It's a technology that could just revolutionize transacting as we know it. Not just in banking -- any kind.
Blockchain is one of those hard-to-understand concepts, mainly because it is based on fairly complex technology involving cryptography, encryption and networking. However understanding its application is key to realising how profound a disruption this could cause on the way we transact and make payments in future.
Imagine three people -- Amar, Akbar and Anthony -- want to exchange money among themselves. To start, assume that Amar is the only one with money to (Rs 20) while the other two are broke. If Amar wants to pay Akbar Rs 10, then Akbar wants to pay Anthony Rs 5, blockchain maintains a record of each transaction linking them in sequence, and stores these records in a ‘digital ledger’. Unlike its real life counterpart, in the blockchain world the ledger is open for any user to view, also copies are stored on the ‘nodes’ or computers connected to the blockchain network. Any new blockchain transaction causes all copies of this ledger in the network to be updated.
Let’s assume Amar and Anthony wish to store a copy of this ledger -- in doing so, each becomes what is called a ‘miner’. Only miners are allowed to update the blockchain ledger with new transactions. To determine which miner gets to win the job of validating a new transaction record in the ledger, each competes by trying to find a suitable key that will be used to lock in this record. While the process of finding this key involves complex computation, there is a definite reward: the miner gets paid in Bitcoin. When the winning miner updates the blockchain ledger, all other miners’ ledger copy gets updated.
Compared to traditional transaction systems, where end users generally work through a trusted third party when transacting (a bank, for example,) blockchain has several advantages:
- Users transact with each other directly.
- The distributed ledger system is transparent, practically impossible to tamper with, and is decentralized by nature.
- Since there are no intermediaries, users don’t need to pay processing fees.
- Transactions happen in near real-time.
Blockchain could augment and possibly even replace traditional transaction systems, and be used for exchanging virtually anything of value, including bitcoin, property, shares, vehicles and more.
Here's a more detailed, yet illustrative, explainer on blockchain and its various concepts.
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