What is Blockchain?

Our frequently asked questions may help.

Blockchain isn’t as confusing as it may appear.

The blockchain is a digital technology that records digital transactions of the users in multiple systems for decentralised storage of data. The name blockchain is a simple wordplay of how the technology works. Every request for transaction submitted to the platform is broadcasted through the Peer to Peer network to all the individual computers (systems) for validation and approval. Every approved transaction is called a block, and the block is added to a public ledger (a chain of previous blocks) to complete the transaction.

What can Blockchain do?

As a peer-to-peer network, combined with a distributed time-stamping server, blockchain ledgers can be managed autonomously to exchange information between disparate parties. There’s no need for an administrator. In effect, the blockchain users are the administrator.

Additionally, blockchain networks can be used for “smart contracts,” or scripts that automatically execute when certain conditions are met. For example, Ethereum Ether exchange users must meet pre-determined conditions that prove someone owns the cryptocurrency and have authority to send the money they claim to own. In addition, multiple blockchain users can create contracts that require more than one set of inputs to trigger a transaction.

How Secure is Blockchain?

While no system is “unhackable,” blockchain’s simple topology is the most secure today, according to Alex Tapscott, the CEO and founder of Northwest Passage Ventures, a venture capital firm that invests in blockchain technology companies.

“In order to move anything of value over any kind of blockchain, the network [of nodes] must first agree that that transaction is valid, which means no single entity can go in and say one way or the other whether or not a transaction happened,” Tapscott said. “To hack it, you wouldn’t just have to hack one system like in a bank…, you’d have to hack every single computer on that network, which is fighting against you doing that.”

The computing resources of most blockchains are tremendous, Tapscott said, because it’s not just one computer but many. For example, the Bitcoin blockchain harnesses anywhere between 10 and 100 times as much computing power compared to all of Google’s serving farms put together.

Why use Blockchain for Fintech?

Fintech, financial services technology is where blockchain is currently shining brightly.

At a high level, blockchain removes third parties from the transaction equation; in other words, a financial transaction on a blockchain needs no bank or government backer, and that means no fees.

Because blockchain entries can be seen in real time, the technology also has the potential to reduce time for clearance and settlement, which can take up to five days.

Accenture recently released a report claiming blockchain technology could reduce infrastructure costs for eight of the world’s 10 largest investment banks by an average of 30%, “translating to $8 billion to $12 billion in annual cost savings for those banks.”

In the case of cross-border payments, processing is often complex and includes multiple layers of communication among payment participants to verify transactions – an operation known as payment and settlement.

Payments, clearance and settlement in the financial services industry – including stock markets – is rife with inefficiencies because each organization in the process maintains its own data and must communicate with the others through electronic messaging about where it is in the process. As a result, settlements typically take two days. Those delays in settlements force banks to set aside money that could otherwise be invested.

Because it can instantly share data with each organization involved in a blockchain database or ledger, the technology reduces or eliminates the need for reconciliation, confirmation and trade break analysis. That helps yield a more efficient and effective clearance and settlement process, according to Accenture.

What's the difference between Private vs. Public Blockchain?

There are a variety of blockchain permutations, and they fall mainly into one of two categories – public or private. Public blockchains allow anyone to see or send transactions as long as they’re part of the consensus process. There are also consortium blockchains, where only a pre-selected number of nodes are authorized to use the ledger. For example, a group of banks and their clearinghouse might use blockchain as part of the trade-clearing, where each node is associated with a step in the verification process.

Private blockchains, in contrast, restrict the ability to write to a distributed ledger to one organization, such as a group of employees within a corporation, or between a set number of organizations, such as a number of banks that agree to a network partnership.

Along the way, blockchain – because of its self-policing security – eliminates huge amounts of record keeping, which can get very confusing when multiple parties are involved in a transaction, according to Saurabh Gupta, vice president of strategy at IT services company Genpact.