In today’s world, new technologies spread like wildfire. Many of them will never see the light of day or, at best, will provide fertile ground for the development of other ideas and concepts. Will blockchain turn out to be a flash in the pan? Everything suggests quite the opposite. After all, blockchain has the potential to upend the key pillars of society.
Most people know very little about cryptocurrencies. Those who’ve heard the term tend to think that cryptocurrencies, such as bitcoin, are merely virtual money or a web-based transaction system. In fact, money is only the tip of the cryptocurrency iceberg. What bitcoin is principally is a pioneering Internet technology. Its use as a means of exchange is only one possible application. Over the centuries, trade has become tremendously complex, its sophistication reaching new heights in the age of globalization. Today, anyone can sell anything to anyone anywhere in the world. With a slight change of perspective, a transaction comes across as pure information. For now, such information is isolated and available exclusively to a small group of transacting parties. Transactions are validated and settled through third parties – middlemen whose contributions rarely exceed sending and confirming deals. Such intermediaries include banks, accountants, notaries public, state governments, financial institutions, individuals and dedicated fiduciary organizations. For now.
Fiduciary institutions in the new world
The nature of blockchain technology is to maintain a shared collective digital ledger of transactions distributed in identical copies to multiple computers all across the web. The ledger is accessible to anyone and fully secured with sophisticated encryptions. A user can only view his/her own transactions. Relying on blockchain prevents any bitcoin from being duplicated, the transactions are public, and their entire history, from the very inception of the bitcoin network to the present, can be viewed in block explorers. A chain of blocks serving as a transaction ledger cannot be counterfeited, as the number of bitcoins is capped and will never exceed a predetermined limit. The transactions encoded in a blockchain are permanent and indelible. Work is currently under way to use blockchains as a banking ledger, a document authentication system, a digital signature in a state administration and for document notarization. All such transactions may be performed outside of the age-old system, without the involvement of fiduciaries, directly between transaction parties.
Successive transaction blocks
A blockchain records and stores all transactions, complete with a timestamp and the number of parties to every transaction. Every node in the network (of which there are tens of thousands) holds a complete copy of the blockchain in the form of a transaction ledger. Using complex mathematical and cryptographic principles, transactions are validated by so-called bitcoin miners, who are additionally responsible for creating new bitcoins and ensuring their fixed number in the network. The mathematical principles also ensure that network nodes automatically and continually validate transactions and transaction ledger records. If someone tries to cheat, alter an existing transaction or enter an unauthorized deal, blockchain nodes will, in the validation and reconciliation process, discover the single copy of the ledger whose transaction is inconsistent with the transaction record in the network and refuse to add it to the blockchain. Every transaction is public. Thousands of nodes unanimously agree that a given transaction took place on day X at time Y. It is much like having a trusted notary public oversee every transaction. As a result, all parties to a transaction have access to a common source of true and verified information.
Protections and fraud-proofing
A new block appears in the blockchain every 10 minutes on average. Blocks are arranged to follow one another. Each contains a package of unique data on concluded transactions. An attempt to modify one block changes the entire chain down the line. Signed in such a way, a block cannot be counterfeited given today’s technology and computational power. This guarantees the uniqueness of every block and transaction as well as their permanence. The philosophy behind blockchain, advanced mathematical methods and cryptographic protections make the data contained in the transaction ledgers trustworthy. This makes the blockchain technology incredibly appealing to banks and public administration. Documents and bookkeeping records stored in this way are safe against any attempts at counterfeiting or tampering.
Transaction ledgers can be used to store any transaction types in any currency. Be it a currency, property, real estate or shares. It is up to the users to decide what a given bitcoin unit represents. Every bitcoin is divided into 100 million individually identifiable and programmable parts. This means that users may ascribe diverse properties to each individual unit. The user can program a bitcoin to be eurocents, company shares, kilowatt-hours of energy, election votes, loans or digital ownership titles. Therefore, bitcoin is a whole lot more than just money and a means of settlement. One can also program bitcoin to behave as needed. Bitcoins may self-cancel on a specified date or automatically return to the owner if the receiver fails to satisfy prescribed terms.
For instance, a business may control its spending on wages, development, machine or supplies purchases by designating each bitcoin up front for a specified purpose. This has the potential to substantially cut red tape, eliminate much accounting work, reduce the number of controllers and save time by streamlining the entire organization.
Threats and opportunities
The programmable open nature of bitcoin will help completely overhaul the financial sector. What is more, some of its supervisory and settlement functions may become superfluous. Commercial processes and information exchange will become more transparent, faster and considerably less expensive, relieved of the cost of maintaining the world’s entire financial system.
Will this really happen? I believe so, but then don’t forget that the foundation of bitcoin and the cryptocurrency, the blockchain, is only in its infancy. Fiduciary institutions such as banks, stock exchanges and financial transaction intermediaries are aware of its great potential, but also realize the threat it poses to the status quo. Bitcoin will open up new markets to financial institutions but will also alter their status. If the financial sector fails to adapt in time, any institutions unprepared for these new realities will be replaced by new ones, not all of which will come from the emerging FinTech industry.