Blockchain is widely regarded as having the potential to be among the key technological revolutions of this century. Indeed, this distributed ledger system was popularized with the controversial introduction of the Bitcoin cryptocurrency.
While the cryptocurrencies and their underlying accounting system is gaining momentum, many financial institutions are trying to figure out how to best participate in this revolution. Specifically, they want to know how to best upgrade their existing IT architectures and operations to take advantage of this new technology. This article provides an overview on the subject.
A blockchain is a database that stores blocks of encrypted data, then puts them together to form a single source of chronological truth for the data. Digital assets are distributed rather than copied or transferred, creating an immutable record of an asset.
The asset is decentralized, allowing real-time access and transparency for the public. A transparent change log preserves the integrity of the document, which creates trust in the resource. Blockchain’s inherent security measures and public ledger make it the technology of choice for almost all industries.
Although blockchain is a new technology, it already has a rich and interesting history. The following is a brief timeline of some of the most important and notable events in the development of the blockchain.
In 2009 the first bitcoin transaction (BTC) succeeded takes place between computer scientist Hal Finney and mysterious Satoshi Nakamoto.
A year later, Florida-based programmer Laszlo Hanycez does it all first purchase using bitcoin, two pizzas from Papa John. Hanycez transferred 10,000 BTC, worth around $ 60 at the time. Today it worth 80 million dollars.
The number of traders accepting BTC surpassed 100,000 in 2015. One of the most significant dates in bitcoin history was 2016. This year, tech giant IBM announced a blockchain strategy for business solutions cloud based. Furthermore, the government of Japan recognizes the legitimacy of blockchain and cryptocurrencies.
How does the blockchain work?
The blockchain is made up of three important concepts: blocks, miners and nodes.
Each chain is made up of several blocks, each of which has three basic elements:
- Lock the data.
- 32-bit integers called nonces. The latter is grandomly generated when creating a block which then produces a hash of the block header.
- The hash is a 256-bit number tied to the nonce. It must start with a large number of zeros.
After the first block of a chain is created, a nonce generates the cryptographic hash. The data in the block appears signed and forever bound to the nonce and hash unless extracted.
Miners create new blocks on the chain through a process called “mining”. Miners use special software for solve math problem incredibly difficult to find a nonce that generates an accepted hash.
The nonce is only 32 bits and the hash is 256. So there are about four billion possible nonce-hash combinations to extract before you find the right one. When this happens, the miners are said to have discovered the “gold nuncio”. Then their block is added to the chain.
One of the most important concepts of blockchain technology is the decentralization. No computer or organization can own the channel. Instead it is a registry distributed through nodes connected to the chain. Nodes can be any type of electronic device that keeps copies of the blockchain and keeps the network running.
Each node has its own copy of the blockchain. The network must algorithmically approve any newly extracted blocks for the chain to be updated, approved and verified.
Blockchain is often associated with cryptocurrencies. These are digital currencies like Bitcoin, Ethereum or Litecoin. They can be used to purchase goods and services.
Just like a form of digital money, cryptocurrencies can be used to buying everything. Unlike cash, it uses blockchain to serve as both a public ledger and an advanced cryptographic security system. Therefore, online transactions are always logged and secure.
To date they are approx.n 6,700 cryptocurrencies worldwide which has a total market capitalization of approximately $ 1.6 trillion.
The advantage of the blockchain for cryptocurrencies:
- The blockchain security makes theft much more difficult, as each cryptocurrency has its own irrefutable identifiable number which is attached to an owner.
- Crypto reduces the need for foreign exchange and individualized central banks. With the blockchain, cryptocurrencies can be sent anywhere and to anyone in the world. And this without the need for currency exchange or central bank interference.
- Cryptocurrencies can make some people rich. Speculators have raised the price of cryptocurrencies, particularly Bitcoin, by helping some users to become billionaires.
- More and more large companies are embracing the idea of a blockchain-based digital currency for payments. In February 2021, Tesla announced it would invest $ 1.5 billion in Bitcoin. Furthermore, the company would accept it as payment for its cars.
Blockchain: Ethereum project
In late 2013, Russian-Canadian developer Vitalik Buterin published a white paper proposing a platform that combined traditional blockchain functionality with one key difference:
execution of computer code. Thus was born the Ethereum project. The Ethereum blockchain allows developers to do this create sophisticated programs that can communicate with each other on the blockchain.
Ethereum programmers can create tokens to represent any type of digital asset. But also to trace its ownership and perform its functions according to a series of programming instructions.
Tokens can be music files, contracts, concert tickets, or even a patient’s medical records. More recently, the non-fungible tokens (NFTs) have become fashionable. NFTs are blockchain-based unique tokens. Their store digital media (such as video, music or art).
Each NFT has the ability to verify the authenticity, history and exclusive ownership of digital media. NFTs have become very popular, as they offer a new wave of digital creators the opportunity to buy and sell their creations, while gaining a adequate credit and a fair share of profits.
Blockchain: use cases
Blockchain has a almost infinite number of applications in almost all sectors. These new uses have expanded the potential of ledger technology to permeate other industries. Including media, government and identity security. Thousands of companies are currently researching and developing products and ecosystems entirely based on booming technology.
Blockchain challenges the current trend of innovation. It allows companies to experiment with breakthrough technologies such as peer-to-peer power distribution or decentralized media modules. Just like the definition of blockchain, the uses of the accounting system will only evolve as technology evolves.
Also, ledger technology can be applied monitor financial fraud and securely share patient medical records among healthcare professionals. Plus, it’s a better way to do it keep track of intellectual property in companies and the musical rights of artists.
Blockchain: validation and registration of transactions
In the blockchain, the balances of the absolute accounts are not recorded. However, users with access to all transactions since system startup can calculate the balances of individual accounts “on the fly”. This is because I am able to see how many tokens a single account has received compared to the ones it has sent.
Therefore, when the inclusion of a new transaction in the blockchain is proposed, the members of the network have the possibility to easily verify if this transaction has been validated. That is, if the corresponding account has the relevant funds. If this operation has been confirmed, it will be placed in a block and possibly added to the blockchain.
blockchain : proof-of-work consent mechanism
In general, a “proof of work” is difficult (expensive, time-consuming) data to produce. However, it is easy to verify by others. For blockchains, this concept is used manage the control of the general ledger between different participants (i.e. who can make changes to the ledger and when). The validation of the blocks takes place through a random process, called “mining”. A “proof of work” is required for each of the blocks.
All participating individuals (the “miners”) are competing to find this “proof of work”. This is a solution to a crypto-math problem involving the transactions of this block as an input. When a miner finds a solution, it is broadcast to all network participants, who can easily confirm its validity and accept the new block.
This way the network is protected from any fraudulent activity or tampering. The power of the consensus mechanism lies in the extreme computing resources required to solve the underlying cryptographic problem for each of the blocks.
The future of blockchain
The main advantages of a blockchain-based world are obvious: financial institutions would be able to track their assets in an omnipresent wayinstead of having to keep track of multiple databases separately. Today, settlement and clearing of US equities takes three days.
Blockchain has the potential for reduce this transaction time to minutes. Also, her simultaneously reduces costs and systemic risk. Blockchain-based ledgers would also facilitate compliance with AML, KYC and other regulations, as they provide unalterable record dand all past transactions.
However, the current state of distributed ledger technology faces many challenges. Indeed, it has inherent scale limits in its current form. Furthermore, there is a lack of the underlying infrastructure that would allow for seamless integration into the existing financial market environment. The improvements will come over time as the industry learns from the successes and failures of market experiments.