It has been a noted observation that blockchain has the power to transform the financial system by upending credit cards, manufacturing and voting industries.
If you have heard the term blockchain in the past decade, you might have heard it in context with Bitcoin. Also, if you are a regular update person, you must know that blockchain is some kind of a database and that a lot of very smart financial people and tech types are looking into it.
What is blockchain?
The first time anyone heard about the term blockchain was in 2009 when a group or a person Satoshi Nakamoto published a paper entitled, “Bitcoin: A Peer-to-Peer Electronic Cash System.” This document describes the basis for a cryptocurrency called Bitcoin, and it defined how a new type of database called a blockchain would store Bitcoin’s transactions.
In a blockchain, a set number of transactions are placed in a block. When a block is filled up, it is “signed” using a mathematical formula that factors in all of the block’s transactions, and generates a unique signature called a hash.
When the next block of transactions fills up and is ready to be signed, the hash from the previous block is mathematically factored into the new hash, and so on. This is reflected in the chain part of blockchain’s name.
Blockchain has a unique hashing system which gives it very high security. If the data of one block is changed, the hash signature for that particular block will also change.
This implies that if the data is tampered with, the hash signatures for every subsequent block will have to change as well. This high level of security means that the blockchain can be completely open to the public.
The blockchain network is maintained by various decentralized entities known as nodes. A blockchain node’s job is to validate blocks. When a new transaction block is created, each node on the network validates the new block by calculating its hash signature.
Every node compares its result with all the other nodes on the blockchain network. If a majority of the nodes have computed the same hash signature, the block is accepted as valid and placed in the blockchain.
However, if the nodes suggest that the block does not have a valid hash signature, the block is simply thrown away. This system makes it extremely difficult to place a fake entry into a decentralized and public blockchain.
Use cases for blockchain
Let us consider the example of credit cards. When you go to a mall, select a thing, and make payment through your credit card, the card accepts your request. The money does not get deducted from your bank account. The bank takes care of it. After a cycle of 30-40 days, you need to pay the bank back. If you are unable to do so, the credit card company charges you interest on the unpaid balance.
Blockchain has the ability to eliminate the credit card companies
A look at the above transaction as described above only from the blockchain perspective is much different. You go into your local store and make a purchase using Bitcoin or another cryptocurrency.
The transaction is validated by a blockchain node and it is fed into the blockchain. Your bank account is debited, and the merchant’s account is credited. The merchant isn’t charged a percentage of the purchase price, and you aren’t charged any interest on the unpaid balance.
As we can say, credit card companies aren’t happy about this possibility.
Blockchain and cross -border payments
Sending money across national borders anytime can be both time-consuming and expensive. We all know that an international wire transfer can take up to five business days to settle, and the newer SWIFT network can take up to three business days to transfer. In the United States, an international wire transfer can cost between $40 and $50.
Veem is a start-up company that took advantage of this and used blockchain as one of its methods for transferring funds. Consider a client based in the U.S. who wants to transfer money from their U.S. bank account to an account in Mexico.
Veem debits the specified amount in U.S. dollars from the client’s bank account, and it buys that amount of Bitcoin. Then, Veem sells the Bitcoins for Mexican Pesos, and it deposits the Pesos into the Mexican bank account.
The best feature is that the entire sequence of transactions takes place within seconds, and is fully traceable through Bitcoin’s blockchain. Also, the fee charged for this type of transfer are less than half of what an international wire transfer would cost.
Blockchain for voting
An important potential use for blockchain is voting. A blockchain transaction doesn’t have to be numerical credits and debits, but can be any piece of data.
Blockchain could be used for voter verification so that when a voter cast his or her ballot, that information is written to a publicly-maintained blockchain database that everyone has access to.
This database can easily be used to verify the election’s results, thus eliminating rigged elections.
Blockchain for supply chain and logistics
In today’s world, one of the most difficult aspects of modern manufacturing is the supply chain. A finished product might be comprised of components manufactured in China or North America, software created in Europe, and the product itself might be assembled in Japan.
Delays, miscommunications, and outright disputes often arise among the various parties, and this leads to slow-downs and unreliable supply chains. A blockchain database can hold every transaction involved in the manufacturing of a product, and it can hold every entity accountable.
Consider an auto part which is manufactured in China, and is added to the blockchain. When that part ships to Europe for assembly in a car, that movement is fed to the blockchain and is timestamped. Every time that auto part moves or is incorporated into another product, an entry that everyone can see is created in the blockchain.
If there is a time delay anywhere in the world, all of the interested parties can know exactly where and who caused the delay. Supply chain blockchains could also be used to analyze inefficiencies and redundancies within a supply chain, and this would dramatically streamline the product manufacturing process.
Talking about Satoshi Nakamoto, to this date no one is sure about who he, or she really is. It is a mystery whether Nakamoto is an individual or a group of people. The Bitcoin blockchain shows Nakamoto as the owner of approximately one million Bitcoins.
At Bitcoin’s price peak in December 2017, this was worth over the US $19 billion, making Nakamoto the 44th richest person in the world at that time. To date, none of Nakamoto’s Bitcoins has ever been redeemed.
What are your thoughts on blockchain changing the world of the economy? We would love to hear about your views. Drop a comment in the comments section.