Blockchain is a way to rapidly exchange digital assets — such as payments, photos and contracts — between two or more parties in a secure, verifiable and auditable process that doesn’t require a middleman. Each party in the network has its own copy of the blockchain attached to every asset. As long as the chains are in sync, all parties can be confident that the asset or transaction is valid.
Blockchain is most commonly associated with bitcoin, a digital currency that can be exchanged without the need for banks, clearinghouses or other intermediaries. Bitcoin transactions are instantaneous and are considered highly secure.
However, blockchain can be used in many other ways. For example, a professional photographer could add a blockchain to verify the authenticity of copyrighted photos. Copies of the photos that lack the verified blockchain could then be pegged as fraudulent. The same goes for titles, deeds, contracts and any other documents that need to be exchanged between multiple parties in a trust network.
Blockchains can also be used to create digital records of use and payments to content creators. The technology can expedite transactions and ensure that all parties have a right to use the copyrighted material.
Blockchains can be public or private, with the rules set by the parties involved. Private blockchains may have lower levels of security if the parties already trust each other; bitcoin is a highly secure network precisely because anyone can use it.
Harder to hack
By storing financial information across a network of computers, the task of compromising data becomes much more difficult for hackers. Instead of having to breach just one server, falsifying a balance or making a fraudulent transaction on a blockchain can only be achieved if the majority of the network is compromised. Hacking a single server can be extremely difficult, even for the most accomplished cybercriminals. Being able to compromise enough servers to falsify records on the blockchain is practically impossible, especially as hackers would need to breach each node simultaneously.
The high level of security afforded by distributed ledger system makes them particularly attractive to financial institutions, but bitcoin itself offers few benefits to banks. However, the same technology that underpins the blockchain can be used to establish secure networks for any type of asset, not just bitcoin.
The World Economic Forum anticipates that 10% of all gross domestic product will be stored on some form of distributed ledger by 2027. Already banks, regulators and financial exchanges are researching ways to adapt blockchain technology to securely record data on stocks, bonds, property deeds or even the energy distributed over smart grids. With such a wide variety of applications the challenge now is to find ways of packaging the technology for use in consumer products and services.
Bitcoin may be controversial to some, but the infrastructure that underpins it could be of big use for the banking sector
Since first appearing in 2009, bitcoin has sparked much speculation about the future of finance. But while interest in the currency itself has fluctuated widely as its value continues to soar and crash, the database technology underlying bitcoin has steadily been garnering interest from the world’s largest banks and investment firms.
Similar to an enormous ledger, the blockchain records and indexes each movement of bitcoin, creating a searchable database of every transaction in the process. However, unlike traditional digital ledgers that record information on a central server, the blockchain stores transaction data across vast networks of computers that constantly check and verify information with each other.
Distributed ledger systems that dissipate information in this way overcome a key challenge for financial firms – how can critical data be stored securely? Stringent regulations exist to ensure companies that handle financial data are doing so in accordance to the highest cybersecurity standards. But despite these requirements, instances of financial data breaches are on the rise.