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Blockchain protects the identities and prevents fraud, thus carrying out legitimate transactions only.
What is Blockchain?
The blockchain is a new infrastructure system for sharing records which were invented to create the peer-to-peer digital cash Bitcoin in 2008. It is a technology that makes creating and sharing of a digital ledger of transactions similar to bank ledgers. However, unlike bank ledgers, blockchain records are not controlled by any central authority. The ledger file is shared among all the participants on the network called miners. Anyone can participate in the network by just downloading the open source bitcoin software.
Using cryptography, blockchain allows the participant on the network to add a new record in a secure way. The record is timestamped and prevents the record from being modified by anyone. No one can change/modify the entries. Any changes to the ledger are reflected in all copies in seconds.
Why is it called blockchain?
In the case of conventional/physical ledgers, the authorized person would verify all the records at the end of a fixed period and sign at the end of the page. This means all the recorded transactions are now fixed and no new entries can be made retroactively. Similarly, bitcoin miners collect all the transactions that happened in the last 10 minutes globally and record it all together and this is called a ‘block’. Like physical ledger where each page is lined with the previous page with running totals, in the blockchain, each block is also linked with the previous block. It creates a chain of blocks and hence the name, blockchain. Anyone can add a block of transactions on the bitcoin ledger after solving a cryptographic puzzle to add a new block. These bitcoin ‘miners’ are rewarded in the form of 12.5 bitcoins for solving the puzzle.
How does the blockchain work?
A person can share information with anyone anywhere in the world just like the internet! However, you must have a private key to access the blocks you own. By sharing a private key with someone, you transfer or rather share the value of what is stored on the blockchain. For example, bitcoins are stored in a bitcoin address. To access the address, private keys are used. This means the address which contains units that have financial value is safe and secure as long as no one else has the corresponding keys.
This way, blockchain protects the identities and prevents fraud, thus carrying out legitimate transactions only. Miners collect all the transactions in the bitcoin network in the last 10 minutes. Then the miners enter into a competition. The winning miner is declared who successfully solves the mathematical puzzle and creates the new block with all the new transactions.
All the other miners then update their blockchain file to this new version and the competition starts all over again. Currently, this reward is 12.5 bitcoins every 10 minutes. At today’s rate of about Rs 66,000 per bitcoin, that is about Rs 825,000.
Below are the reasons why blockchain could be the next big thing for India:
Asset database:
In simple terms, blockchain as a distributed ledger is an asset database that can be shared across geographies. The assets can be financial, legal, physical or electronic. The technology can be used in many industries like real estate, insurance, brokerage etc to store information such as identity, stocks, land or commodity in an encrypted format.
No one other than the owner can modify the information in the block thus protecting the originality of the records.
No Counterfeit / Forgeries:
Let’s take an example of bitcoins. Bitcoin is a digital cash. Cash issued by a bank is identified by serial numbers and other security devices. But there is no ledger to record transactions which inflates the chances of forgeries of notes and coins. While in the case of bitcoins, the distributed ledger pledges their authenticity. Therefore, blockchain is considered as a breakthrough in innovation against cyber fraud as all financial transactions can be verified electronically over a network of computers.
Cost benefits:
Data management in today’s information first world has become highly complex, especially while recording personal data. The existing methods require implementing large IT systems involving huge cost and complexity for the companies.
Many times such systems are vulnerable to cyber attack causing huge data loss forever. Financial institutions like banks, credit card companies etc have to deploy infrastructure to secure their ledgers.
Blockchain eases the cost and complexity involved in recording their transactions. The transactions are immutable and they do not have to worry about its security. Hence, they have the opportunity to save billions of dollars.
RBI tests blockchain
RBI praised the intrinsic potential of blockchain technology to help check counterfeiting and bring a major transformation in financial infrastructure, collateral identification, and payments system. Earlier this month, the RBI’s research wing, Institute for Development and Research in Banking Technology (IDRBT) completed the first ever end-to-end test of the blockchain technology. The project was tested in a trade finance with banks and National Payments Corporation of India (NPCI).
Leading IT companies like Microsoft, IBM, Infosys etc are investing in the blockchain technology. The technology is believed to have wide-reaching implications that will not just transform the financial services but many other businesses and industries. Aligning distributed ledger technology in the processes that are traditionally time-consuming and require considerable manpower, would result in completely new business models in today’s sharing economy.
However, adopting the distributed ledger technology at a system-wide level would require more research on costs and benefits. This would help to identify what existing costs could be avoided, and where remaining cost savings and opportunities could be found.
Chuck Reynolds
Contributor
