Market Basics: Introduction to Blockchain
Following the financial subprime crisis in 2008, many investors lost trust in the banking system in its current form. Bitcoin was widely regarded as the “new hope” for the financial world. But how does this coin function and what is the technology behind it?
Firstly, one must understand what a ledger is. A ledger is the capturing of in- and out flows of cash which reports an individual’s balance. For instance, when you increase liquidity on your debit card, a centralised ledger (being your local bank or other financial institution) will update your personal ledger. With blockchain on the other hand, a high number of computers update your ledger.
Every 10 minutes, the blockchain software updates the ledger. To do so, the connected computers (the “miners”) will compete in solving extremely energy-intensive computations to offer the most precise approximation of the ledger. Once at least one of the miners has solved the mathematical equation, the computer will verify the first miner’s solution and next, the transactions will be validated. More than 50% of the computers must agree to make that block valid. A block is a set of transactions awaiting to get validation.
What is this decentralised ledger-check good for?
First of all, as all the transactions can be checked, transparency is not an issue. You can easily access all the transactions within a block on the internet. As next to the amount it is not your name but a serie of number (which is similar to an IBAN) appearing, anonymity is also respected.
In addition, auditing abilities are further improved vastly. The series of numbers identifying you as a person (similar to a personal code) can be traced back to a name when, for example tax-issues occur or ‘grey' transactions are made.
What problems can we solve with the blockchain technology?
Within the modern banking system, interactions involving international transfers take extensive lengths of time to be executed, as the different banks need to work with partners to send the money around the globe. Causes of this can be manual errors, ledgers that do not overlap etc.
If the banks are all connected to one decentralized ledger, the transactions would be able to occur at much faster rates. In fact, the Australian Stock Exchange considered shifting their entire system towards the blockchain technology.
Counterfeit items that go from shoes to drugs can have serious repercussions on individuals. In fact, according to Interpol, a million people die from counterfeit drugs every year. The current issue is that the supply chain is not entirely transparent. This too can be solved by the blockchain technology, in a way that every transaction along the supply chain has to be verified individually.
Moreover, the blockchain can solve numerous issues for investors. As investing in a company currently requires a lot of paper work for asset managers due to legal responsibilities, the auditing part would be done by the blockchain. Thus, paper work could be erased to an impressive extent, further positively impacting the environment.
What are smart contracts?
Smart contracts result from negotiations between parties, while the transactions which are convened in the contract occur automatically. For instance, assume that you are building an app. You will first look for a developer if you are not fully knowledgeable in this branch. In the smart contract it may be agreed that the developer would get 10% of your revenues. As soon as an individual customer pays, the payment of 10% to the developer will be wired through automatically. Instead of trusting your manager, you just have to tend towards blockchain.
Blockchain as political solution:
In many developing countries, governments and elections are frequently influenced by either local bias or corruption. In many cases, citizens have lost trust in the election process and, consequentially either do not attend or do not put an effort in informing themselves towards the vote that represents them best. Implementing blockchain during elections could speak for transparency and thus lead to greater trust of the nation.
In all the aforementioned cases, it comes down to one common factor: trust. Regardless if the trust is between banks, supply chains or elections, blockchain eradicates trust issues between individuals, processes or institutions. with its multiple check system and decentralised functioning.