Blockchain is a term often in the news. It’s a concept that has broken out of its tech silo to reach the wider world, and is a subject now discussed in financial forums, TED talks, and financial regulators’ gatherings.
But what does blockchain mean, and how does it have the potential to upend conventional financial mechanisms?
What is blockchain?
By itself, blockchain is just a global distributed ledger. It’s a book of accounts held on multiple servers worldwide. What makes it powerful is the currency it enables. Blockchain is the accounting mechanism for virtual cryptocurrency Bitcoin – the world’s first currency that doesn’t have a central bankregulating it. Instead, Bitcoin’s worth is governed entirely by market transactions, and all these transactions are stored in the global blockchain ledger.
But if Bitcoin isn’t centrally regulated, does that mean it’s easy to manipulate and counterfeit? No, because that’s where the decentralised nature of blockchain is a key advantage. There are thousands of duplicate ledgers in the blockchain, and all of them are updated regularly. Any suspicious activity that is only reflected in one ledger but not the others is removed. Hackers might be able to compromise a few of the ledgers at worst, but can’t change all of them. It’s the very plurality and easy accessibility of blockchain ledgers that forms such a potent guard against compromising activities. It’s like regulation through the masses.
Blockchain’s utility isn’t restricted to currency. It can be used to track and record transactions for anything digital of value – from music to photography.
How does blockchain work?
Each time a successful transaction occurs, it’s updated across millions of computers globally. Across the world, the community of “miners” play an instrumental role in keeping the blockchain current.
Miners have access to a lot of computing power. And they use it to create new blocks in the chain containing all the transactions from the previous time period – usually every 10 minutes. These miners also compete with each other: the first miner to verify and validate the new block is awarded in digital Bitcoin currency. Once verified, the new block is time-stamped and linked to previous records, literally creating a chain of blocks – hence the name “blockchain”.
So why is blockchain so revolutionary?
Blockchain runs contrary to the way finance works in the status quo. Think about it, and you’ll realise that we’re all used to relying on big and powerful intermediaries for all our financial transactions. Be it banks, credit card companies, insurance firms, or brokerage houses, our relationship with money is determined by these firms. And they play the role of policemen – from identifying and authorising to tracking, settling and record-keeping.
And while these large firms perform very well in the norm, they can’t reach everyone. There are vast swathes of people across the globe who are unbanked, uninsured, or can’t access key financial services. While inclusivity is a key value espoused throughout the industry, there are limitations on what can be achieved by large centralised concerns. On the other hand, theoretically at least, blockchain has no such limitations. Its decentralised nature could make digital currencies available to anyone with an Internet connection.
Safety is also the other area where blockchain can excel. While our big policemen firms are incredibly safe, they’re not infallible. There have been hacking attempts against the biggest brands around the world. And thus far at least, blockchain has resisted all attempts to compromise it.
In short, we’re looking the potential for humans around the world to transact peer to peer using safe and trusted currencies. And for the first time, this trust is being established not by a big institution or policeman, but a combination of decentralisation, cooperation and clever coding.
The ramifications of blockchain
Taken together, Bitcoin and blockchain can change how we conduct transactions. Remittances could leave our phones and go straight to receivers –without ever passing through a centralised control. From developmental aid for emerging markets to empowering artists to charge directly for their music without needing record labels, Bitcoin can disintermediate conventional financial players.
Of course, it’s worth remembering that Bitcoin and blockchain’s very benefits can also pose huge regulatory hurdles. Bitcoin is designed to be anonymous, empower individuals, and cut out middlemen. This makes it a nightmare to conduct anti-money-laundering, anti-terrorism-finance, and KYC (Know Your Customer) initiatives. Bitcoin also works independently of central bank policy, so quantitative easing and other tools central banks use to spur trade won’t be applicable.
Thanks to blockchain, the future is exciting. But it’s also a place fraught with uncertainty in terms of the global order. Central banks are already considering Bitcoin-like technology for their own services to customers. It’s now time to come up with a legal and regulatory framework that can accommodate cryptocurrencies without undue risk. Watch this space.
