“The blockchain is an incorruptible digital ledger of economic transactions that can be programmed to record not just financial transactions but virtually everything of value.”
– Don & Alex Tapscott, authors Blockchain Revolution (2016)
The world has changed, and so have we. In our efforts to go beyond conventions…to have a closer and connected world, we have let technology transform the way we feel, live and transact. Today, the technological marvels including the concept of having a digital world, social media, and online payment gateways have become a part and parcel of our existence, hopes, expectations, and aspirations.
All of a sudden, there comes a technology that calls banks inefficient. The technology asks you to retrospect once and see how many times banks have collapsed, leading to an inefficient system and mind-bogglingly catastrophic disasters. It bluntly conveys in their video- “Bitcoin doesn’t care who you are, or the color of your skin, or where you are. It is a global community of inclusion, for you to participate in the future… to be your own bank.”
A lot of people say Blockchain will be one of the biggest disruptors of the century, some call the technology as a threat to the existing banking system. Harvard says yes, and most of the experts agree to it. To discover the truth, let’s dig down deep into Blockchain and analyze how it will disrupt the global banking system. Before we begin, let’s get some jargon out of the way.
BitCoin is a form of cryptocurrency based on the Block Chain Technology.
CryptoCurrency: A digital decentralized currency based on cryptography. Cryptography involves the development of communication techniques over a computer network so that other people (or third parties) are unable to decipher the message you send over a network.
Decentralized vs Centralized Currency: In a centralized currency system, banking and economic systems like government or federal reserve control the supply of currency by printing money. However, in a decentralized currency system like blockchain, governments WILL NOT ISSUE NEW UNITS OF CURRENCY! Instead, everyone would be able to ‘mine’ bitcoins by solving complicated puzzles. That’s what bitcoin miners do, they simply solve complex math problems to make money!
One last thing before we plunge deep into the topic. The Blockchain is different from Bitcoin. We will talk about both here. Where Bitcoins are digital coins or assets to transfer from individual to individual, blockchain is the enabling technology.
Blockchain Technology: Background and Working
From as early as 1981, Internet geeks and Inventors have been trying to find solutions to problems relating to privacy, inclusion & security concerns pertaining with cryptography. A simple payment through credit card using the internet was also insecure as it required revealing a lot of personal information along with a high transaction fee. As there was always an involvement of a third party, Re-engineering of the process was of no help.
The story of blockchain started with an anonymous person. In 2008, several persons or a person pseudonymous as Satoshi Nakamoto– who may or may not be an Australian entrepreneur named Craig Wright– designed a new peer to peer electronic cash system using cryptocurrency. Surprisingly, this person never intended to design a Cryptographic currency. His accidental innovation led to the birth of one of the biggest disruptors of the century.
Blockchain resembles a shared spreadsheet on which people may keep adding data. It is a growing list of records linked through Cryptography, where each record is called a block and is linked to its previous block through a hash pointer. It serves as an open, distributed ledger.
Formation of this chain begins with the creation of a genesis block, depicted here in green. Each next block is linked in a secure way to the previous block. The main chain colored in black originates from the genesis block. The blocks outside the main chain colored in purple are called ‘orphan blocks’. Two know more how it works, refer to the image below.
How Bitcoin mining works?
Bitcoin transactions run on a blockchain. This is a public ledger, which holds a record of every single transaction. The other person receives the bitcoins once the transaction is verified. This verification involves solving a complicated mathematical problem, a process called “mining”, and anyone with a powerful enough computer system can do it.
Bitcoin mining requires a computer and a special program. Miners will use this program and a lot of computer resources to compete with other miners in solving complicated mathematical problems. About every ten minutes, they will try to solve a block that has the latest transaction data in it, using cryptographic hash functions. The first miner to find the solution announces it to others on the network. The other miners then check whether the sender of the funds has the right to spend the money and whether the solution to the puzzle is correct. If enough of them grant their approval, the block is cryptographically added to the ledger and the miners move on to the next set of transactions (hence the term “blockchain”).
The miner who found the solution gets 25 bitcoins as a reward, but only after another 99 blocks have been added to the ledger. All this gives miners an incentive to participate in the system and validate transactions. Forcing miners to solve puzzles in order to add to the ledger provides protection: to double-spend a bitcoin, digital bank-robbers would need to rewrite the Blockchain and to do that they would have to control more than half of the network’s puzzle-solving capacity. Such a “51% attack” would be prohibitively expensive: Bitcoin miners now have 13,000 times more combined number-crunching power than the world’s 500 largest supercomputers.
But is it all good?
Though Blockchain is being viewed as a revolutionary technology that holds huge potential to change the way society functions, it has its own limitations. Be it Automation, Artificial Intelligence or Big Data, there is always an ambiguity of unemployment resulting in the adoption of these technologies. It may also displace a number of humans from their jobs.
Further, blockchain is an unhindered technology. Without any government regulations, it may be used for a lot of illegal activities!
Moreover, the energy consumed to get this massive network of computers working is huge and with the increasing transactions, a bigger block size will be required to handle the transactions.
However, unlike the internet, blockchain has no structure & process to figure out things, this has created trouble in finding an optimal solution for block size. (There are loads of other limitations, refer to the Infographic for more!)
Future Expansion: How it can change the landscape of Economics
One of the most profound studies on blockchain impacting the Economy has been done by Data 61. According to the Data 61 reports, Blockchain has the potential to be linked with everything of importance to humankind. This may include education degrees, financial services, birth & death certificates, medical procedures, insurance deeds, marriage licenses, votes & anything that can be coded.
This will help the businesses to thrive and will enhance banking, logistics and healthcare productivity. The Internet of Things enabled technology will also help governments to manage databases better.
The features like openness to writing and inspection, authentication through computerised cryptography and redundant storage will help in the secure exchange of funds.
Further, we can even have “smart contracts” with cryptocurrency. Smart Contracts are the transactions that happen only if certain conditions are met, such a specific life insurance policy that sends money to the beneficiary only if a specific doctor submits a digitally signed death certificate to the blockchain.
The money lenders would be able to trade without the use of intermediaries, resulting in elimination of back hand time in consuming and inconsistent functions of financial houses & enterprises.
In all, Blockchain is a technology with immense economic potential whose results can be mind-boggling for money traders, governments, healthcare workers, and almost everyone.
If the experts manage to find a way around the limitations, another disruption may be evoked by Blockchain. Just imagine, no government is having the power to issue this currency. People solving ‘Math Problems’ to mine money… and no need of demonetizing queues to have money in your hands… just an algorithmic solution, and a (currently infamous) virtual currency.
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