Aug 312015
Extracted from BBVA Research on Digital Banking. What is Blockchain? Blockchain is a peer-to-peer public ledger maintained by a distributed network of computers that requires no central authority or third party intermediaries. It consists of three key components: a transaction, a transaction record and a system that verifies and stores the transaction. The blocks are generated through open-source software and record the information about when and in what sequence the transaction took place. This “block” chronologically stores information of all the transactions that have taken place in the chain, thus the name blockchain. In other words, blockchain is a database of immutable time-stamped information of every transaction that is replicated on servers across the globe. This technology is the foundation of bitcoin, a crypto currency. In traditional transactions such as money transfers or foreign currency, there is usually an intermediary or a centralized entity that records the transmission of money or currency that exist apart from it. In blockchain, the token or digital coin itself is what has value, which is determined by the market. This is what makes the system a truly decentralized exchange. When people buy or sell cryptocurrency, a secret key or token is broadcast to the system. “Miners” use nodes, computers or devices linked to a network, to identify and validate the transaction using copies of all or some information of the blockchain. Before the transaction is accepted by the network, miners have to show “proof of work” using a cryptographic hash function –a special algorithm- that aims to provide high levels of protection. Miners receive some form of compensation for their computing power contribution, avoiding the need to have a centralized system. New protocols such as Ripple rely on a consensus process that does not need miners nor proof of work and can agree on the changes to the blockchain within seconds. In any case, the blockchain offers an inherent level of trust for the user, eliminating the need for the middleman and mitigating the risk of human error. In this public ledger, the data is protected against tampering and revision, and individuals cannot replace parts of the blockchain as the cost of doing so is significant – hypothetically one would need to control more than half of the “nodes” to surreptitiously alter the block chain. The Disruption While cryptocurrency itself has received a lot of criticism, the blockchain technology is thought to offer great (more…)