What are blockchains?
Blockchains are decentralized databases or digital ledgers of cryptocurrency transactions that can be seen by all parties on the network.
The most recent transactions are recorded and added to form completed blocks in chronological order, allowing market participants to keep tabs on cryptocurrency related transactions without central record keeping. Each computer connected to the network receives a copy of the blockchain which is downloaded automatically.
Blockchains were first created in 2009 by Satoshi Nakamoto, for the purpose of sending payments digitally and anonymously between two parties without needing a middleman to verify the transaction.
How do they work?
Blockchains are basically shared databases which contain entries that require to be confirmed and encrypted.
A block is the newest and developing part of a blockchain. It records recent transactions until it is completed. Afterwards, the block goes into the blockchain as a permanent database and a new block is generated. All the blocks in the blockchain are connected in linear, chronological order. Each block has the hash of the previous block. The blockchain contains information about the addresses and balances of various users, starting from the genesis block to the last block to be completed.
Blockchains are immutable, meaning that when new data is entered, it can never be erased. Even though data cannot be erased, consenting parties can update the blockchain and the data can be distributed, but not copied.
The size of a blockchain grows by each cryptographic add of a block, and is thought by some to create problems in storage and synchronization.
The code and framework behind blockchains can be a secure, digital alternative to banking services and a useful tool in financial processes.
But in spite of its great potential, blockchain technology is still in a growing phase, therefore setbacks in technology deployment and bugging issues can occur.
Cryptocurrencies and Blockchains
The first decentralized cryptocurrency ever created, Bitcoin was born by making use of blockchains. Since its apparition, thousands of cryptocurrencies have been created by using the same blockchain technology and cryptography, thus facilitating secure and anonymous transactions.
Currency is not the only application that can be built on blockchains. The Ethereum public blockchain platform has made use of this technology and it uses it to make “smart contracts”.
Smart contracts are digital contracts that bypass intermediary services, and they can be used to exchange money, property, shares in a transparent and conflict-free way. Smart contracts are scripts that self-execute when a certain set of conditions are met. Read more about them from What Are Smart Contracts?
The technology is attracting not only financial institutions and stock exchanges, but also people from the music industry, insurance and Internet of Things (IOT) devices. It has been suggested that it can be used for voting, weapon and vehicle registrations, medical records and to confirm ownership of various artwork.
Given its potential to simplify business operations, new blockchain-based models have started to replace the inefficient accounting and expensive payments in the financial sector.
Hesitant at first, banks have started researching on how they can install back-office settlement systems for trade processing, transfers and other transactions at a higher rate, while also saving them money.
The first international blockchain transaction was a $35,000 deal for the Australian cotton trader Brighann Cotton Marketing for purchasing 88 bales of cotton from the United States. The transaction was completed on the 24th of October, 2016 and it was brokered by the Commonwealth Bank of Australia and Wells Fargo & co. This trade was made by using a smart contract that automatically made partial payments when the cotton shipment reached specific geographic regions.
The Linux Foundation has made tools for building blockchain collaboration networks, such as smart contracts.
According to the CEO and founder of Northwest Passage Ventures, a firm that invests in blockchain technology companies, blockchain’s simple design makes it the most secure of technologies.
He goes on saying that: “In order to move anything of value over any kind of blockchain, the network [of nodes] must first agree that that transaction is valid, which means no single entity can go in and say one way or the other whether or not a transaction happened. To hack it, you wouldn’t just have to hack one system like in a bank…, you’d have to hack every single computer on that network, which is fighting against you doing that.”
No matter how secure it may be, we must keep in mind that no existent system is immune to hacking.
Computing resources are enormously high, because the technology needs lots of computers to find transactions and make or discover the blocks. To give things a perspective, the Bitcoin blockchain amasses a computing power varying from 10 to 100 times much more than all of Google’s combined serving farms.
“So again, [it’s] not un-hackable, but significantly better than anything we’ve come up with today,”
Distributed ledger technologies have proven to be very efficient in cost savings. This system facilitates the internal flow of operations in the business and banking sector, significantly decreasing the number of expenses, mistakes and delays which usually occurred when dealing with traditional methods of record stocking.
Distributed ledger technologies will have the most impact in the following three areas.
Accounting systems are more expensive to maintain in comparison to electronic ledgers, and it also reduces the number of staff.
Distributed ledger technologies eliminate repetitive confirmation steps and have far fewer errors due to the fact that the system is almost fully automated.
Less capital will be held in pending transactions if the processing delay is minimized.
DLT also saves brokers from putting more money in unsettled trades. The technologies’ transparency makes it easier to be audited and save money in anti-money laundering regulatory compliance costs.
Removing almost all human involvement will prove beneficial in cross-border trading, saving time because it is not affected by time-zone and the processing of all of the parties’ confirmations on their payment.
Even though there is a big hype now with blockchains, not everyone is readily embracing it.
Banks are wary of an open-source model, as both banks and regulators wish to preserve their close control over transactional processes.
Regulation is needed to create a digital platform for commerce and financial transactions. In real life, certificates have to be digitized to be used in an electronic system.
Blockchains offer a lot of benefits, and the means to create flexible and secure businesses and operations. It remains to be seen if companies will succeed in adopting this technology and produce services and items which will interest customers. So far, the demand for blockchain-based services is rising, and the technology is evolving at impressive rates. It will also have a massive impact on global economy mainly thanks to a continuously growing list of real-world applications. But it will take time for people to develop and master the many uses of this technology.
Blockchain technology has endless potential applications. At the time being, some of said application are still in developmental stages or in beta mode. More and more investors are pouring money into blockchain startups so it will not come as a surprise if distributed ledger services will become mainstream products in a few years.