a third party.
Using cryptography to keep exchanges secure, blockchain provides a decentralized database, or “digital ledger”, of transactions that everyone on the network can see. This network is essentially a chain of computers that must all approve an exchange before it can be verified and recorded.
Blockchain Vs Bitcoin — What’s the connection?
Bitcoin is an innovative peer to peer electronic cash system that enables online payments to be transferred directly, without an intermediary.However, the main technical innovation is not the digital currency (Bitcoin) itself but the technology that lay behind it, known today as blockchain.
Although commonly associated with Bitcoin, blockchain technology has many other applications. Bitcoin is merely the first and most well-known uses. In fact, Bitcoin is only one of about seven hundred applications that use the blockchain operating system today.
“[Blockchain] is to Bitcoin, what the internet is to email. A big electronic system, on top of which you can build applications. Currency is just one.”— Sally Davies, FT Technology Reporter
How does it work in practice?
In the case of Bitcoin, blockchain stores the details of every transaction of the digital currency, and the technology stops the same Bitcoin being spent more than once.
The blockchain network lives in a state of consensus, one that automatically checks in with itself every ten minutes. A kind of self-auditing ecosystem of a digital value, the network reconciles every transaction that happens in ten-minute intervals. Each group of these transactions is referred to as a “block”. Two important properties result from this:
- Transparency: Data is embedded within the network as a whole, by definition it is public.
- It cannot be corrupted: Altering any unit of information on the blockchain would mean using a huge amount of computing power to override the entire network.In theory, this could be possible. In practice, it’s unlikely to happen. Taking control of the system to capture Bitcoins, for instance, would also have the effect of destroying their value
A second-level network
With blockchain technology, the web gains a new layer of functionality. With the added security brought by the blockchain new internet business are on track to unbundle the traditional institutions of finance.
Goldman Sachs believes that blockchain technology holds great potential especially to optimize clearing and settlements, and could represent global savings of up to $6bn per year.
Blockchain can work for almost every type of transaction involving value, including money, goods and property. Its potential uses are almost limitless: from collecting taxes to enabling migrants to send money back to family in countries where banking is difficult. It could also help to reduce fraud because every transaction would be recorded and distributed on a public ledger for anyone to see.
Future will seeblockchain as an integral part of digital payments to drive financial inclusion and social justice.