Bitcoin has been disrupting the FinTech world since the release of Satoshi Nakamoto’s paper “Bitcoin: A Peer-to-Peer Electronic Cash System” in Oct 2008. Its growth has been steep in the recent past. In the last year alone, Bitcoin and its allied technologies have attracted investments over USD 1 Billion. But, Bitcoin is just the tip of the iceberg and an implementation of a greater technology that powers it. To understand Bitcoin, we must first understand Blockchain, the underlying technology that powers the Bitcoin ecosystem.
In simple words, Blockchain is a publically distributed, synchronized and secured database which is used to store and record transactions. But it’s not simple as it sounds. So, let me try to decode it.
The Blockchain system consists of the following two basic building blocks.
- A Block is a set of information such as a transaction record that is represented in the form of computer codes. If the Blocks are related to each other, they are chained to each other using a digital signature, forming the Blockchain.
- A Node is a computer system that’s interconnected to the network just like any other computer on the internet. Each node in the Blockchain system carries an identical copy of a distributed ledger (database) which holds the record of all transactions that are made in the system.
What makes the Blockchain system powerful is its anti-counterfeit mechanism that prevents fraudulent transactions. Whenever a transaction is initiated by a node in the system, a Block with the relevant information is created with the initiator’s digital signature. But, for the transaction to complete, the block must be verified by all the nodes in the system and get updated in their respective ledgers. A transaction doesn’t pass through even if a single node disapproves it. To make a fraudulent transaction, all of the nodes in the system must be hacked at the exact same time to modify the ledgers. This is almost impossible even with enormous computing power, as the keys in the ledgers are cryptographically encrypted. Even synchronizing the ledger between the nodes necessitates a clever mechanism. All nodes compete with each other on a complex mathematical problem based on the previous transactions. The ledger of the winning node is taken as the base and synced with all other nodes in the system. This security feature makes the Blockchain a fool proof system highly invulnerable to cyber-attacks.
Blockchain has a great potential to transform the Financial Industry, predominantly in the areas of Banking, Payments, and Capital Markets. The following are a few of its disruptions in the financial industry.
- Blockchain-based Cryptocurrencies like BitCoin, LiteCoin and Ripple are evolving, which might replace paper currencies in the future.
- R3, a Blockchain company was formed by a consortium of more than 70 of the world’s biggest financial institutions to perform research and development of Blockchain usage in financial systems.
- Nasdaq, the second-largest stock exchange in the world has come up with Nasdaq Linq, a Blockchain enabled trading platform.
- Distributed consensus, one of the core caliber of BlockChain has enabled fast and low-cost transactions to take place without the intervention of a 3rd party. Few payment protocols like Ripple Protocol and payment applications like BitPay have also evolved out of it.
- The programmability of Blocks has given rise to a few Smart Contract platforms such as RSK and Ethereum. These platforms enable self-enforcement of contracts between two parties once the terms are met, without the interference of a third party.
- The linking ability of Blocks can be used in provenance tracking. This comes handy when verifying the authenticity of certificates and in conducting audit trials.
This revolutionary technology is all set to transform the BFSI sector and it’s not too late to catch up with it.
About Market Simplified: Market Simplified is a thought leader in handcrafting custom solutions by continuously innovating and simplifying finance. We have maximized the revenues of industry leaders like OptionsXpress (Charles Schwab), Currenex (State Street), MB Trading, Maybank Kim Eng, Kotak Mahindra Bank and National Stock Exchange of India by providing enhanced and sustained user engagement through Experience Engineering.
About The Author: Gokoulane Ravi is a foodie, technology enthusiast, and a developer turned marketer with more than 5 years of experience in the space of mobility. When he is not working, he likes to read, write, run and cycle.