Many of us have heard about blockchain technology because it underpins Bitcoin, a controversial “virtual” currency launched in 2009. However, blockchain has many other potential uses, making it one of the hottest ideas in the financial technology space.
Like an accounting ledger, blockchain is a way of recording transactions. But unlike in a traditional accounting ledger, the information stored is validated and confirmed digitally as part of the process used to create it.
A way to deal direct
Using blockchain can make it easier for two parties to deal directly with each other, “peer to peer”, instead of going through a middleman. This can help keep costs down and help streamline processes.
Additionally, everyone with access to a blockchain network can see what the others have done. This means, in part, that the different parties to a money transaction are more able to trust each other.
Blockchain company R3 in January 2016 piloted a blockchain-based digital ledger system that successfully connected banks in different countries in a test environment.
The experiment showed how banks could potentially settle financial transactions with each other without having to use a third-party clearing house.
Blockchain could help improve a range of banking deals and services that are offered to customers. One specific area where the technology might be used is international payments, as this whitepaper explains.
How blockchain works
A blockchain is a type of distributed database. This means data is stored in multiple physical locations. Importantly, the various locations all have the same “view” of the information stored. In a blockchain, time-stamped lumps of data are linked to each other, like a chain, in chronological order.
These blocks of data can then both log and confirm the time and order in which transactions happen. Because several blocks of digital data refer to each individual transaction, it can be harder to falsify or destroy the information.
All accounted for?
Some writers have suggested that blockchain can help reduce the cost of providing modern financial services to people without full access to banking. Virtual currency based on blockchain can be stored in digital “wallets” and used much like a bank account.
According to the World Bank's Global Financial Inclusion annual report , as recently as 2014 some 48% of the world’s population did not have an account with a bank or other financial services provider.
Other industries than banking may also get benefits from using blockchain.
Blockchain technology is being developed to work with new “smart contracts” that may help boost sales of perishable items. One example might be fine wines, which can easily spoil in transit.
If wine being shipped was kept in storage equipped with smart sensors, data transmitted based on the humidity and temperature could then be recorded using blockchain. If the climate control failed, the system would “know” and be able to alert users or even actually update the buyer’s contract.
Chain of confidence
Both buyer and seller could then be more confident the wine would keep its quality while shipping – and of getting a fair deal.
Read about more potential uses for blockchain here.