Since Bitcoin’s meteoric rise to almost $20,000 in 2017, Blockchain has emerged as a major buzz word. But what exactly is blockchain and why is it such a significant advance in financial technology.
What is Blockchain?
Blockchain can simply be said to be a decentralized, distributed ledger (Distributed Ledger Technology or DLT) that records the origin and transactions of a digital asset in such a way that it is inviolable and unalterable. This high level of integrity is achieved through decentralization and cryptographic hashing.
To illustrate the concept of blockchain, its easy to think of a WhatsApp group. The groups content is created and shared amongst all participants and no one person has total control over the group and the group records the conversation permanently and indelibly. Everyone can use it at the same time and everything happens in real-time.
Now, Blockchain is significantly more complicated than a WhatsApp group but this is a simple analogy to understand how the technology functions. Blockchain was originally created by Satoshi Nakamoto (an unknown individual or group of individuals) to facilitate Bitcoin transactions, which is why Blockchain and Bitcoin are so often linked together in conversation. However, blockchain can be used to transfer and record transactions of any digital asset token.
How it Works
It’s difficult to go into great detail about how blockchain works within the confines of this article. However, a blockchain consists of three important things: blocks, nodes and miners.
The Blocks – Each block consists of data (i.e. transaction information) plus a nonce (a 32-bit whole number) and a hash (a 256-bit number added to the nonce).
It sounds complicated but don’t worry, it isn’t necessary to understand the detailed mechanics. What’s important is that the nonce generates the hash and the two combine to sign and lock down each block using advanced cryptography.
Miners – For new blocks (i.e. new transaction data) to be added to the chain, miners need to use specialized software and plenty of computer processing power to find the right nonce-hash combination to add their new block to the chain. When that happens, the miner is said to have found the “golden nonce” and as a result their block gets added to the chain.
Once a block is successfully mined, the change is verified and accepted by all of the nodes on the network and the miner receives a reward in terms of newly generated tokens. This is what Bitcoin mining and crypto-mining is all about. Miners are the transaction facilitators and are thus financially rewarded for their work.
Changing an earlier block in the chain requires re-mining not just one block but all the blocks that come after. This is why blockchain is extremely difficult and virtually impossible to accidentally or maliciously manipulate.
Nodes – The defining feature of blockchain is that it is decentralized, thus distributed across a network of nodes. No one computer or organization ever has control or ownership over the whole chain. Nodes can be any kind of electronic device that keeps a copy of the blockchain and keeps the network operational.
Each node has its own copy of the blockchain and the network will need to algorithmically approve each newly mined block for the chain to be updated, trusted and verified. As blockchains are transparent, all transactions can be reviewed and checked. Each participant on the blockchain is assigned a unique alphanumeric identification number (for example, a Bitcoin wallet address) that links their transactions to them.
As the information is publicly available and combined with checks and balances, a blockchain is thus able to maintain integrity and trust amongst its users.
As the MIT Technology Review said in April 2018, “The whole point of using a blockchain is to let people—in particular, people who don’t trust one another—share valuable data in a secure, tamperproof way.” This makes blockchain excellent and ideally suited to financial transactions.
At Euro Exim Bank, we are proud to be one of the early adopters of blockchain technology through our partnership with RippleNet. Blockchain is helping us provide cutting-edge solutions that make global cross-border payments faster, cheaper and more secure than ever before; especially for participants in emerging markets.
Benefits of Blockchain for Financial Transactions
Traditional Transactions are Complex & Costly – There is plenty of room for human error and fraud as each participant must maintain their own ledger. These networks are inefficient as they require intermediaries to validate transactions. Transactions are often subject to delays due to different time-zones, data being stored locally etc…
A Single Ledger for All – On a blockchain everyone uses the same ledger. Once transactions are validated they’re permanent, secure and immutable.
Possibility for Smart Contracts – Blockchain can accommodate additional rules and codes on top of basic transactions, as mutually agreed to by the transacting parties. This allows for contracts to be enforced automatically, removing the need for 3rd party intervention.
Freedom – Blockchains are not subject to restrictions, sanctions or other punitive regulations. Everyone is free to transact without limit and without the involvement of intermediaries.
Streamlined – The blockchain process is highly streamlined reducing the need for paper processes and increasing efficiency while providing 100% transparency.
A Blockchain Future
Blockchain will have huge benefits going forward into the future, not just for financial services but for any service that requires publicly available, tamper-proof records. The technology will also democratize the financial system and equalize the playing field and we at Euro Exim Bank are proud to be part of the pioneering group leading the charge.