The ABC of Blockchain And How It Is Disrupting Banking

 In Fintech, Startup Thought Leaders

What if paying money to someone who is thousands of miles away becomes as straightforward and easy as paying someone who lives nearby? Any technology, which makes it possible, is the most disruptive of all the financial innovations till date. The technology in question is Bitcoin Blockchain, which is all set to revolutionize the financial system in the world. While Bitcoin is digital money, Blockchain is a technology, which enables moving this digital money from one person to another person.

How does Bitcoin Blockchain work?

The fundamental problem, out of many, which Blockchain addressed to solve, is money transfer. To understand it simply, let’s presume, A and B are two individuals who are neighbors. A owes some money, let’s say $5, to B, A can simply walk into B’s house and pay him in a physical currency. But what if the two lives in two different states in one country? The transaction will become little complicated as A will have to deposit $5 in B’s bank account. So here comes the involvement of a third party, i.e., bank.

The transaction becomes further complicated if the two lives in two different countries with two different currency system. Not only that the currency of A’s country has to be exchanged by paying some charge, but it also has to be deposited in B’s account, and the whole process takes two to three days with the transaction fees ranging from 9% to 18%.

The bank becomes a trusted third party whose role is to establish the identities of A and B and make sure that the transaction is authentic. The banks keep the financial accounting of all the past, present and future transactions in their possession and only an account holder can access the records of his transaction on request from the bank.

Blockchain decentralises financial accounting

Now using Blockchain technology, A can do the same transaction to B from anywhere in the world immediately and pay a transaction fee which is far cheaper than the current ranging rate of 9% to 18%. So Blockchain eliminates the role of a trusted third party, and it maintains an open ledger, which is accessible to all the consenting parties in a transaction.

Let’s have another instance to understand how a public ledger is available to the consenting parties of a transaction. Let’s presume A, B, C and D are transacting parties. So when A pays any money to B or C or D and similarly if B does at the same time, each transaction is recorded as one block and keeps getting added as the transactions follow. So these transactions become a chain of blocks, which is also called e-ledger or digital ledger.

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What’s important to note here is that a copy of this particular e-ledger is available on the computers of all the four consenting parties of the transactions and if there is any new transaction, it will be added in a form block on all the four e-ledgers simultaneously. So in a way, there is no copy of this ledger as all four copies are original. The number of e-ledgers depends on the number of consenting parties in a particular transaction. The synchronization of all the copies of e-ledgers with the update of transactions and its availability with all the transacting parties is one of the unique features.

Any transaction, which is not valid, can’t be recorded as a block in the Blockchain. For instance, if A owns total Bitcoin worth $50, he can pay $10 each to five people and these transactions can be recorded in Blockchain but A can’t pay more than that as he has no money to pay now. If A still wants to pay $20 to someone in the transacting group, he can’t do that as this will amount to an invalid transaction and this transaction will not be recorded as a block in the Blockchain.

This technology is all set to decentralize the financial accounting from a centralized authority, let’s say a bank, and empower each participating member to access the details of the transactions.

The problem with having a centralized ledger with any one authority is that in case it’s lost due to any reason, it can cause the huge problem for any financial system in any country. It’s also vulnerable to hacking whereas, in Blockchain, the records of transactions are decentralized and made available to each consenting parties of the transaction.

In Blockchain Minors validate each transaction

Another interesting feature? of Blockchain is the role of minors in any transacting group. In any transacting group, every transaction has to be validated before it becomes a valid block and added into the existing Blockchain. So this community of participants of a transaction is called minors who commit substantial computing resources to solve the difficult problem.

Let’s take the earlier example of A trying to pay $20 without having any Bitcoin or e-money in its account. Minors compete among each other to validate every unvalidated transaction and put it into the e-ledger in the form of a block. If the transaction is not valid, it can’t be added to the ledger, but in case a minor has been able to validate this transaction with the help of his mathematical acumen, he will get a financial reward of Bitcoin.

Now since A doesn’t have any money to pay further, A’s transaction can’t be validated, but if B, who has got $10 from A, wants to pay $5 to someone else in the transacting group, the minors will check whether B has the financial capacity to do that. Since the ledger is open and available to everyone, it can be easily calculated. But the most difficult part comes later when the minor has to devise a unique key to add this transaction as a block to the Blockchain. Interestingly, since each block is the timestamp, no one can change any block once its validated and added to the chain.

Blockchain, a product of 2008 financial crisis

A year after the financial crisis of 2008, Blockchain was created to track the Bitcoin transaction without the involvement of any central financial regulatory authority. Experts believe that if banks want to use Blockchain technology, they will have to face a series of issues such as innovation opportunities, identifying feasibility and impact on existing financial system, practical implementation of the concepts, understanding the regulatory and data security implications, etc.

Experts believe that when two and a half billion people in the world don’t have any bank account, any technology, which does away with the existing financial system and creates a system, which is more simple and flexible, it is going to serve a larger interest in the society.

While the banking system relies on the identity of a person, economic mobility has made it difficult for people to have a permanent character. In the want of that, they can’t access formal financial services. But the Blockchain technology is going to change all that. Every person can have his or her own a unique e-identity based on which he can transact with each other. There is no need for an intermediary like a bank to establish the identity of transacting parties before validating a transaction.

How big is the Blockchain industry?

The rising popularity and acceptability of Blockchain is due to several reasons such as decentralization and data integrity. According to estimates, there are more than 200 Blockchain startups whose average valuation is $4.4 million. The estimates further suggest Venture capital funding for Bitcoin and Blockchain startups went up to $1 billion in 2015 and many experts expect that Blockchain funding will reach $2.5 billion in 2016. Experts say that VCs’ trust into Blockchain startup is an indication of its potential as an ?IC engine’ of Fintech. Companies such as Goldman Sachs, Visa and NASDAQ have poured money into Bitcoin and Blockchain.

Last year in March, 21 Inc raised $116 million from firms like Andreessen Horowitz, RRE Ventures, Khosla Ventures, Data Collective, PayPal, eBay, Dropbox, Expedia and Zynga. Other blockchain startups such as Coinbase, Circle, Chain.con earned $75 million, $ 50 million and $30 million respectively from investors such as investors such as DFJ, USAA Bank, NYSE, Andreessen Horowitz, Union Square Ventures, Ribbit Capital, Goldman Sachs, IDG Capital Partners, Visa, NASDAQ, Citi etc

Some of the Blockchain startups, which can be promising according to the industry leaders, are Provenance, Enigma, Consensys, Ethcore, IPFS, Colony , SlockIt, Backfeed, Ethereum, Plex, BlockStream, t?, OpenBazaar, ZapChain and BitFury just to name a few.

Globally Banks are also gearing up to face the FinTech challenge. Reports suggest that the Bank of Ireland has decided to invest $588 million in upgrading its core IT infrastructures to counter the challenges posed by the Bitcoin Blockchain companies. Considering government’s strong supports to FinTechs in most of the major economies, the future for these firms seems extremely bright.

Brian Powell

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