Is Blockchain the future of the financial system?
Satashi Nakamoto created the Bitcoin; a cryptocurrency based payment system. While the Bitcoin is still struggling to replace the traditional currency, the technology that runs it has caught everyone’s attention and is also being touted as the game changer in finance industry. The technology is Blockchain which infactis a distributed database. It consists of blocks, holding batches of individual transactions. Each block contains a timestamp and a link to a previous block. The Blockchain is the main technical innovation of bitcoin, where it serves as the public ledger for bitcoin transactions Every user is allowed to connect to the network, send new transactions to it, verify transactions, and create new blocks, making it permissionless.
In simple terms, the Blockchain is a technology which allows two users to transact without requirement of a third party. It acts as a digital ledger which keeps a record of all transactions known as “chain” wherein an individual transaction is termed as a “block”. Blockchain uses cryptography to keep exchanges secure. It provides a digital ledger in the form of a decentralized database, which everyone on the network can see. The network essentially represents the chain of computers which must authorize, approve and record the transaction taking place.
The advantage of Blockchain is that it can work for a transaction involving any kind of commodity be it a good, money, property etc. It has numerous other uses. Firstly it prevents fraud because a transaction shall be noted and accessible to everyone on the network. Secondly, it can be used for collecting taxes and thirdly it can also be used to send back remittances.
The advantages of Blockchain are numerous:
- Firstly it provides an Automated conflict resolution that ensures that conflicting transactions (such as two or more attempts to spend the same balance in different places) never become part of the confirmed data set.
- Secondly the system provides for the ability for independent nodes to converge on a consensus of the latest version of a large data set such as a ledger, even when the nodes are run anonymously, have poor inter-connectivity and have operators who are dishonest or malicious.
- Thirdly a node connected on the network can determine, with reasonable certainty, whether a transaction does or does not exist in the data set.
- Fourthly a node well connected to the network can determine with a reasonable level of certainty whether the transaction is valid, able to take place and become final (i.e., that no conflicting transactions were confirmed into the Blockchain elsewhere that would invalidate the transaction, such as the same currency units “double-spent” somewhere else).
- The transaction history cannot be changed.
The idea has caught up with many organizations. Presently very small proportion of global GDP (around 0.025%, or $20 billion) is held in the Blockchain, according to a survey by the World Economic Forum’s Global Agenda Council. However, there are organizations like UBS, Microsoft, IBM, PwC and The Bank of Canada who are experimenting with the technology so as to adapt it in the future. The major advantage which Blockchains have is that there potential is limitless and can easily replace the public ledger system. However, the major challenge comes from the Bureaucracy which runs the public ledger system. It is very unlikely for it to let go the power which it enjoys by running the public ledger system. However, the quote from the movie The Shawshank Redemption ” hope is a good thing, maybe the best of things, and no good thing ever dies” comes out in favor of the Blockchain.