What is blockchain and how does it work?
A blockchain is a distributed ledger that tracks and records anything of value. When people hear the word “blockchain”, they usually think of Bitcoin, but the blockchain is not always about Bitcoin. Blockchain is a technology on which Bitcoin is built. Blockchain can be used to track anything of value like financial accounts, medical records, land titles and more. A blockchain is a decentralized network of computers and no one entity has control over the network.
A block is a batch of information and these blocks are linked together in a “chain” in chronological order, hence the name “blockchain”. Whenever a change is made to a particular block, it is not modified but a new block is created with the changed information. Just before a new block is added to the network, the computer must solve a cryptographic puzzle and the computer, then, shares the solution with other computers on the network and this is called “proof of work”. These computers, then, verify the solution and once the proof of work is verified, the block is, then, added to the chain. This decentralized nature of blockchain makes it nearly impossible for someone to tamper with the data and, hence, it is secure and trusted.
Blockchain and Banking
Before we jump into how blockchain technology is poised to disrupt banking, let’s look at what banks actually do. Banks act as intermediaries in financial transactions of assets. They aid in fundraising, trade finance and are involved in clearing and settling transactions.
Moving money around the world is a logistical nightmare. This is because of how our financial infrastructure is built. An average bank transfer takes around 3 days to be settled as the money has to go through intermediaries and custodial bodies. Transactions in a blockchain network are peer-to-peer and eliminate the need for any intermediary and have the potential to be highly transformative in the payments industry. Blockchain networks are very efficient as they eliminate the risk of error and duplications; the time taken for a transaction could be as low as 10 minutes, effectively, the time taken to add a new block.
Banks usually operate only on weekdays from 9 to 5 so that would mean if you deposit a check late on a Friday you will have to wait till Monday of the next week for further clearing, whereas a blockchain network would be active 24x7. Banks can save a lot of money because of reduced processing and operating fee. For example, Santander, a European bank, estimates it could save up to $20 billion a year and Capgemini, a French IT and consulting enterprise, opines that consumers could potentially save up to $16 billion a year in banking and insurance fees.
The blockchain framework is very difficult to hack. Blockchain systems are prone to “51% attacks”, which refer to an attack where a hacker or a group of miners need to control more than 50% of the systems in the network, which would involve millions of computers online. Such attacks are extremely difficult to attack.
Blockchain can eliminate fraud and the need for KYC (Know Your Customer). Entrepreneurs and businesses can raise money through ICOs (Initial Coin Offerings) by selling tokens or coins for fundraising without the need for traditional VCs or investors. Blockchains are safe, efficient, trustworthy and reduce costs.
Why don’t we use blockchain already and what is its future?
Before blockchain takes over banking and goes mainstream, it still has to undergo multiple regulatory and technological challenges. This technology is still in its infancy and has some ground to cover. Blockchain will have to be widely adopted by banks to actually reach its full potential. Some people believe blockchain would completely overhaul banking and others believe blockchain would supplement the banking infrastructure. One thing is certain: blockchain is a huge positive for the finance world. It’s proven tech and it is not a matter of if, but a matter of when.