Bitcoin has altered commerce in remarkable ways. However, there are two lingering misconceptions about the crypto currency:
- Bitcoin transactions are anonymous.
- Bitcoin transactions don’t leave a digital trail.
The entire bitcoin network relies on block chain technology to keep a permanent, public record of all bitcoin transactions. Block chain technology was probably an afterthought when bitcoin first emerged, but it is becoming increasingly important now that the digital currency has gone mainstream.
A reader recently emailed me requesting to have blockchain explained in more detail in a future blog post, so here is an overview.
Blockchain explained: How does it work?
Blockchain is a decentralized ledger system. The integrity of blockchain is established by making transactions easy to validate and impossible to tamper with.
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Every transaction request is initiated over a P2P network. Every transaction must be validated by at least 51% of all computers within the network. After the transaction passes the validation test, a unique entry is stored in the ledger and the transaction is processed.
Third-party validation services have ceased offering authentication services to Blockchain, explained by Brookings University.
“Similarly, third parties that currently verify transactions (the central authority) stand to lose against the Blockchain (the decentralized network). As such, the Blockchain essentially dis-intermediates these third-party transaction verifiers: auditors, legal services, payment processors, brokerages and other similar organizations.”
The Importance of Blockchain Technology Explained
Bitcoin has grown in popularity, but is still not widely trusted. Trust diminished considerably after the collapse of Mt. Gox and other scandals.
Blockchain plays an important role in building confidence in the cryptocurrency. It promotes transparency and the authentication solutions also help thwart fraud. The blockchain ledger also leaves a trail, which makes money-laundering more difficult.
By promoting transparency and preserving the integrity of bitcoin transactions, Blockchain should stave off overzealous regulators that want to ban or heavily limit the use of bitcoin.
Blockchain technology can serve purposes for other financial entities in the near future. Since blockchain enables transactions to be processed so efficiently, many traditional financial institutions are beginning to explore similar solutions for processing fiat currency transactions. Datafloq explains:
“Many organisations are already exploring the possibilities of the Blockchain, although primarily still in the Financial Services industry. The R3 Partnership is a consortium of 45 of the biggest financial institutions, investigating what the Blockchain means for them. Next to the R3 consortium, four of the biggest global banks, led by Swiss bank UBS, have developed a “Utility Settlement Coin” (USC), which is the digital counterpart of each of the major currencies backed by central banks. Their objective is to develop a settlement system that processes transactions in (near) real-time instead of days. A third example is Australia Post, who have released plans for developing a blockchain-based e-voting system for the state of Victoria.”
One of our previous articles on blockchain explained this in a little more detail. Melissa points out that the entire financial industry could face a massive change if blockchain expands beyond bitcoin servers.
“Obviously if Blockchain catches on, the world of finance is going to be in for an explosive change. And with the transparency and security it offers, it appears that decentralized ledger technology, in one form or another, is the wave of the financial future.
The world banking infrastructure is at a crossroads. It can stay hidebound with past tradition or take a leap into this new and daring technology. The new technology promises greater transparency of regulatory reporting. Criminal financial activity such as fraud as well as money laundering will become much harder to perpetrate, since counterfeiting documentation will be nearly impossible. Identities of transactors stored on the blockchain, for instance, guarantees instantaneous authentication with no need for warehousing data in third party depositories.”
Ironically, people have warned about using bitcoin for money-laundering and fraud for several years. However, the bitcoin community has developed the technology that may eliminate it in other parts of the financial sector as well.
Blockchain is the Future of the Financial Industry
Blockchain was originally developed to reduce the risk of fraud and stave off regulators in the bitcoin network. It has become more effective than anyone expected, so is expected to play a key role in the future of the financial sector as a whole.