The Beginner’s Guide to the Blockchain
- What is the Blockchain?
- How does it work?
- Types of Blockchain Architectures and Consensus Models
Technology is shaking things up, new trends dictate new rules across all spheres of life, and the financial sector is no exception. In recent years we have witnessed a surge in the adoption of blockchain technology, with forecasts suggesting a market value of over $23.3 billion by 2023. The financial sector has been one of the most proactive when it comes to embracing the new technology, with over 60% of the market value concentred here.
The current financial system based on trusted arbitrators has been governing relations between individuals and businesses for decades. This system is not only heavily reliant on trust but also vulnerable to a variety of environmental conditions and pigeon-holed by a substantial amount of operational activity. Over time, old systems become sluggish and outdated. This is where new technologies come in and shake the fortress.
With blockchain disruption business models are transformed, allowing lower costs, faster execution of transactions, improved transparency, and auditability of operations. If you are curious about the relationship between blockchain technology and the financial sector look no further. Sit tight as we guide you through the what and the how below.
What is the Blockchain?
In its simplest sense, the term blockchain is what it says on the tin, a block of chains. Blockchain can be described as a public database (the ‘chain’) of digital information (the “block) that is stored across multiple computers.
In the financial sector, a blockchain takes the form of a distributed, secure, and transparent system that logs and shares transactions across a digital network. By using a distributed ledger, banks can trade faster, cheaper, and improve overall efficiency. According to research carried out by Jupitar Research, blockchain deployment will enable banks to attain savings of more than $27 billion annually by 2030. Also, reducing costs by 11% compared to current levels.
Cryptocurrency is the primary market that blockchain is used for, most commonly Bitcoin. Most of us will know that Bitcoin is a digital currency that uses peer-to-peer technology to allow the transfer of payments without the need for an intermediary. By enabling these contracts and direct transfers of value, it presents the potential to undermine the current system.
How does it work?
In the blockchain, every block holds some information such as the actual block’s hash, and the last block’s hash. The information stored inside a block relies upon the kind of blockchain it is. For instance, the Bitcoin blockchain keeps a record of the transaction details such as the name of the sender, the name of the recipient, and the total of coins.
Just like humans have a finger impression as a unique identity, every block has a hash. A hash recognizes the block and the entirety of its substance. It is consistently extraordinary, similarly as a unique finger impression is. As soon as a block is made, its hash is immediately determined.
If you try transforming anything inside the block, you will eventually make changes to the hash. At the end of the day, hashes are helpful when you need to recognize changes to the blocks. If the hash of a square changes, it is not, at this point a similar block.
The third and most important component inside each block is the hash of the past block. This viably makes a blockchain, and it is this strategy that makes a blockchain so reliable and secure.
Types of Blockchain Architectures
There are 3 main types of blockchain architectures namely the public blockchain, private blockchain, and consortium blockchains architecture.
1. Public blockchain architecture
A public blockchain architecture works based on different protocols and algorithms of proof of work (PoW) consensus. Since it is open-source, it doesn’t require any permission, and new blocks could be defined with the existing state. This allows you to download code for blockchain and keep a check on transactions over the network.
2. Private blockchain architecture
In the architecture of private, only a specific group of people or organizations can access the data and information. The organizations make use of this architecture to increase the efficiency and overall advantages it brings to the organization. This architecture makes use of consensus algorithms such as Byzantine Fault Tolerance (BFT) and Proof of Stake (PoS) consensus algorithms to ensure maximum safety and seamless work.
3. Consortium Blockchain Architecture
The consortium blockchain architecture is a public permission architecture of blockchain. In such blockchain architectures, everyone has permission to connect or check the blockchain but only the participants have the right to add or modify the information. This architecture also makes use of the same consensus algorithms such as BFT and PoS. In this way, the trust of the customer’s increases, and everyone works as a single unit.
Blockchain Consensus Methods
The blockchain makes use of the four main consensus methods which are:
It uses the hash function and puts forward a condition where only one person is allowed to announce the conclusion and the rest of them verify it.
Practical byzantine fault tolerance (PBFT)
It is the most potential solution as it makes use of the general who gathers all answers concerning the current state and then forwards them to the rest of the generals.
It replaces the calculation of the hash function with a digital signature that provides the owner of the stake.
Delegated proof-of-stake algorithm (DPoS):
It works the same way as PoS except that the individuals have some other entity to prove their ownership of stake.
The Blockchain & Finance
Cryptofinance technologies have been touted as the “next-big-thing” and their untapped potential can disrupt the world of finance.
It’s no doubt that cryptocurrency adoption has grown substantially in recent years, particularly in the last 12 months. Thus, blockchain is lowering the barrier for entry and providing a seamless alternative to the current way of banking. How can the financial sector harness the power of cryptocurrencies and their underlying blockchain? Let’s dive in.
Faster Execution of Transactions
Blockchain creates the ability for instant settlements, while currently, transactions can take anything up to 5-10 working days. Traditional business transactions can increase complications and are accompanied by unwanted expenses. The fact that blockchain technology is a one-to-one affair cuts out the middleman and streamlines this process. In turn, this provides faster execution and lower fees but, the same security guarantees.
People have less control over their funds with the current system. For instance, when transferring money from one account to another the status of the transaction is less transparent. Cryptocurrencies standardize shared processes. Since all transactions take place over peer-to-peer technology and are governed by a code, it creates a single shared source of truth for all network participants.
Data Integrity & Security
Another way that blockchain can disrupt the current financial system is by offering higher levels of security. At present, the need for a middleman can bring a higher risk for data being compromised.
The use of blockchain ensures the authenticity of data by empowering modernized processes that automate data verification and reporting and digitizes Know Your Customer (KYC) procedures. Furthermore, any recorded data can be tracked in real-time and is immutable. This helps to eradicate the risk of fraud, operational risk, error handling, and reconciliation.
Remember when the availability of the internet to a mass audience represented a huge step in moving globalization forward? Blockchain is the new internet. The financial world is very much embracing the wonderful realm of blockchain, and cryptocurrencies such as Bitcoin have been gaining momentum and popularity. Despite a less than convincing March performance, the crypto asset peaked to an all-time high of €54,000 before its retreat, this was off the back of a stellar month in February, as experts believe that we are heading €100k by the end of 2021. Blockchain is very much at the beginning of its journey. Nevertheless, we cannot deny that blockchain technology is here to stay.