A block chain is a digitized, decentralized, public ledger of all cryptocurrency transactions. Constantly growing as ‘completed’ blocks (the most recent transactions) are recorded and added to it in chronological order, it allows market participants to keep track of digital currency transactions without central recordkeeping. Each node (a computer connected to the network) gets a copy of the block chain, which is downloaded automatically.
Originally developed as the accounting method for the virtual currency Bitcoin, block chains – which use what’s known as distributed ledger technology (DLT) – are appearing in a variety of commercial applications today. Currently, the technology is primarily used to verify transactions, within digital currencies though it is possible to digitize, code and insert practically any document into the block chain. Doing so creates an indelible record that cannot be changed; furthermore, the record’s authenticity can be verified by the entire community using the block chain instead of a single centralized authority.Order now
BREAKING DOWN “Block chain”
A block is the ‘current’ part of a block chain, which records some or all of the recent transactions. Once completed, a block goes into the block chain as a permanent database. Each time a block gets completed, a new one is generated. There is a countless number of such blocks in the block chain, connected to each other (like links in a chain) in proper linear, chronological order. Every block contains a hash of the previous block. The block chain has complete information about different user addresses and their balances right from the genesis block to the most recently completed block.
The block chain was designed so these transactions are immutable, meaning they cannot be deleted. The blocks are added through cryptography, ensuring that they remain meddle-proof: The data can be distributed, but not copied. However, the ever-growing size of the block chain is considered by some to be a problem, creating issues of storage and synchronization.
Block chains and Bitcoin
The block chain is perhaps the main technological innovation of Bitcoin. Bitcoin isn’t regulated by a central authority. Instead, its users dictate and validate transactions when one person pays another for goods or services, eliminating the need for a third party to process or store payments. The completed transaction is publicly recorded into blocks and eventually into the block chain, where it’s verified and relayed by other Bitcoin users. On average, a new block is appended to the block chain every 10 minutes, through mining.
Based on the Bitcoin protocol, the block chain database is shared by all nodes participating in a system. Upon joining the network, each connected computer receives a copy of the block chain, which has records, and stands as proof of, every transaction ever executed. It can thus provide insight about facts like how much value belonged a particular address at any point in the past. Block chain.info provides access to the entire Bitcoin block chain.
Extensions of Block chains
To use conventional banking as an analogy, the block chain is like a full history of a financial institution’s transactions, and each block is like an individual bank statement. But because it’s a distributed database system, serving as an open electronic ledger, a block chain can simplify business operations for all parties. For these reasons, the technology is attracting not only financial institutions and stock exchanges, but many others in the fields of music, diamonds, insurance, and Internet of Things (IOT) devices. Advocates have also suggested that this kind of electronic ledger system could be usefully applied to voting systems, weapon or vehicle registrations by state governments, medical records, or even to confirm ownership of antiquities or artwork.
Given the potential of this distributed ledger technology (DLT) to simplify current business operations, new models based on block chain have already begun to replace the expensive and inefficient accounting and payment networks of the financial industry. Block chain technology could free up billions of dollars: A recent Goldman Sachs report suggested that it could save stock market operators up to $6 billion a year.
While banks were initially hesitant to explore these technologies because of their concerns about potential fraud, they have started looking into how the block chain might provide generous cost savings by allowing back-office settlement systems to process trades, transfers and other transactions much faster.
In fact, the first international block chain transaction was completed on October 24, 2016. Brokered by the Commonwealth Bank of Australia and Wells Fargo & Co (WFC), the $35,000 deal involved Australian cotton trader Brighann Cotton Marketing, which purchased 88 bales cotton from its U.S. division in Texas and sent it to Qingdao, China.
Block chains and Tech Companies
Attracted by the idea of removing the middleman and moving towards democratization and decentralization, tech startups are adopting block chain technology with the goal of disrupting a variety of industries.
Among the startups leveraging block chain technology for IOT devices is 21 Inc. The Silicon Valley-based startup received a total of $116 million in funding in 2015. According to the firm, the funding will be used to embed Bitcoin mining chips into connected IOT devices and cell phones.
BTCJam, a P2P lending platform headquartered in San Francisco, specializes in providing Bitcoin-based loans. Over the last year, the company has lent more than $15 million.
Storj is just one company that is currently beta-testing the concept of developing cloud storage based on a block chain-powered network, with the goal of improving security while decreasing users’ dependency on a single storage provider’s centralized system. The company even offers users the opportunity to rent out storage capacity they do not need, similar to the way that property owners rent out extra rooms on Airbnb.
Proofof Existence, one of the first non-financial companies to utilize block chains, is a platform for executing contracts. It uses DLT to store encrypted information, thus enabling a transaction that cannot be replicated to be linked to a unique document.
Even established firms are interested. Microsoft Corporation (MSFT) has also expressed interest in block chain technology, having recently formed a partnership with block chain firm ConsenSys. In December 2015, Microsoft and ConsenSys announced Ethereum Block chain as a Service (EBaaS) on Azure — Microsoft’s cloud computing platform — to provide a single-click, cloud-based environment to clients and developers. In June 2016, the two companies started developing an open source, block chain-based identity system for people, products, apps and services.
Advantages of Block chains
Efficiencies resulting from DLT can add up to some serious cost savings. DLT systems make it possible for businesses and banks to streamline internal operations, dramatically reducing the expense, mistakes, and delays caused by traditional methods for reconciliation of records.
The widespread adoption of DLT will bring enormous cost savings in three areas, advocates say:
Electronic ledgers are much cheaper to maintain than traditional accounting systems; the employee headcount in back offices can be greatly reduced.
Nearly fully automated DLT systems result in far fewer errors and the elimination of repetitive confirmation steps.
Minimizing the processing delay also means less capital being held against the risks of pending transactions.
In addition, some smaller number of millions will be saved by shrinking the amount of capital that broker/dealers are required to put up to back unsettled, outstanding trades. Greater transparency and ease of auditing should lead to savings in anti-money laundering regulatory compliance costs, too.
Block chain’s removal of almost all human involvement in processing is particularly beneficial in cross-border trades, which usually take much longer because of time-zone issues and the fact that all parties must confirm payment processing. Block chain systems can set up smart contracts or payments triggered when certain conditions are met. The block chain cotton transaction mentioned above, for example, used a smart contract that automatically made partial payments when the cotton shipment reached specific geographic milestones.
Nevertheless, block chain startups are not without challenges. Among the most significant is the fact that most consumers simply do not understand the extremely complicated concept of block chain technology. In order to overcome this challenge, companies will need to find ways to precisely explain what they do in easily understandable language – and how they intend to deal with issues like secure online transactions and consumer privacy.
Incredible opportunity for decentralization, block chain technology offers the ability to create businesses and operations that are both flexible and secure. Whether companies will succeed in deploying block chain technology to create products and services consumers will trust and adopt remains to be seen. Nevertheless, this is definitely a space investors should watch. The demand for block chain-based services is on the rise, and the technology is maturing and advancing at a rapid pace.
The potential applications for block chain technology are almost without limit. At the moment, several of these applications are still either in the development stage or in beta testing. With more money being poured into block chain-based startups, consumers should not be surprised to see DLT services and products becoming more mainstream in the near future.