We have all witnessed a major technology-led revolution in recent years. While Cloud, IoT, Virtual Reality and Mobility were the frontiers of transformation, Blockchain is quickly getting the desired stronghold. Blockchain has already tasted huge success across banking and financial industry, but what sets it apart is its application in various other industries ranging from education to automobile and anything that wide.
For many, the terms bitcoin and Blockchain often become obfuscating and it becomes difficult to find a relation between both of them.The idea of Bitcoin created by Satoshi Nakamoto was the first of its kind cryptocurrency with the aim to bypass government control and make transactions simple. Blockchain is the technology that was built for Bitcoin. There was a need for a secure and efficient system for recording financial transactions and Blockchain answered it amazingly well. It took everyone a lot of time to understand that Blockchain could also be designed for businesses apart from using it as an underlying technology for Bitcoin. There are multiple business applications of Blockchain apart from BFSI industry which makes it a trending technology to look forward in 2018.
Blockchain network helps to trade and track any asset that has value, virtually. It is commonly referred as a shared, distributed ledger that helps to record transactions and track tangible assets such as house and intangible assets such as patents for example.
Tracing Blockchain roots – Shortcomings of the current system
From barter system to cash, the way we transact has evolved over the period of time. No matter the mode of transaction, there were many problems in the existing system such as security of data and payment transactions, the existence of intermediaries and middlemen for payment exchanges, the time of settlement for a transactions, high entry fees, and limited access to banks in rural areas.
In order to overcome the existing shortcomings, there was a need for a payment network which is faster, reliable and secure. There was a need for having a transaction system in place which eliminates the need of intermediaries and at the same time makes the process decentralized.
5 characteristics that make Blockchain a promising technology
1. Immutable: Data security concerns are addressed extremely well with Blockchain. With immutability a core characteristic, it becomes next to impossible to make any change or even alter the data after it is stored inside of a Blockchain. If data needs alteration due to error, a new transaction has to be recorded or if it has changed, it would require permission.
2. Hash Function: A hash is a one-way function that has multiple usages in decentralized systems and Blockchain. A hash function takes a specific input and runs an algorithm on it to produce a fixed length unique digital output called hash, hash value, digests or hash codes. The output length is fixed and smaller than the input. Every time the input is changed, the associated hash changes and makes the data unique. The mathematics behind the hash function ensures that there is no way to alter or change the original digital content. This ensures that the transaction is secure.
3. Digital identity: While existing transaction system witnessed frauds and perils pertaining to the identity theft, Blockchain’s decentralization blended with unique digital ID for every transaction ensures that customers have more control over their personal information and they can prevent sharing it further.
4. Peer to peer technology: Blockchain is considered to be one of the most effective peer to peer technologies. In a P2P network, interconnected peers or nodes are able to share resources with one another without using a separate server or centralized admin system. In a real-world peer to peer sharing economy, there shouldn’t be a middleman who takes the cut. Companies like Airbnb, Zipcar and multiple others have been able to leverage sharing economy effectively. However, they still need to manage the platform and at the same time ensure governance. The DLT technology backed up by digital identities and digital currency eliminates the need for a central authority.
5. Distributed ledger: A Blockchain is a Distributed ledger which is open to everyone. The unique characteristic of distributed ledger is its ability to make the data invulnerable to cybercrime or hacking. In simple term distributed ledger is somewhat like accounting ledger. However, the fact that makes it different from an accounting ledger is that the function of a middleman is easily eliminated. A distributed ledger is linked to a network of computers and an essential data is stored in the distributed ledger. A copy of the data is sent to everyone in the network and in case someone wishes to tamper the data, he/she needs to change the data on every computer of that network. This makes it immutable.
Unlocking the business benefits of Blockchain:
In this era of online commerce and internet banking, trust becomes the most vital part of the entire ecosystem. Blockchain solves multiple business problems for companies pursuing Digital Transformation and trust tops it all. Outlined below are some other benefits of Blockchain:
Blockchain is known for it speed as the time taken to perform a transaction is extremely nimble. The biggest reason is that the information stored in Blockchain once can be leveraged at multiple instances without the requirement of re-capturing it. Consider the example of KYC documents. KYC documents get processed across multiple departments and some require constant changes. However, with Blockchain, the KYC process is not a complex task. KYC details of an individual are captured only once and it is then further published and distributed across the other nodes.
A report released by Accenture stated that Blockchain technology could reduce infrastructure costs for eight of the world’s 10 largest investment banks by an average of 30%, “translating to $8 billion to $12 billion in annual cost savings for those banks.”
Merkle tree is an essential part of a Blockchain when it comes to data integrity. As we know there are multiple transactions in a Blockchain and each transaction contains data. Let’s make this concept simpler with the help of an example. In this example, there are four transactions namely – L1, L2, L3 and L4. The data of all the four transactions are passed through a hash function generating a unique hash for each transaction- Hash(L1), Hash(L2), Hash(L3) and Hash( L4). Further, the pair of hashes are again passed through a hash function, this process produces one unique hash for the pair- Hash 0 and Hash 1 ( As can be seen in the fig below). This process is known as hashes of hashes. The last pair is then combined again and passed through a hash function creating a single root hash forming a complete Merkle tree. This way the Merkle tree allows any detection of the change to any data within the transaction of a block. This is done by simply rerunning through the process for each of the transaction and comparing the results to the original root hash.
Blockchain is a chain of information. With the help cryptography, each and every transaction is verified. In Blockchain, each transaction is linked to the previous transaction. Every transaction which is performed is run through algorithms. So, in order to violate one server, the hacker needs to tamper every network of the computer. This is because no single identity is solely responsible for making changes. The characteristics of the distributed ledger and peer to peer network make it highly secure.
Blockchain is highly transparent as there is no single identity who owns the chain. Blockchain being an open source, anyone can see the details of the record. These records are known as blocks and with the help of a private key, the owner of the block gets the access to their individual block so as to make the changes and the same change gets updated in real time.
We living in a digital world where Blockchain is an ideal solution for companies who are looking to streamline their networks. According to many experts, Blockchain is a revolution resulting in a transformation of the economy. In our next blog, we will be covering components of Blockchain.