What is a Blockchain
The fundamental principle of the Blockchain technology is decentralized accounting, through which network participants approve, verify and record transactions. Network members, also known as miners, collectively check information, and the blockchain system itself prohibits unauthorized changes to entries.
As the name of the Blockchain system implies, network transaction data is stored in blocks or data segments. Blocks are a series of transaction records that are associated with other approved transactions. Blocks store and record transactions in the global Blockchain network. As the number of assets or transactions in a commercial network increases, the level of trust in the ledger increases.
Assets that can be tracked using this technology include:
- Houses, cars.
- Earth, patents.
- Copyrights and trademarks.
The destabilizing feature of Blockchain is that this technology facilitates peer-to-peer transfers or transactions without intermediaries, such as a bank or governing body. Unlike the current intermediary-based transaction model, Blockchain technology requires confirmation of operations by consensus among miners. This is usually called a consensus testing protocol. Miners must use the important computing power of their computers to verify and cryptographically synchronize the database in real time and, in turn, receive commissions or “tokens” from the base Blockchain system.
Five qualities of Blockchain technology
Blockchain technology has five characteristics that create a sustainable network:
- General information book: the data registration book does not belong to anyone and is not controlled by any object. The reliability and security of the general ledger are independent of a single entity. Instead, a general ledger or database requires the public consent of network members.
- Security and confidentiality: security is maintained through consensus on the network and its continuous synchronization with previously verified transactions. Blockchain values in the form of ‘tokens’ are assigned to electronic wallets of network participants. The wallet on the network has a unique identifier and is updated in accordance with new transactions. Although the wallet’s transactions and email addresses are publicly available, the names and details of its respective owner remain confidential if the wallet does not exist in a regulated exchange.
- Transparency of information: The concept of an open shared book allows network members to verify transactions and have ownership without intermediaries. At the same time, transactions are dated and verified in real time without the need for a third-party audit.
- Consensus Algorithm: Using consensus algorithms, all network participants must agree that the transaction is valid. Transactions that do not comply with the consensus protocol are discarded as invalid operations.
- System flexibility: in addition to accounting for transactions and their cost, the “tokens” of the Blockchain network can include user rules, such as contract terms. For example, a “smart lease” token will include information on rental conditions, such as initiation and permission. Because protocols and business rules can be incorporated into the system, Blockchain networks can adapt and evolve to support a wide range of activities.
Blockchain Network Benefits
Blockchain has the following advantages over traditional networks:
- Faster settlement of transactions: for current, intermediary intermediaries, such as banks and trust companies, it may take days or even weeks to confirm, verify and compensate transactions.
- Less cost: peer-to-peer elimination of costs associated with audit supervision and duplication of records.
- Enhanced Security: Consistent protocols and a distributed Blockchain architecture prevent manipulation. As the blockchain grows, it becomes more and more secure.
- Enhanced Auditability: A common journal serves as a single open book for monitoring and auditing transactions.
What is a “hash’ for (cryptographic summary)
Each block of information contains a digital signature called a “hash” (cryptographic summary). The ‘hash’ is dated and associated with recent transactions and with the ‘hash’ of the previous block. A “hash” is issued by a trusted trust agency, otherwise known as miners. Miners are assigned to blocks to verify and provide identification information that is protected against unauthorized access.
Since the “hash” of the previous block is associated with the next new block, it prevents the blocks from changing or adding a block between two existing blocks. As each subsequent block is added, the requirements for checking the previous block increase and, therefore, the security of the entire Blockchain system increases. As accounting grows, it is more and more protected from fakes.
How revolutionary can Blockchain technology be for the industry
Given the rapid growth of e-commerce, online banking and the spread of mobile transactions around the world, companies need networks for fast, secure, transparent and efficient transactions. Despite advances in technology in traditional databases and networks, audit and registry functions remain costly, inefficient, and vulnerable to security.
Transactions in traditional trading are becoming more expensive and more complex. The commissions of each new intermediary for their services and transaction cause higher management costs. For example, in the insurance sector, there are management costs associated with subscribing to company policies, as well as costs associated with claiming. The cost levels of these features can be reduced or eliminated by a Blockchain-based smart contract.
Inefficiencies in the current business environment often arise from duplication of information. For example, in the credit sector or in fixed income trading, several parties monitor documentation, ownership, and negotiations. This type of duplicate work can be reduced with the Blockchain solution, which essentially requires synchronization of all versions of the database.
Centralizing traditional databases is more risky than a general book. Thanks to a centralized management system, a single weak point can jeopardize the entire commercial network. Thus, a decentralized Blockchain network can significantly improve transaction and accounting security.
What is the future for Blockchain technology
Although historically Blockchain applications have been limited to cryptocurrencies (they were originally used primarily to make payments from “shadow networks”), it is believed that Blockchain technology itself will revolutionize the payment and accounting of assets.
This technology will change sectors that have benefited from a lack of transparency in trade. Blockchain has the potential for:
- Lower transaction and accounting costs;
- Increased security;
- Increase the efficiency of commercial and personal transactions.
At the same time, the success of Blockchain will result in the disintegration of those intermediaries who currently rely on the inefficiency of the financial structure within their business model. Banking and financial intermediation sectors can be transformed through the introduction of Blockchain networks. This transformation of the blockchain system opens up opportunities for current and new participants, but the technology poses a threat to the status quo of existing banks. Banks should be prepared to adapt and introduce new technology in addition to overcoming obstacles encountered in the adaptation process.