Blockchain demystified!

  • 5 min read

Financial technologies transforming the world

Technological disruptions over the last decade have changed how we communicate, transact and do business. Emerging technologies in the financial services industry have consistently disrupted the consumer experience and also the modus operandi of these financial transactions and institutions. These technologies are advancing in a steady pace and are all set to make the financial processes more transparent, efficient, faster and easier to handle.

One such technology rapidly making inlays into the financial/consumer world is Blockchain. Let's look at how this new technology operates and what are the practical aspects where you will experience the impact of these new technologies as they amplify their presence.

What is a blockchain?

Blockchain or “Distributed Ledger Technology” is a decentralized, distributed, and oftentimes public, digital ledger consisting of records called blocks that is used to record transactions across many computers so that any involved block cannot be altered retroactively, without the alteration of all subsequent blocks. This allows the participants to verify and audit transactions independently and relatively inexpensively.

A blockchain database is managed autonomously using a peer-to-peer network and a distributed time-stamping server. They are authenticated by mass collaboration powered by collective self-interests. (Definition source: https://en.wikipedia.org/wiki/Blockchain)

History of blockchain

The blockchain was first conceptualized by Satoshi Nakamoto in 2008 and was progressively developed for the cryptocurrency Bitcoin. The cryptocurrency was conceptualized as currency of the world which will not be managed by a central bank but the demand and supply of the people trading in cryptocurrency.

However, over a period of time, multiple uses of blockchain were developed and the technology as well as the use cases emerged from various areas like community management by the government, media rights management, supply chain management, trade finance between global banks etc.

The fundamental disruption that a blockchain has brought about is democratization of processes and removal of requirement of a central authority and reduction in time to process from several days and weeks to several minutes and hours.

So how does a Blockchain actually work

Cryptocurrency – most heard about use of blockchain

Cryptocurrency today is thought of a currency to buy and sell products online as well as a commodity like gold, silver etc. which can be traded digitally on an exchange and will have price fluctuations on an everyday basis based on the demand and supply for the same. Crypto runs on a public blockchain where users / customers put in a transaction which is immediately validated by a set of people who are called “Miners”.

Each transaction approved by a “Miner” gets added onto the blockchain as another block and the transaction is non-repudiable. Therefore, every exchange of a crypto currency can be traced for its history.

Different types of blockchain

There are mainly three different types of blockchain:

  1. Public blockchain – Fully decentralized and any user can be added to the blockchain. e.g. Bitcoin
  2. Hybrid blockchain – Publicly available to an identified group of entities and groups of people within them. e.g. blockchain for a bank, blockchain within a company and its vendors across the globe
  3. Private blockchain – Almost equivalent to a client-server database

Now lets see some practical use cases for a blockchain

a) Property registration / Rental registration

Let us take an example of property buying and registration in a typical urban area in any country. The buyer needs to look into the available properties within his / her requirements which can be available in the blockchain for the buyer to decide on. The buyer decides on a property and intends to buy the same from the seller. The buyer can see all the details, the legal agreement, fees for registration, local taxes for municipal services etc. in the blockchain itself.

The blockchain will have the approval / consent of all the stakeholders like the association of the apartment, the multiple municipal departments, registration authorities etc. and each of these will have full history of the buyer for them to review and approve. The buyer can make the purchase, each of these authorities can approve and the same will be visible to the public and hence the property will not be available for sale anymore.

Advantages here would be:

  • The legal documentation can be reduced significantly as all the details for the Sale agreement can be stored in the smart contract in the blockchain
  • Transaction is fully transparent including all the approvals and remarks
  • Both buyer and seller will know their histories
  • Full transaction chain of that property is visible

Entire process therefore gets completed in days instead of current procedural mechanisms. This process has been implemented in Finland in Helsinki by Skanska. (Ref: https://group.skanska.com/media/articles/new-listing-digital-home-buying-powered-by-blockchain/).

b) Diamond tracking from mine to customer

We all love diamonds, don't we? and love to look for their origin. Diamonds or any other rare commodity has a strong tendency to have fakes and counterfeits which is very difficult to identify. Provenance for diamonds has been an important feature and blockchain helps to track and trace the path of a diamond from the source to the ultimate destination. The value of luxury items such as diamonds, works of art, fine wine, and more depend in large part on their history. Using blockchain to validate provenance can increase their value.

Everledger has built a blockchain to bring transparency to the diamond marketplace. Data points from more than 1.6 million diamonds are stored on its blockchain today. At each stage in the manufacturing process, Everledger’s protocol allows users to enter data, such as the time and date of the process and the name of the artisan performing it. Retailers can enter information about any jewelry piece containing the diamond, such as store location and warranty details. Customers can view the entire provenance simply by logging in with their credentials.

The weak part of any technological system of controls is human interaction. In many cases, a blockchain overcomes this weakness by using digital signatures. For example, when a certified mine puts a diamond on the blockchain, it signs the transaction with its private key. The signature can be verified by anybody using the mine’s public key. This means that the mining company cannot later deny that it was the source of the diamond. It also means a rogue company cannot put a diamond on the blockchain claiming that to be the certified company because the rogue company’s signature will be seen immediately as being invalid.

c) Why do we not see blockchain extensively then?

Blockchain technology has a lot of pre-requisites and dependencies which create a lot of impediments for its implementation:

  • It needs a lot of entities / organizations to come together on a common objective and operationalize on a common set of processes
  • Data is stored differently and different forms in these entities and hence coming on a common data platform becomes difficult
  • Blockchain is an ecosystem and till each component has significant interest in it, people may not participate in the ecosystem which means that others will not get the value for the time and money invested
  • Blockchain needs significant time and investment for it to mature and return the value to the entity implementing

Therefore, with all the advantages, it appears that unless there is a strong governmental backing or a common objective the growth trajectory of blockchains may not accelerate significantly. However, with the ever expanding digital technologies space and the pace at which the financial environment is transforming, it is more likely that some of these new technologies are here to stay in the long run!!



Disclaimer : All views presented are purely for educational purposes and is not a technical advice.

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Experienced finance professional
I am an experienced finance professional and love exploring my creative side and reinventing myself all the time.
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