Blockchain

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Blockchain
Blockchain-380x214.jpg
Founded 2008
Headquarters Unknown
Key People Satoshi Nakamoto (pseudonym), inveotor
Products Distributed Ledger

Blockchain is a type of database for recording transactions such that each participant within a defined network receive a copy of the complete transaction log, in what is known as a "distributed ledger."[1] A mysterious programmer or group of programmers, known only by the pseudonym Satoshi Nakamoto, is credited with the 2008 invention of blockchain as the underpinning for bitcoin, a digital currency.[2]

Blockchain rose to prominence in the financial sector in 2015, as having the potential to replace traditional ledger-based systems, including bank payment and settlement systems, clearing, reporting, reconciliation and other post-trade functions, and even voting systems, vehicle registrations, wire fees, gun checks, trade settlements and cataloguing ownership of art works.[3]

In November of 2017, Goldman Sachs and JPMorgan Chase completed a successful six-month test program - managed by the blockchain startup Axoni - on blockchain technology in the $2.8 trillion equity swaps market, giving the new technology the stamp of legitimacy for use in transforming financial services to reduce back office and clearing costs.[4]

Blockchain Explained

(Excerpted from What is Blockchain?, by Jeff Bergstrom, John Lothian News, April 2016)

At its most fundamental level a blockchain is a cryptographically secure distributed ledger system. For example, a bank keeps a ledger of its transactions. Customers deposit money, take out money, or get a loan, and it all gets recorded in the ledger. Each part of the ledger depends on what goes before it. So if someone wants to take out money the ledger needs to show that he or she already has that money in the bank and then the new balance is recorded after the withdrawal.[5]

In order to know that the ledger is correct and that no one has written down the wrong amount or moved a decimal place, whether accidentally or fraudulently, we have to have faith in the business or the people we are transacting with. It is for this reason that banks (as one example) have extensive procedures in place to make sure everything is recorded as it should be. It is also why there are delays in the system. The delays allow more time to be certain all is as it should be. Even with all that, mistakes and fraud can still occur.

This is where cryptography comes in. While we usually think of cryptography as a means to hide secrets, in this case cryptography is a means to ensure that each entry into a ledger cannot be changed once it has been recorded.

The math used to calculate a block can only be done in one direction. You can get an answer but you cannot discern the previous pieces that got you to that answer. So the secret number you used to encrypt the data cannot be guessed by looking at the result it produced.

In a blockchain, each block incorporates the cryptographic hash of the previous block. That makes it nearly impossible (or at least exceptionally difficult) to go back in the chain and change something. All the blocks are dependent on the ones that came before. Change even one, no matter how long the chain, and everything after that change will have incorrect values, making it immediately apparent something was altered.

That alone, though, does not make the system secure. If only one person has the ledger, he could change something in the chain and recalculate the whole chain after that so that it looked perfectly fine. The "distributed" part of the "distributed ledger" is what stops this from happening. Instead of one ledger there are many, many copies distributed among a large group of people. Since they all have a copy of the ledger, they all have to agree on what the correct ledger looks like. As transactions occur the whole network agrees on what are legitimate transactions and everyone has a record of that transaction (and if there is a conflict the whole network votes on which transaction is the right one).

Now, putting it all together you can see the blockchain in action. Everyone has a copy of the ledger, each entry in the ledger is a "block," everyone agrees that each transaction is legitimate, and if one person tries to change the ledger fraudulently, the rest of the network will disagree because the cryptographic hashes will be wrong compared to the rest of the network. Each transaction depends on the block before it and thus, by extension, the entire chain all the way back to the beginning.

It is important to distinguish between blockchain and Bitcoin. Bitcoin is a cryptocurrency that uses blockchain technology to work. Bitcoin is often accused of being a means for drug dealers to do business. Whether or not that is true, that does not make the blockchain technology it uses "bad." That would be akin to saying cars are bad because moonshiners used them to smuggle alcohol during prohibition. While blockchain technology underlies cryptocurrencies, blockchain is not itself a cryptocurrency.

Blockchain Articles in John Lothian News

MarketsWiki Education Video, London 2015

Financial Services Disruption: The Rise of Bitcoin and Blockchain

"There is this big debate as to whether bitcoin is a currency or a commodity. I would argue that it is its own category."

Sandra Ro is a veteran in the world of bitcoin and blockchain, which simply means that she has been following the cryptocurrency and its underlying technology for over two years. In this MarketsWiki Education talk, Ro takes us through the nascent world of digital currencies, from the volatility of bitcoin, to the rise of blockchain technology and massive investments being made by venture capitalists, banks and other strategic investors. According to Ro, the next few decades are going to be exciting.

References

  1. Blockchain - Enigma. Paradox. Opportunity. Deloitte.
  2. Who Is Satoshi Nakamoto, Inventor of Bitcoin? It Doesn't Matter. Fortune.
  3. Why bitcoin’s tech could ‘change everything’ for banks. CNBC.
  4. Blockchain Gets a Wall Street Win: ‘We Know the Thing Works Now’. Bloomberg News.
  5. What is Blockchain?. John Lothian News.