Blockchain, a revolutionary financial technology (fintech), was recently hailed as the biggest innovation since the internet by global financial services executives. Why does the financial services industry value blockchain so highly? Htet Tayza reveals five things you need to know about blockchain.
Many, not one
There is not one blockchain, but many, because blockchains are distributed, tamper-proof public ledgers of transactions. The most famous blockchain is the one that is used to keep track of cryptocurrencies e.g. bitcoin transactions. However, there are also blockchains for recording stock transfers, contracts, loans, healthcare data and even votes.
We run it
Blockchain systems are not operated by central authorities; they are run by us. News portal MIS Asia notes that “participating computers exchange transactions for inclusion in the ledger they share over a peer-to-peer network.” A copy of the ledger is retained by each node in the chain and because of the way ledgers are signed, each node can trust the others’ copy. Every so often, a new block of data is added to the chain, in order to conceal the latest transactions.
Furthermore, each block includes a computational “hash” (a short digital representation of bigger pieces of data) of both itself and the preceding block in the chain. Someone would have to change the relevant hash to modify or fake a transaction. In order to conceal the change, they would also have to recalculate all the hashes embedded in both the transaction and in subsequent blocks. It would be very difficult to perform this task before new, legitimate transactions were added to the chain.
Increasingly, some of the biggest companies in the world are realising that blockchain has major potential. Massive global firms such as Microsoft and IBM are selling blockchain solutions, while stock exchanges and banks are purchasing them. IBM even recently announced that it will open a blockchain research & development centre in Singapore. Capitalising on the city-state’s favourable fintech regulatory environment, IBM will dream up blockchain-based solutions for various industries.
There is no need for ‘middlemen’ to maintain a blockchain database, because the computers included in the system contribute to the ledger, guaranteeing its safety. This is why it is so attractive to the financial services industry, but as traffic soars, it is also proving problematic for bitcoin transactions.
Estimates suggest that the total computing power involved in bitcoin transactions eclipses that of the planet’s 500 fastest supercomputers combined. Recently, however, the number of bitcoin transactions climbed so high that the network took as much as 30 minutes to confirm that some had been placed into the ledger. However, it takes just seconds to confirm credit card payments, which depend on a central authority to serve as a facilitator between the two parties involved.
Interestingly, blockchains can be used to record what should happen in future, rather than what has happened before. This is allowing bodies such as Swiss-based computing platform the Ethereum Foundation to store and process “smart contracts” via blockchain technology.
These contracts are executed on a pay-as-you-go basis by the network of computers which operate in the blockchain. They have the ability to gather, store and transmit data, as well as transfer the digital currency that the blockchain deals in, to respond to transactions. The blockchain within which they are stored ensures that these contracts cannot be altered, guaranteeing security.
Htet Tayza’s commentary
In a report, online security firm Symantec notes that financial services firms are a top target for cybercriminals. With the number of worldwide mobile banking users set to climb from 0.8bn in 2014 to 1.8bn by 2020, according to accountancy firm KPMG, it is more important than ever that the industry shields itself from cyber-crime. Looking at the five facts listed in this article, it is easy to see why financial services firms place so much value in blockchain technologies. They can provide the financial services industry with the secure fintech solutions needed to safeguard consumer data.