What is Blockchain and why it is relevant for Financial Domain

blockchain codeWe are not even done with utilizing the mobile app, IoT technology to its fullest that the buzzing started around Blockchain. Have you heard about what is this so-called Blockchain technology? Well, even I don’t know much about this technology. So, what you say? Should we wrap up our heads about this technology?

It is believed that blockchain will change the IT landscape in the same way as did open-source software a decade ago. And just the way Linux took almost a ten-year period to become the foundation of the advanced application development, blockchain will also take its time to come out as a low cost, competent and safe as houses way for sharing information.

What is the Blockchain technology?

The Blockchain technology was initially related to the finance and banking sector but that’s not true, this technology is gaining reputation even in other industries. The blockchain is a distributed ledger on which information is stored on blocks or nodes, in the form of a chain, hence the name ‘blockchain’. The data of this technology is not stored on one server (system) but is rather distributed across thousands of servers (systems).

These data blocks are connected through cryptography.  Each data block has a secure (cryptographic) hash function of the preceding block. By design, once data is written on the block, there’s no way it can be altered or modified. Technically, blockchain is defined as “a public distributed ledger that can register transactions between two parties effectively and in a certifiable and enduring way”. To be used as a distributed ledger, it is typically managed in a peer-to-peer network following the inter-node communication protocol.  The blockchain is as of now split into two types:

  • Public Blockchain
  • Private Blockchain

The people who have access to the blockchain-based application can only access the ledger’s data thus keeping hackers away. Further, the node(s) can’t be deleted hence experts are still debating on the challenge of managing this huge amount of data that will keep on adding.

The Structure of Blockchain:

Blocks:

The blocks hold bunches of legitimate transactions that are hashed and scrambled (encoded) into a Merkle tree. As mentioned above, each block has the cryptographic hash of the preceding block, thus linking the blocks together and forming the chain. This repetitive process guarantees the integrity of the preceding block, all the way to the original birth block.

Decentralization:

By storing data on a peer-to-peer network, the Blockchain development technology eradicated the number of risks associated with storing data on a central location. It uses the best security methods like public-key cryptography. A public key i.e. a long random looking array of numbers is an address on the blockchain, the value tokens relayed across the network are logged as fitting to that address. Each block has the replica of the blockchain with it.

Openness:

The openness of the blockchain is quite befitting compared to some traditional ledgers, which, even after being publicly accessible, still need physical access. Earlier, blockchain was illegitimate but now debates are going on to make it a private system which will be authorized by a central authority.

This was the basic structure of the blockchain technology. It is said that this technology will completely change and reform the way we do financial transactions. The reason being that due to its decentralized and unchangeable (data) nature, it will remove the involvement of the third-parties like banks.

So, let’s look at why is the blockchain technology so relevant for the financial domain and what is its impact on this domain?

Cross-border trading:

Cross-border trading is still in the olden days and needs to be revolutionized. For transactions, Western Union is the name that pops up in our heads when we want to do an international transaction. Or we have to rely on our banks for the transfer.

This process is first of all, very time consuming because the banks do identity check, follow their procedures and validate if the transaction is legitimate or not, this doesn’t happen in a day’s time. Secondly, the banks charge a fee for the transfer; depending on the country and its currency, this charge is calculated and varies as well.

With blockchain, the need for intermediaries can be removed because it allows creating direct links between the involved parties. The involved parties will be authenticated beforehand and the transfer can be done in no time. Ripple is once such granted blockchain application.

Financial Backing and Investment:

Today’s financial backing and investment models depend on intermediaries to do the transaction at every stage of a process. Lawyers, investment entrepreneurs etc. are not affordable. But the peer-to-peer lending and equity seed capital schemes have dampened this costly market for years now. It facilitates the capitalist to meet the investors directly without the expensive third-party.

Blockchain-based smart contracts can strengthen this further and improve the majority of functions. It can automate almost all functions and make sure that the transactions of investment are recorded in a transparent, safe and smooth manner.

Digitized property as a class:

With the invention of Bitcoin, a unique class of ‘Digital Property’ was created. Before Bitcoin, anything digital could be copied, be it a music album or an important file. But with Bitcoin, came the new type i.e. uncopiable digital asset. Till today, the value of Bitcoin is based on its underlying blockchain technology which helps in preventing double spending and the creation of bogus coins.

After getting consent from SEC, Overstock declared that they will offer public shares on their blockchain platform. ICOs ‘Initial Coin Offerings’ and Cryptocurrencies are other such initiations of the blockchain.

Bookkeeping and auditing:

Most of the activities of bookkeeping and auditing are centered around allocating financial resources. For accountants, getting the clearness of proprietorship of assets, the presence of obligations, updation of old records are some of the major challenges.

With blockchain-based solutions, they will be able to carry out these auditing and accounting activities more efficiently and in much less time.

Take Away:

The blockchain is capable of performing all the financial functions on itself without the involvement of any third-party or levying any kind of additional costs. Yes, it is true that blockchain is not perfect at this time but going down the lane its advantages will be difficult to be neglected. It has security problems but even today there’s no other technology that has the potential comparable to the blockchain.

– Harsh Arora

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