Blockchain is gaining popularity because of the recent turmoil created by popular Cryptocurrencies like Bitcoin and Ethereum in the global financial ecosystem. Even the people who are not directly connected with the I.T. and software industry are growing interest in knowing more about this impressive technology. And why they shouldn’t be? Blockchain technology has so many practical applications in major industries like Finance, Supply Chain, Healthcare, Manufacturing etc. that each and every professional of the industry would have to deal with it sooner or later.
The reason behind the vast number of use-cases of Blockchain is in its features or rather in its definition. It is difficult to define Blockchain technology because it is a technological solution that has been made by combining multiple technologies. Before getting into what is Blockchain technology, let’s just be clear what it is not!
Blockchain is not (only)
- A database
- A network
- Bitcoin or Ethereum or other Cryptocurrencies
- A software
A Financial Ecosystem with No Middlemen
Blockchain was originally developed with the thought of being able to transfer money peer-to-peer without the need of intermediaries like Banks. The idea was to build an ecosystem where people can do transactions among themselves transparently and securely, even if they don’t trust each other.
Eventually, in 2009, Bitcoin was developed – A digital currency which works on the principals of peer-to-peer transactions and can be exchanged in a network in which each member (computer) has a copy of the database (distributed ledger). Each transaction in this network is time-stamped and its details are encrypted through cryptographic hashing. This underlying technology on which Bitcoin works is the Blockchain.
In a Blockchain network, before a transaction is processed, it needs to be validated by the members of the network (called nodes) to ensure its authenticity. It is further verified by some specialized member of the network called miners, who compete with each other to solve a mathematical puzzle in order to verify a transaction. The miner who verifies the transaction first gets incentivized.
Centralization V/s Decentralization
Blockchain is based on the concept of decentralization since it utilizes distributed ledger technology. Centralization of the data makes a system more vulnerable to security attacks. A hacker is able to steal the data more easily since it is all stored in a central place. Moreover, if this central system goes down, it leads to the failure of the whole network. On the other hand, in a decentralized network, even if a single node (computer) goes down, the network continues to operate. It is more difficult to steal any information since it is distributed among the nodes of the network.
Why is it So Secure?
One of the main reason why Blockchain is gaining popularity is the security features it offers. But what makes it so secure?
Firstly, whenever a transaction is initiated in the network, it gets known to all the nodes in the network. So a suspicious activity can be easily pointed out and appropriate action can be taken.
Secondly, after the verification of a transaction by the miner, the details of the transaction is recorded in the form of a cryptographic hash – a specific alphanumeric string of fixed size having a time stamp. If the original information gets altered, it would produce a different hash string.
Thirdly, after a specific period of time (varies for different Blockchains), transactions are stacked together in the form of a ‘Block.’ Each of these Blocks has the address to the previous Block, thus forming a chain of Blocks (hence the name ‘Blockchain’). To alter some information in a Block, a hacker would need to alter the information of all the Blocks in the chronological order, which is practically impossible.
Is it Really Hack-Proof?
Not exactly! But yes, Blockchain makes stealing/altering an information so difficult that it doesn’t make sense economically for a hacker to invest so many resources. In simple words, it makes hacking unprofitable. However, if a hacker can afford buying computational power, then he might be able to bypass the security features that Blockchain offers.
Read Also: Largest security Holes in ICOs and 9 Important Ways to Keep Your Initial Coin Offering’s Tokens and Funds Secured
How can you use blockchain in the Financial Industry?
Since Blockchain was originally developed for financial transactions, its implementation is most fruitful for the financial industry. Some of the use-cases are as follows:
- Cross-Border Remittance: Transferring money across the border has been a problem since long. There are so many regulations and intermediaries involved in the process. It takes days and sometimes even weeks for the money to get actually credit in the receiver’s account. Not to mention that there are no guarantees that the money would even reach its destination, and if it gets lost on the way, the process to get it back is so painful.
Cryptocurrencies are not governed by any regulations (in most of the countries) or fewer regulations as compared to fiat currency. They can be transferred almost instantaneously in any part of the globe without the need of any intermediary.
- Automated Settlement: Blockchain (like Ethereum) deploy Smart Contracts to automate processes and complete transactions without any manual intervention. These are conditional codes (if this happens, do that) written to execute when exposed to an external data trigger. For example, in this case, transfer of money in the specific account would happen on receiving approval (data trigger) or on the due date (data trigger).
- Automated Reconciliation: In the financial industry, every party manages and store its own version of the document. A PO (Purchase Order), SO (Sales Order), Invoice etc. are borne out of the same information, but yet stored in different data silos. Blockchain act as a single source of truth since any information recorded on the Blockchain has been mutually agreed upon by all the parties in the network. With all the information available on the Blockchain, there is no need to reconcile each of this document manually, which is a cumbersome process that requires both time and resources.
- KYC and Identity Management: For availing any financial service, like loans, the KYC process is mandatory. Since Blockchain records information immutably, it helps in storing the information submitted by the user securely, and hence eventually aids in identity management, which today is the cause of many frauds and thefts.
- Loyalty Rewards: Most of the loyalty and customer engagement programs today suffer from low activity and low redemption. The major reason behind this is the limitations of the loyalty programs such as limited redemption options for the user and limited geographical coverage. Blockchain offers redemption of loyalty points at merchant stores globally. Moreover, some Blockchain-based loyalty projects also offer the interoperability of the loyalty points among different loyalty programs.
Blockchain technology is not a magical solution to every problem that exists on the internet today. However, if implemented correctly, it can streamline business processes reducing cost and time involved. It is particularly effective for the businesses where centralization of the data is a major concern. However, like any other new technology, it is still going through a buggy phase and can’t be called perfect yet.