Now everyone knows what a smartphone is, and many understand the impact of mobile and social technologies on their business. But the story is different when it comes to the new technologies introduced here. This article details the new concept of blockchain, which is just beginning to be understood by financial professionals.
For example, suppose you have a child who goes to college and spends money on living every month. There are many ways to send money, but the most common is to transfer money from your bank account to your child’s bank account. The transaction records a debit in your bank account and a credit in your child’s bank account.
Usually, neither you nor your child sees each other’s bank records. Banks spend a lot of time and money keeping individual ledgers on behalf of their customers and ensuring their accuracy and confidentiality.
Imagine that every month you send in, you put a “block” engraved with transaction information (date, time, amount, etc.). Both you and your child can look at this block to confirm remittance and receipt. The poorly-paid child will not come in the following week and complain that the bank has made a mistake and was not remitted.
A “chain” is formed by adding blocks every month. “Blocks” and “chains” record all transactions with this child who will eventually graduate from college. As you age and decline, you can show your children this chain to show how much money they have spent on college and demand that they spend the same amount on quality nursing homes.
This is the general mechanism of the blockchain Trade. Each block is a record of a financial transaction and the chain is a shared ledger that can be seen by all parties, or “nodes,” across multiple networks. Each new transaction is verified by every node and, if valid, added to all copies of the ledger. That is, a new “block” is added to the “chain”.
Because the chain is secured by encryption, no one can change the record after posting. Even if you find a way to circumvent encryption, it is almost impossible to change the block without anyone noticing, because the records are visible to all parties. At best, it only adds new blocks.
Impact on financial systems
Modern financial structures evolved from 15th-century Venetian traders and 17th-century Dutch stock exchanges. Double-entry bookkeeping has been used so early that it has shaped the system that is the foundation of modern financial circles.
With all types of exchange and transaction concepts, such as funds, commodities, stocks and loans, each stakeholder is required to track all transactions using their own ledger. In most cases, this method is very effective. Occasionally, however, multiple ledgers may become inconsistent, leading to increased auditing, distrust and oversight.
A feature of the blockchain is that all parties use the same ledger and all parties can see it. If there is only one ledger, it is impossible that they do not match.
This new approach to financial records offers a number of benefits, including:
- Improve credibility of transactions: All parties can check all blocks in the chain, which makes it easy to ensure the fairness of all transactions. It is difficult to engage in fraudulent transactions under public perception.
- Reduction of fraud: Similarly, concealment of financial transactions and other transactions, fraudulent transfer, peripheral, if not impossible becomes very difficult.
- Reduced risk-related “lack of ethics”: Corporate credibility is reduced by increasing trust and reducing fraud. By evaluating contracts and transactions, “moral hazards” or “lack of ethics” become more noticeable.
- Reduction of transaction costs and processing time: The reduction in the number of systems and organizational infrastructure simplifies and speeds up the entire transaction process and reduces costs.
Bitcoin and blockchain are often discussed together, but they are not the same thing. Bitcoin is an application of blockchain, which does not require bitcoin. Nevertheless, it is Bitcoin that has proven globally. How blockchains work, and is rapidly sparks interest in blockchain, especially in the financial services industry such as banks and credit card payment providers.
However, disruptive blockchain innovation is not limited to the financial services industry. This includes industries that sell products through distribution or public works that measure and track electricity and water and sewage usage. Short-term housing rentals, car sharing, and food production from the farm to the table may also experience blockchain disruption.
Examples of rapidly evolving blockchain applications include online voting, medical record keeping, the history of art and historical relics; non-profit banking for areas and people not served by traditional banks, time, and Process automation of such general back-office operations.
Both financial and technology organizations have just begun to delve into blockchain and consider its future uses. Even in this early stage, there is the potential to increase efficiency, transparency and credibility while reducing risks, costs and complexity.
Edel is an Editor with a decade of print and digital media experience – specializing in Science, Technology, Finance, Entertainment, and Advertising. He is also a stock and cryptocurrency investor. When Edel is not editing or analyzing charts, you can find him with his DIY lightbox taking timelapses of plants.