Demystifying Blockchain

By: Sujay Sen, Heads - Enterprise Consulting

The origin of money had roots in the barter system, which was essentially a one-to-one exchange. What once began as a decentralized concept, has become very centralized over the centuries; with governments, regulators and financial institutions acting as intermediaries. As this is happening with digital, most intermediaries are getting challenged and technology itself is acting as an integrator between transacting parties.​

Similarly, the busine​ss of ‘money’ also got challenged in 2008, when a person or group of people under the anonymous name of Satoshi Nakamoto, published a paper describing bitcoin, and how it could be used to digitally send payments between any two willing entities without the need for a third-party financial institution. Bitcoin was born out of this, and they built an underlying technology that had a data structure that made it possible to create a digital ledger of transactions and share it among a distributed network of computers. It used cryptography to allow each participant on the network to manipulate the ledger in a secure way without the need of a central authority. This setup meant that the entire network, rather than a central authority, was responsible for ensuring the validity of each transaction.

With millions of startups mushrooming recently, sometimes the idea of a startup becomes more powerful than the startup itself. With Bitcoin being in the news for the wrong reasons, people got more interested in the underlying powerful concept and platform of Bitcoin rather than Bitcoin itself.

So what is Blockchain?
Large financial services firms and Fintech startups have taken the underlying concept of Bitcoin and started to use it to evaluate how they can build digital ledgers. A good example can be seen in the financial services, where trades are often verified by a central clearing house, which maintains its own central ledger. Using that process, it can take days to settle a transaction, and the clearing house typically collects some kind of fee. With the cost of cash in the US alone being more than USD 100 billion, a breakthrough here could cut up to USD 20 billion in middle-man costs.

Although there are several Fintech startups that heavily leverage the platform provided by Bitcoin itself (which can be used by anyone!), the bigger banks want to build a more ‘private’ network. As a result, there are now several blockchain consortiums and communities. But the underlying concept is still the same – A network of computers where the transaction will happen, a network protocol that will help share these blocks of transaction and a consensus mechanism to chain these computers to agree on the validity of the transactions. Hence the name, Blockchain!

How is Blockchain evolving and what does it mean to me?
Blockchain remains at an experimental phase inside many large firms today. Also, the first level of disruption seems more likely for the Financial industry, in the payments space. Here traditional transactions such as money transfers, credit and debit card payments, remittances, foreign currency and online payments, require an intermediary such as a clearing house or a financial institution. In these cases, a transaction would occur directly between the buyer and the seller, without any intermediary and the validation of the transaction would happen in a decentralized way or ‘distributed ledger’.

​​However, Blockchain has the capability to become the ‘internet of money’ parallel to the world of IoT, directionally. Also, we are seeing interest in Blockchain beyond the world of Financial Services. So, even though Blockchain is starting with some narrow objectives, signs definitely suggest wider usage and broader adoption.

For a large scale adoption to be successful, technology would have to scale well, as more companies participating would mean more nodes where the blocks would have to travel to. Also, since addition of each node drives exponential data growth in every node, bigger chains would drive Blockchains to grow more than 200 peta bytes/year. This could completely overwhelm the bandwidth of any node’s connection.​ ​However, today we have comp​anies like Amazon, Facebook and Netflix, which run distributed databases at massive scale. Similar technologies are powering Blockchains, and hence, their ability to scale is almost certain.

​Another key point would be building of consortiums and communities to standardize on Blockchain protocol and platforms. Today, it seems fairly fragmented, but we believe once some networks reach critical mass they will drive convergence amongst participating networks.

So, today you may not be able buy a Sandwich with Blockchain like you can with your Visa card. However, the world is getting ready to setup a massive Blockchain network behind the scenes that might drive a uniform digital currency, enabling us to pay without middlemen like Visa!​

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