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It’s almost impossible to avoid hearing about Blockchain nowadays. As one of the hottest new concepts in the financial industry, and one that looks set to be highly disruptive at that, it’s the big buzzword right now. But what exactly is Blockchain? Relatively few people actually understand how the concept works – which is why we’re here to clear that up for you!
As you probably already know, many financial transactions involved a trusted third party intermediary – especially when you’re transferring money from one country to another. These third parties (usually your bank) handle the transfer of the funds, which can take a few days in some cases. What’s more, they also often charge a commission, either as part of the exchange rate conversion or as an additional charge.
Blockchain, on the other hand, works a bit differently. The easiest way to explain how the concept works is to take you through a real-world example, and explain the technical terms as we go. First of all, let’s say that you (in technical terms, a “node”) have a file on your computer listing all your financial transactions (known as a ledger).
Now, you might not be the only person with this file – for instance, there might be two accountants (or “miners”) who also need access to it. In that case, the file is “distributed”, because other people have the exact same file.
Now, when you make a transaction, the accountants need to update their copy of the file. So when that happens, your computer sends them a message to let them know. The accountants race to be the first one to check if you can afford it, because they want to make sure they can get paid their salary of Bitcoins. Whoever gets there first sends everyone a response explaining their reasoning behind verifying the transaction (their “proof of work”). If the other accountant agrees with them, then everyone updates their files, and the transaction is logged. Blockchain is the technology that makes this possible – it’s the software which sends out the updates, and allows everyone to keep track of things.
While the above is just a simple example of how Blockchain works in practise, the concept as a whole isn’t much more complex than that. Naturally, the complexity comes from how individual users put the technology into practise. There are so many different possible uses for Blockchain. That’s because the original Blockchain tech is open-source, meaning anyone can access the code and modify it to suit their needs.
It was designed around the need for transferring Bitcoin, and replacing those third-party intermediaries we mentioned earlier with collective verification – a radical concept that’s transforming the whole financial industry. Not only is it fast, but it’s highly secure, and offers a high level of traceability.
In the example given above, which is a public Blockchain, there are multiple versions of the user as different nodes on the same network. These nodes act as both miners and executors of transactions at the same time. The transactions are collected into “blocks” which are then added to the Blockchain – hence the name.
The Bitcoin reward that the miners receive will depend on the amount of time it takes to work out if the transaction is valid, as well as the right mathematical key to link the applicable block into its right place in the open ledger. The more transactions are completed, the more Bitcoins enter the virtual supply chain.
Transactions, as well as records of them are essential to our economic system, but the way we approach them simply hasn’t caught up with the digital revolution. The way that we kept track of them was simply much too slow for today’s world- until now. Blockchain could well eliminate the need for intermediaries like banks and lawyers, which will of course have a huge impact on the entire economy.
However, as with most digital technologies, it will take time before Blockchain is put to use across the industry, and so it remains to be seen just what that impact will be. The possibilities are enormous, though, as Blockchain could potentially be used to track any sort of transaction, financial or not, and it can be private as well as public. This means that this technology could be used to cut compliance and back-office operation costs, so its impact will likely travel far outside the financial sector.
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