2008 was the economic meltdown and shut down. Lehman Brothers filed for bankruptcy on September 15, 2008 and two months later Satoshi Nakamoto published a paper on crypto currency defining an algorithm that eliminates the need for an intermediary like a financial institute to manage financial transactions. He subsequently released the first version of the bitcoin software client in 2009. Underlying Bitcoin technology or algorithm is called Blockchain. It resolved the challenge of Double Spend without having a centralised database. It created tremendous buz and interest within financial and government institutions. And it has the potential to create tremendous disruption in industries including financial, government and shared platform economies with likes of Uber, Airbnb and ebay.
Blockchain is an Open ledger, Peer to Peer software technology that protects the integrity of a digital piece of information. It was invented to create the alternative currency Bitcoin but may be used for online signature services, voting system, bonds, contracts, music and many other applications. Blockchain helps to solve the problem of value transfer. Lets explore farther …….
TRADITIONAL BANKING SYSTEMS: In the traditional system; if A in France wants to transfer USD 100 to B in China. A would instruct trusted 3rd party (Intermediary Bank) to transfer USD 100 to B. Trusted 3rd party validates A’s request and then transfers USD 100 to B in next 2/3 days’ time period after deducting a service charge. The records are maintained at the trusted 3rd party centralized servers.
BITCOIN/BLOCKCHAIN: Whereas with Blockchain technology, the process enables transfer of money from A to B without a centralized trusted 3rd party instantly at a fraction of charge. Blockchain follows the concept of OPEN LEDGER. And OPEN LEDGER is PUBLIC, DISTRIBUTED, SYNCHRONISED and SECURED.
PUBLIC: Let’s assume there are four people in the network (A, B, C and D) who want to move money. Assume at the beginning of the set up; A had USD 100 (Block # 1 = USD 100) and he wants to move USD 50 (Block #2 – move USD 50 from A to Node B) to B. The two blocks (Block #1 and Block # 2) are linked together forming a chain. Now B wants to move USD 30 ( Block # 3 move USD 30 to Node C ) to C. Now block # 3 is LinkedIn to the chain of Block #1 and Block #2 and so on. Blocks are set of information and they are chained.
DISTRIBUTED: Now we move to second principle “DISTRIBUTED” that means there is no centralized server and copy of ledger is maintained by respective nodes A, B, C and D in the network and since multiple copies of common data-sets are maintained; it’s much more difficult to hack.
SYNCHRONIZED AND TIME STAMPED: Now the third challenge is “VALIDATION.” Assume A wants to move USD 50 to B. A will float intended transaction request. Now in the network there are many nodes with very high computational power and they act as MINERS. The job of MINERS is manifold, firstly to compete among themselves and validate the intended transaction request, 2ndly find a special key so that it can chain with other blocks and then float the special key. 51% of the nodes must validate that transaction before it can update the open ledger. Successful miner is rewarded by a bitcoin.
CRYPTOGRAPHY: Now let’s assume A moves USD 100 to D. But A only has USD 50 hence his transaction will be denied because everyone in the network knows that A has USD 50 stopping DOUBLE SPEND. Since a common data set copy is maintained at every node, Blockchain maintains complete data transparency hence nodes know how much money others have.
The above is a broad view of Blockchain technology. Having said that it has the potential to disrupt banking because millions of transactions are impacted around the globe every minute. The Economist estimates that banks charged us more than 1.7 trillion dollars to process these payments in 2014. That’s about 2% of the entire world economy! With Blockchain we can save a lot of this cost because it lets us send money direct to the recipient. Further over 2.5 billion population do not have access to banking system and Bitcoin with underlying Blockchain technology can enable those 2.5 billion people across the globe.
Blockchain doesn’t just allow us to create safe money online; it lets us protect any piece of digital information. This could be online Identity cards, voter ballots, contracts and many other “legal instruments”, bringing bureaucracy into the 21st century. Finally Email took 30 years to become mainstay and disrupt postal systems. Similarly we have just seen the tip of the Blockchain iceberg and rest of the iceberg would continue surfacing gradually in next 5 – 15 years’ time period and drive disruption across industries.