At its very basic core, a blockchain is a database of information that records the provenance of a digital asset in a way that makes it very difficult to change. It is a digital ledger of transactions and provides an open database of every transaction involving value – this could involve goods, money, property or even election votes.
It is literally made up of blocks, albeit digital, that link together in a chain. Each block contains a number of transactions as well as an immutable cryptographic signature called a hash and a timestamp to when it was added. Every time a new transaction is completed, it’s added to the ledger in a new block connected to the previous one, with both the new hash and the previous hash recorded. Once you have a longer chain of these block transactions that are stored in chronological order, it becomes near impossible to change them as altering one block affects the whole chain.
This is useful, as a blockchain creates a permanent, immutable record of transactions or assets, where the authenticity can be verified by anyone with internet access.
The reason people are so excited about blockchain as it really is a revolutionary technology that helps reduce risk and fraud, as well as leveraging transparency that has practical application in a whole host of sectors, not just finance.
A brief history of blockchain
Blockchain technology was first proposed in 1991 by Stuart Haber and W. Scott Stornetta, where they worked on a cryptographically secured chain for a system where document timestamps were unable to be tampered with.
Blockchains first actual real-world application didn’t come about until almost 20 years later in 2008, where it was conceptualised by Satoshi Nakamoto. His design of blockchain was implemented as a core component of bitcoin, where it is the public ledger for all transactions on the network. So, when anyone buys bitcoin, it is all recorded on a blockchain.
In terms of security, the blockchain is pretty secure. Blocks are always stored chronologically, making it very difficult to go back and change what happened before it. As mentioned, because blocks contain their own hash codes, if information in a block is changed in any way, the hash changes as well, but since the blocks are connected, any altered blocks wouldn’t match up to the rest of the change, making it clear that it has been tampered with.
Blockchain isn’t a magic wand that can make life easier in the fintech world, however, it is an excellent tool and a great means to achieving things more efficiently.
Decentralisation is one of the key benefits of a lot of public blockchain platforms – and here means that no single entity has exclusive control over the data or processes. Blockchain provides a level of decentralisation as transactions are recorded by the users on the network, and any changes to the transaction record must be recognised and confirmed by the majority of blockchain users to be confirmed as legitimate. So, for example, if one person tried to manipulate the blockchain data in a way that the majority of a network disagreed (for example, trying to fraudulently edit a block to say they owned an asset), they would be stopped by the rest of the network and their attempt to change anything would be thwarted.
This of course differs from traditional databases in which all records are stored in a central location, usually controlled by a single party who can modify records. In a centralised scenario, everyone has to trust that third party to accurately keep and protect the records stored and not use them for their own gain. For example, when you give your personal details to your bank, you are trusting that company not to share your information with anyone else, and to keep it safe in case of an attack.
In theory, decentralisation is the answer to this, and reduces the level of trust needed in third parties, as well as improving data reconciliation when companies want to exchange data with their partners.
Uses of Blockchain
The use cases of blockchain are near endless, and over the next 5-10 years or so, it is predicted that the blockchain will become a regular facet of our everyday lives. Of course, it is particularly prominent in the finance industry, as blockchain can help speed up transactions in banking, for example, the time it takes to deposit a cheque could be greatly reduced, as the processing time would only be however long it takes to add the transaction to the blockchain, rather than waiting for the bank. Blockchain can help speed up other back-office processes and can even be used to share customer onboarding data between institutions. Even health care providers can use it to store personal health records, and even property ownership records can find a home on the blockchain.