Blockchain technology is the digital transaction support system created for or, more exactly, derived from the bitcoin operations.
Defined as a distributed database that incorporates the ever-growing data records associated to bitcoin transactions, the blockchain database is secured against tampering or revision through its structure. Functioning as a public distributed ledger that records (so far) bitcoin transactions, the blockchain relies on nodes and transactions.
How does blockchain work?
The maintenance of this system depends on the network made out of communicating nodes – hosted on machines. Any new transaction is broadcasted to the network via software applications and the nodes validate and add the transaction to the ledger’s copy stored at their level. Each node stores its own copy of the blockchain to ensure independent verification. The architecture is decentralized and does not require the transactions to be intermediated. That is why the bitcoin, the only digital store value associated so far with blockchain technology, acts as a peer-to-peer payment mechanism.
The denomination fuses this transaction system main characteristics: it consists out of a virtual chain of “blocks”, each one representing a bundle of transactions. A new block can be added to the chain only after solving a complex cryptographic puzzle and finding the right hash value. Bitcoin miners are the ones that find the hash by running the hashing function (a one-way function or an algorithm) trillions of times per second. Once a new block is part of the chain, any change would assume re-calculating each subsequent block’s hash – therefore the chain is considered secured against tampering. A new block is usually created each sixth of an hour, added to the chain and published to all nodes.
Using blockchain for traditional banking
A recent topic involving blockchain technology regards the utilization of this system by renowned banks and payment giants. The distributed ledger paradigm attracts financial actors due to its peer-to-peer potential, its fast transaction speed and its positive forecast when it comes to appreciating the Bitcoin importance in the future decade. Qualified as “open, shared, transparent and immutable”, the blockchain structure is very attractive since it can provide secure transactions from one corner of the world to the other in a matter of minutes.
Some of the interested companies so far are Master Card, American Express, Visa or PayPal. Visa recently introduced blockchain technology into car leasing digitization and came with a proof-of-concept in view of this.
Banks are also willing to get involved in this type of transaction system because otherwise the short to medium future timeline might just place them in the second place, with the blockchain on top of the list of the most utilized money transaction system.
On the cyber-security side, the blockchain has also proved very resilient, with no successful attack being able to breach the system so far.
Adopting blockchain without Bitcoin – is it even possible?
Although willing to adopt the blockchain technology, the mainstream financial entities seem to continue rejecting the Bitcoin in the process. The talks mention using the banks ‘own blockchain technology – and some wonder why.
You may check here a forum discussion on this exact topic – and the possible explanations. Ranging from Bitcoin’s bad reputation to the lack of control over it, the possible explanations include cyber-security reasons. Yet it seems like the financial world would rather adopt the payment system because of its genius structure, apply its beneficial features to the pre-existing currency. Going from the traditional currency to cryptocurrency would be too big a move to make in the same time.
In September 2015 nine international financial entities unveiled their plans regarding blockchain technology. Names such as JPMorgan, Goldman Sachs, Barclays, Commonwealth Bank of Australia, Credit Suisse were joined on September 29 by other 13 renowned organizations: Bank of America, BNY Mellon, Citi, HSBC, Morgan Stanley, Commerzbank, Deutsche Bank, National Australia Bank, Royal Bank of Canada, SEB, Societe Generale, and Toronto-Dominion Bank. Mizuho Bank, Nordea, and UniCredit adhered to the team on October 28.
The project’s name is R3 CEV – a start-up promoting the distributed ledger initiative. The founder of the initiative is a former ICAP CEO of Electronic Broking, David Rutter, who has a 32-years’ experience on Wall Street. Described as a “financial markets crypto, exchanges and venture practice“, the venture aims at building the first financial-grade ledger, strong, secure and capable of handling a transactional amount of hundreds of billions operations daily. David Rutter names this foundation layer “the fabric”, and acknowledges the need for the financial industry to back up this bold project.
Future projections in blockchain
The blog section of R3 CEV’s site constitutes a very interesting and instructional read: it provides insights into the future projections regarding the Fedcoin and the Bitcoin versus the ledger dispute.
Supporting the paradigm of a distributed ledger system, Tim Swanson published a report on consensus-as-a-service, in his quality as an adviser at R3 CEV and also as a research fellow at the Sim Kee Boon Institute in Singapore.
Swanson’s report mentions other notable previous initiatives involving blockchain technology, such as Blockstream (based on Bitcoin), Augur (based on Truthcoin), SKUChain, Ethereum, Pactum os Symbiont. The evolution of Bitcoin motivates the necessity of such an initiative, meant to gather the benefits of two separate financial worlds that have been barely bridged in the last six years.
Judging by the importance and market roles of those who have officially entered the R3 venture, adopting the blockchain technology in mainstream finance is not only possible, but highly recommended for keeping the pace with the evolving tech world. The initiative members will establish a collaborative joint working group in order to perfect the distributed ledger system and all its protocols.
