The uncomplicated blockchain explanation
Simply put, blockchain talks about applying accounting principles to the process of "information sharing" of any kind, so as to create better transparency and trust.
What accounting principles?
Creation, Maintainence of an electronic ledger that records information in a format, which cannot be tampered with. Also,any deletions in its records is not allowed, only further additions. This ledger is distributed to either all users or kept in multiple trusted servers. Either ways, all of its copies get synced real-time.
What is the end goal?
Virtually any information, transactions or assets of value can be tracked and traded on a blockchain network, reducing risk and cutting costs for all involved. This is the in principle theoretical blockchain explanation.
How blockchain works?
Blockchain gets its name from the way it stores information — as blocks that are linked together to form a chain.Blocks record and confirm the time and sequence of transactions,which are then logged into the blockchain. As the number of transactions grows, so does the blockchain.
Each block contains a hash (a digital fingerprint or unique identifier),along with time stamped batches of recent valid transactions, and the hash of the previous block. The previous block hash links the blocks together and prevents any block from being altered or a block being inserted between two existing blocks. In this way,each block verifies the previous block and hence the entire blockchain. This method renders makes the blockchain tamper-proof.
Unlike so many technologies throughout history, that reduced jobs, blockchain could in fact create new opportunities for value creation and entrepreneurship.
While most technologies tend to automate workers on the periphery doing menial tasks, blockchains automate away the center.
So for instance, instead of putting the taxi driver out of a job, blockchain puts Uber out of a job and lets the taxi drivers work with the customer directly.”
There can be no complete blockchain explanation without considering its architectural advantages as listed below:
For the first time in history, two parties who neither know nor trust each other can transact and do business. The blockchain can establish trust when trust is needed by verifying the identity and capacity of any counterparty through a combination of past transaction history (on the blockchain), reputation scores based on aggregate reviews, and other social and economic indicators.
On the blockchain, the network both clears and settles peer-to-peer value transfers, and it does so continually so that its ledger is always up to date.
The case made for speed is perhaps the most compelling blockchain explanation and application for the financial industry. Today, remittances take three to seven days to settle. Stock trades take two to three days, whereas bank loan trades take on average a staggering twenty-three days to settle. The SWIFT network handles fifteen million payment orders a day between ten thousand financial institutions globally but takes days to clear and settle them. The bitcoin network takes an average of ten minutes to clear and settle all transactions conducted during that period.
Blockchain technology promises to mitigate several forms of financial risk. The first is settlement risk, the risk that your trade will bounce back because of some glitch in the settlement process. The second is counterparty risk, the risk that your counterparty will default before settling a trade. The most significant is systemic risk, the total sum of all outstanding counterparty risk in the system.
How to decide if Blockchain will benefit your institution, system or business?
» Does your business/institution network needs to manage contractual relationships?
» Do you need to track transactions that involve more than two parties?
- » Is your current system overly complex or costly, possibly due to a central point of control?
- » Can the system benefit from increased trust, transparency, and accountability in recordkeeping?
- » Is the current system prone to errors due to manual processes or duplication of effort?
- » Is the current transaction system vulnerable to fraud, cyber-attack, and human error?
If the answer is “yes” to any of these questions, blockchain will benefit your industry,business, institution or system.