The following article is based on my own interpretation of the said events and/ or publicly available information. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.
Krishnachaitanya Potturi, MBA 2016-18, Vinod Gupta School of Management, IIT Kharagpur.
Blockchain is emerging as a potentially disruptive force capable of transforming the financial services industry by making transactions faster, cheaper, more secure and transparent. The Blockchain is a public ledger where transactions are recorded and confirmed anonymously. It’s a record of events that is shared between many parties. More importantly, once information is entered, it cannot be altered. A block is the “current” part of a blockchain which records some or all of the recent transactions, and once completed, goes into the blockchain as permanent database. Each block contains a timestamp and a link to a previous block.
The key attributes of the blockchain include the following:
- Security– hacking is impossible given the ledger is distributed across thousands of computers, reducing server maintenance requirements and improving security for banks.
- Transparency– the sender and recipient of each transaction are recorded and all transactions are publicly available for inspection.
- Privacy– users are anonymous and can move money around instantly and securely. This allows banks to save time and reduces costs on international transactions.
- Risk– currently, if a bank’s system goes down, users are unable to perform transactions. Using the blockchain technology, the bank’s system would continue as normal.
Blockchain has a lot of potential and will be disruptive to existing business models. It can provide payments capability at a fraction of the cost of traditional payment methods. Blockchain principles go beyond just currency and can potentially represent an exchange of value of complex bank transactions and other assets like investments and shares. It also offers an inherent level of trust for the user, eliminating the need for the middleman and mitigating the risk of human error. The first levels of disruption seem more likely in the payments space where 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. However, the biggest potential impact of a public ledger may extend beyond the payment system. Given that the majority of financial assets such as bonds, equities, derivatives and loans are already electronic it may be possible that someday the entire system is replaced by a decentralized structure.
However, this technology is still very new and unknown to most, trust in its application is nowhere near the trust we give our banks. Powerful incumbents or governments may try to stop this technology as it can create an entire sub-economy that can’t be tracked should the owners of the Blockchain choose not to reveal the underlying transactions. Blockchain is 100% digital, as more and more blocks are added to the chain, more and more data and power will be consumed to support the network. Will this be sustainable for large players using this technology? Currently, Bit coin can handle 3 to 5 transactions per second and Ethereum 15 to 25. But the interbank Visa system handles 2,500. So if blockchain have a serious future, it must overcome current scalability roadblocks.