Blockchain is a much-used word and a hot topic for the last few years. (On the lighter side, many of you ladies out there who are not technically inclined – do not for a moment think it is another piece of jewellery you may have missed out :-)))
BLOCKCHAIN is simply a technology platform that contains BLOCKS of data / information that is chained together and the chain increases with the addition of more BLOCKS (whole lot of technical stuff to ensure integrity behind this).
I thought it best to pen down a few fundamentals of what exactly is Blockchain technology, in the first place – before going into what are the benefits and risks associated with it as of today.
- The term blockchain and bitcoin are not synonymous or interchangeable. Bitcoin is a cryptocurrency token (like there are many other digital currencies available and emerging in the world).
- You may wonder what is cryptocurrency – it is a medium of exchange like traditional currency, it is designed to exchange the digital information through a process made possible by cryptography. Cryptocurrency is a bearer instrument, meaning that the holder of the currency has ownership and no other record is kept of the identity of the owner.
- Blockchain, on the other hand, is the ledger (or technology) that keeps track of who owns the digital tokens at any given point in time. Therefore, you need blockchain technology in order to transact in Bitcoins.
- Blockchain can be defined as an interlinked chain of “BLOCKS”. These “BLOCKS” contain data or information on transactions between persons, businesses, Governments or other users and it has a technique that digitally timestamps documents that is not possible to backdate or erase or tamper with them in anyway. This provides integrity, security and a risk-free transaction recording.
- This is possible since all information transferred via Blockchain is encrypted and a digital distributed ledger keeps every occurrence recorded and immutable making it almost risk-free as compared to traditional methods of transacting.
- Blockchain enables peer-to-peer transactions between parties that are even unknown to each other. Unlike in traditional methods where there needs to be a central authority or trusted middlemen to complete transactions, Blockchain guarantees correct transactions through an automatic program.
- Typically, when you want to do a bank transfer from one country / Bank to another person, you have to necessarily go through a chain of transactions like your Banks’ correspondent bank remitting it to the receivers’ correspondent bank and then it finally reaches the receivers’ own Bank account. In a blockchain scenario, observe the diagram below (released for public understanding by ICICI Bank in India).
- Blockchain can be used for the secure transfer of funds, property, contracts, etc. without the intervention of a third-party intermediary like a bank or Government. The data recorded inside a Blockchain is immutable and irreversible.
- Blockchain is decentralized, so there is no need for any central, certifying authority, eliminating the single point of failure in a centralized setup.
- The data that is stored in a BLOCK depends upon the type of Blockchain – it can be a Bitcoin Blockchain or a healthcare blockchain or a Government record management type. It can be a public blockchain which is transparent and anyone can use the same, or a private blockchain or consortium which restricts it to authorized or a community of users.
- Blockchains cannot be run without Internet and is a software protocol that uses database, software applications and some connected computers.
- Blockchain technology first evolved from a distributed ledger concept that was used in payments in cryptocurrencies like Bitcoin. Then came Smart Contracts that are executable programs that check and verify conditions. Now there are what is called Dapps (or decentralized applications) running on peer-to-peer networks and are just like any other app, with front end and backend codes.
- There is a myth that Blockchain solves every problem, and smart contract is always legal. The reality is that this technology is so fast emerging that there are still grey areas that need to be addressed.
While India’s position is positive towards Blockchain technology it is cautious in it approach to digital currencies like Bitcoin. However, a lot of pioneering work in various industries and sectors are already in progress and both public and private sectors in India are actively contemplating the use of Blockchain for various use cases like land registration and property management, e-KYC for SEBI (in the wake of large scams), supply chain finance, international trade finance and foreign currency remittances by banks, e-Governance by linking databases built around the citizen identity project Aadhaar and so on.