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Blockchain Technology and Applications

San_Francisco_California_072314
(San Francisco, California, U.S.A. - Jeffrey M. Wang)

 

 

 

- Overview

While Financial Technology (FinTech) disrupts banks, the blockchain disrupts FinTech. A blockchain is a public ledger of all bitcoin transactions that have ever been executed. Blockchain, the technology underpinning the bitcoin digital currency and the technology to power open finance, is a decentralized public ledger (or distributed ledger) of transactions that is revolutionizing the way people around the world exchange value. A blockchain is, in the simplest of terms, a timestamped series of immutable record of data that is managed by cluster of computers not owned by any single entity. Each of these blocks of data (i.e. block) are secured and bound to each other using cryptographic principles (i.e. chain). A blockchain carries no transaction cost.

The blockchain is a simple yet ingenious way of passing information from A to B in a fully automated and safe manner. One party to a transaction initiates the process by creating a block. This block is verified by thousands, perhaps millions of computers distributed around the net. The verified block is added to a chain, which is stored across the net, creating not just a unique record, but a unique record with a unique history. Falsifying a single record would mean falsifying the entire chain in millions of instances. That is virtually impossible. Bitcoin uses this model for monetary transactions, but it can be deployed in many others ways.

To use conventional banking as an analogy, the blockchain is like a full history of banking transactions. Bitcoin transactions are entered chronologically in a blockchain just the way bank transactions are. Meanwhile, blocks, are like individual bank statements. The full copy of the blockchain has records of every bitcoin transaction ever executed. It can thus provide insight about facts like how much value belonged to a particular address at any point in the past.

 

- Blockchain: Disrupting the FinTech

While FinTech disrupts banks, the blockchain disrupts FinTech. Blockchains are a very powerful technology, capable of performing complex operations. The distributed ledger technology that underpins blockchain systems is designed for near real-time transfer of data. It can deliver instant resolution to customers' transactions and interactions with their banks. Blockchain technology allows for the entire financial services industry to dramatically optimize business processes by sharing data in an efficient, secure, and transparent manner.


- Blockchain: a Comprehensive, Always Up-to-date Accounting Record 

Blockchain is a comprehensive, always up-to-date accounting record of who holds what or who transferred what to whom. It is emerging as a way to let people make and verify transactions on a network instantaneously without a central authority. 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. A blockchain carries no transaction cost.

To use conventional banking as an analogy, the blockchain is like a full history of banking transactions. Bitcoin transactions are entered chronologically in a blockchain just the way bank transactions are. Meanwhile, blocks, are like individual bank statements. The full copy of the blockchain has records of every bitcoin transaction ever executed. It can thus provide insight about facts like how much value belonged to a particular address at any point in the past. 


- Three Main Types of Blockchains

Three main types of blockchains exist: public (a platform where anyone on the platform would be able to read or write to the platform), private (it allows only the owner to have the rights on any changes that have to be done), and consortium (a mix of both the public and private, wherein the ability to read and write could be extended to a certain number of people/nodes). Ethereum is a public blockchain-based distributed computing platform. It provides a way to create online markets and programmable transactions known as smart contracts. Ethereum is the biggest innovation after bitcoin.


- Smart Contracts and Distributed Ledger

Smart contracts, a central component to next-generation blockchain platforms, are computer protocols intended to facilitate, verify, or enforce the negotiation or performance of a contract. Proponents of smart contracts claim that many kinds of contractual clauses may be made partially or fully self-executing, self-enforcing, or both. The aim with smart contracts is to provide security that is superior to traditional contract law and to reduce other transaction costs associated with contracting. Smart contracts use autonomously executed software programs running on a distributed ledger to automate business processes. Blockchain is the database and smart contracts is the application layer that makes much of the benefits of blockchain technology a reality. Smart contracts cause a convergence of smart devices, analytics, artificial intelligence, cloud, and blockchain technologies.

Smart contracts have been used primarily in association with cryptocurrencies. The most prominent smart contract implementation is the Ethereum blockchain platform, which also calls them decentralized applications or dapps. In addition, Trade finance, post-trade services, and event-driven insurance are the leading use cases being piloted/experimented by financial services institutions.  Loyalty and rewards, smart power grids, and digital rights management are the top use cases being piloted in other sector.


- Emerging Applications For Blockchain

Blockchain shows great promise across a wide range of business applications. An increasing number of enterprises across all industry sectors are now exploring how they can use blockchain technology to remove friction from business processes and build systems of trust for value exchange. Blockchain databases, powered by enterprise-grade, scalable and secure core databases are core to unlocking the potential. 

By using the blockchain, individuals can exchange money or purchase insurance securely without a bank account. Financial institutions can settle securities in minutes instead of days. Blockchain technology lets strangers record simple, enforceable contracts without a lawyer. It makes it possible to sell real estate, event tickets, stocks, and almost any other kind of property or right without a broker. Blockchain also keeps tracks and makes sure all the payments are done properly. Businesses of all types (government, banking, insurance, finance, accounting, healthcare, legal, supply chain and logistics, manufacturing, retail, etc.) can more closely manage the flow of goods and related payments with greater speed and less risk. Unlike existing financial ledgers or databases used by banks and other institutions, the blockchain is updated and maintained not by a single company or government. Instead it is run by a network of users.


- The Challenges To Blockchain Technology

But, the fame of blockchain has also given rise to several new challenges, including interoperability, flexibility, scaling, and management. There are now many blockchain-based currencies, each optimized for different purposes. And none of these currencies are compatible with others, making it hard for users to transfer money between them. Also, there is a growing tendency to use blockchain in other fields. These fields include IoT, the supply chain, stock exchange and other domains where secure data transactions are important. However, the original blockchain used in bitcoin was not designed to scale to all possible use cases, making it difficult to use it in these domains. Since blockchain is a decentralized system, once it goes wrong, there will be no one to sue and be responsible for, and there is the challenge of management. It will take some time for such problems to be worked out. The industry will have to work with governments to create standard rules and laws to govern transactions. Further, nodes holding copies of the blockchain receive constant updates. These nodes are distributed around the world. Because of this, blockchains have high latency. 

Blockchain needs to undergo changes if it is to meet the requirements of every possible industry. The Hyperledger Project, an effort overseen by the Linux Foundation, is a collaborative effort created to advance blockchain technology by identifying and addressing important features for a cross-industry open standard for distributed ledgers that can transform the way business transactions are conducted globally.

 

 

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