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.
What is Cryptocurrency
One of blockchain’s more well-known uses is cryptocurrency, as previously mentioned bitcoin is closely wrapped up in blockchain. There are thousands of cryptocurrencies active in the world, and while bitcoin is the most popular, the total market cap of crypto is around $1.6 trillion. Crypto is gaining a lot of interest in the world and can be used to buy goods and services – even for things like groceries – in the same way we use cash. However, one of the big differences is that crypto uses blockchain to act as a ledger as well as an “enhanced cryptographic security system”, so transactions involving the currency are always secured, and more importantly, recorded.
So, let’s say you wanted to buy a car using your bitcoin stash. You would be able to buy it using a digital wallet or trading platform, and when the sale of your new car finalised, the bitcoin would be digitally transferred from you to the seller with blockchain recording the transaction and also who now owns the bitcoin. The record on the blockchain would record that you bought the car, how much you bought it for and who you bought it from (and therefore now owns the bitcoin). This makes everything super transparent, with an immutable record that is difficult to change, and easy to confirm the provenance of.
There are a number of benefits to crypto, with blockchains security being one of them, as it makes theft of assets much harder due to the irrefutable records it produces. Crypto also reduces the need for individualised currencies and central banks and can be sent anywhere to anyone via the blockchain without the need to exchange currencies.
However, while there are many pros to crypto, especially since it’s now entering the mainstream more and more, there are also legitimate cons against these currencies. Crypto is very underregulated across the globe and is extremely volatile. While the value of the currencies can be high, with Bitcoins record being around $60,000 per token, the value can disappear at the drop of the hat and dip down to much lower. Though some people have gotten very rich from it, the lack of stability in the currency can and has caused many people to lose a lot of money.
Whats an NFT?
One of the bigger fads at the moment within fintech is NFT’s, or Non-fungible tokens. You’ve probably heard about them in everyday lives, as not only are they gaining a lot of traction, but a lot of celebrities, public figures and other popular groups are getting behind them and producing their own offerings.
An NFT is a non-fungible token, which means that is one of a kind and completely unique, it can’t be replaced with something else. So, a £1 is fungible, as every £1 is exactly the same as the next. But a one-of-a-kind collectable trading card is non-fungible, as you can’t get it anywhere else. So, an NFT can be anything digital that’s collectable, and most of the time doesn’t exist anywhere else. So digital art, music, videos or even digital figurines (Terra Virtua currently has the rights for a Godzilla figurine). It’s kind of in the same vein as buying real-life artwork. Anyone can own a print of a Picasso, but only one person can own the original painting.
One of the main perks of NFT’s is that they are part of the blockchain so when an individual buys an NFT, there is a record of who bought it, when they bought it and most importantly – how much they bought it for, so in theory, NFT’s never lose their value. So, if you wanted to sell it on, there’s a clear record of how much you bought it for, and you can sell it on.
As mentioned, the whole world seems to be going NFT crazy at the moment, but some people are less enthused, noting “buyer beware” in a lot of cases. The NFT market is seemingly quite volatile, and people pay a lot of money for something that doesn’t exist in real life. If you’re into that, collect at your own risk.
There are also some concerns around the environmental impact of NFTs, with these tokens thought to be at least partially responsible for the carbon emissions generated by cryptocurrencies. The reason NFTs are involved with these extreme greenhouse gas emissions is because they are largely bought and sold on marketplaces that use the cryptocurrency Ethereum. Like most cryptocurrencies, Ethereum is built on the blockchain system called and utilise “proof of work” to add new blocks of transaction onto the blockchain (as we’ve already talked about). However, this process is incredibly energy inefficient, and is so on purpose as using a lot of energy makes it a lot less profitable for someone to try and tamper with the ledger.
These concerns surrounding NFTs have certainly left a sour taste in many people’s mouths, whether that’s the artists looking to sell crypto art or the buyers themselves. While it’s all the rage at the moment, many industry experts wonder about the longevity of the system, and whether NFT’s will still be around in a few years.