Blockchain can be defined as a shared, distributed and decentralized ledger for all cryptocurrency transactions. It is the process of maintaining transactions and assets in a business network.
The transactions in blockchain are recorded in the chronological order. The chronological order allows market participants to keep eye on digital currency transactions independent of central recordkeeping.
The assets included of two basic types: tangible and intangible.
Tangible: Tangible assets are assets that you can touch, such as house, property investments or any vehicle.
Intangible: It includes intellectual property, such as patents, copyrights or branding.
Before analysing the system of Blockchain, it is important to understand the cons of the current transaction systems:
- The estimated time between transaction and settlement can be more than expected.
- Cash can be useful for transactions with local vendors and usually in small amounts.
- Half of the population do not have access to the bank accounts. For them, it is important to have a parallel payment systems to conduct transactions.
- Online transactions are prone to fraud and cyberattacks.
- Transaction volumes are growing at a rapid rate which increases complexities, vulnerabilities and inefficiencies in the current transaction system.
The increase in ecommerce, online banking and in-app purchases has increased transaction volumes in geometric progression. To overcome these challenges as mentioned above, the world needs payment networks which provides a mechanism for easy, secure and fast transactions. The one solution for this is “Blockchain”.
Birth of Blockchain:
Blockchain consists of two words namely “Block” and “Chain”. A block records all the recent transactions. Once the transaction is completed, a block is committed as a permanent record in database. These blocks are connected to each other through links which are referred as chains
The chains are connected to each other in chronological/ linear order.
Every block contains some information of previous block referred to as a “hash”. The blockchain once created for every transaction is immutable (which cannot be deleted).
Every block includes a cryptographical methods ensuring that they are secured.
The increasing size of the blockchain creates issues of storage and synchronization.
- Consider for user “A” who wants to send money to “B”. User uses the blockchain method for completing the transaction.
- Each transaction is referred as a block.
- The block is broadcast to the public network of transaction.
- User “B” validates the transaction with cryptography functions. The block is added to the chain.
- After validating the transaction in blockchain, the money is transferred from A to B.
These transactions are referred as “Bitcoin” transactions.
Blockchain provides a gateway to record and store bitcoin transactions. Bitcoins can be considered as the first use case of blockchains.
Features of Blockchain:
- Consensus: All the participants in the given transaction must agree on consensus model for making the transaction valid. The Consensus model helps to keep transaction less vulnerable.
- Provenance: Participants have complete detail of source of assets and change in ownership of assets over a period.
- Immutable: Once the transaction is recorded by the ledger, no participant can change or tamper the existing transaction.
- Ownership: A single ledger provides only one place to go to determine the ownership of the mentioned asset.
Exploring Blockchain application:
Consider for a “Car manufacturing company” and the procedure of manufacturing a vehicle.
The methodology for tracking a vehicle ownership without blockchain is mentioned as follows:
- Ownership of vehicle is initially under the Manufacturer.
- The ownership rights are transferred from Manufacturer to Dealer.
- The leasing company maintains all the transactions i.e. transfer of rights from Manufacturer to Dealer.
- Later, the ownership rights are undertaken in lessee and passed on to the Scrap merchant.
Now, consider for methodology of “Tracking vehicle ownership with blockchain”. With blockchain, network participants interact with each other as follows:
- The government maintains every new registration of the vehicle in “Blockchain”.
- Once the vehicle is registered as per the given norms, the ownership rights is transferred to manufacturer.
- The manufacturer marks every model with the unique identification number within parameters of smart contract (a digital agreement in blockchain for every transaction).
- Every vehicle registered is published in the network. The dealer can check the stock availability through network and the ownership rights can be transferred from manufacturer to dealer based on smart contract.
- The leasing company can have a look on dealer’s inventory. The ownership rights can be transferred to leasing company in similar manner based on smart contract.
- Every transaction or transfer process is maintained as block as visible in the diagram.
Key Business Benefits:
- Time saver: Every transaction and settlement as mentioned in block is faster and does not require any verification with central authority.
- Cost savings: There are no intermediaries as all participants can exchange the items directly with other blocks.
- Secure: The model is secure as it maintains cryptography and digital signatures also called as “smart contracts” for validation which helps in protection against tampering, fraud and cybercrime.
- Privacy: Each block includes a unique identification number and permissions which mentions the transaction details. Permissions are granted for special users.
- Efficiency: Every transaction includes assets which is streamlined for ownership, so transactions can be conducted at a faster speed.
The volumes of transactions are increasing tremendously, and banks must deal with these transactions on daily basis. Blockchain has the capability to bring in more secure and authenticity of day to day banking transactions. The processes defined in Blockchain technology is simple and transparent due to which it can easily gain trust of financial institutions. Blockchain is known for reducing the risks and frauds which will spike its demand in future thus making its core place in the financial sector