Before I dwell into the specifics, I plan to provide my readers with insights on certain fundamental aspects that I consider essential to understand this topic.
To begin with, one needs to understand what a blockchain is. In my words, I would define blockchain as a digital method of recording information in a way making it nearly impossible to hack or cheat the system.
According to Oxford, blockchain is defined as a digital ledger in which transactions made in bitcoin or another cryptocurrency are recorded chronologically and publicly. Perhaps the concept of blockchain would go way beyond this notion, and that its characteristic as a foundation for cryptocurrency is just one of the many features that have been explored by blockchain analysts.
This article aims to let the readers have a basic knowledge on blockchain, how it works, how it affects peer to peer lending, and how it is disrupting the traditional financial transaction sectors.
How does this work?
I feel concepts are best explained through examples and stories. Imagine that you are a student in Japan and your family lives in Europe. They send you monthly allowances at the start of the month. Have you ever thought about how the transaction of money took place? The cash your parents credit to their bank account is sent by their local bank to a major European bank which then makes the transaction by contacting its Japanese counterpart with whom it has already made previous agreements. Once the funds find their way to the major Japanese bank, the bank contacts the smaller institution where you hold an account and deposits the amount. There are two main disadvantages in the entire process. The first one is that since the entire process is extremely complex, long and time-consuming it would take days for the money to arrive to your bank account while the second disadvantage would be the fact that since every intermediary bank would impose a certain amount of fee for its service one would lose a significant amount of money as commission or fees. Instead of these traditional mechanisms the use of blockchain technology would help one overcome all the above-mentioned problems. Instead of relying on banks or financial institutions to help send money on your behalf, blockchain technology enables the users to become their own banks. What this necessarily means is that you no longer need the help of an external entity to help you send money. In the case of finance, one could use cryptocurrencies (which are digital assets or currencies based on blockchain technology). Once the sender and receiver create a crypto wallet to store the digital asset, the sender may use any cryptocurrency of his convenience to send any amount to the receiver using his wallet’s address.
As cryptocurrencies are virtual, they can be sent and received instantly via the internet and as the transactions involved are peer to peer, the charges involved are often negligible. One could argue that traditional transactions are much safer. I disagree. While blockchain is considered to be fast and efficient it is also one of the safest ways to store data making it nearly impossible to hack. This is because this technology uses two features to secure the pieces of data it holds. They are self-auditing by the users and a set of very complex algorithms. Both of these together make this technology immensely secure and nearly impossible to compromise.
What is self-auditing and how does it work? Well, what happens when you make a payment using DeFi (Decentralised finance, another way of naming blockchain tech used in transactions as it is decentralised without any central entity) is that your data is stored in a permanent ledger or in the form of individual blocks. When the other person makes another transaction with the assets you have given them another block is created that succeeds your block which would contain his or her data. Therefore, what you have within your digital asset is also a set of permanent data on who owned the asset previously. And since everyone who owns the asset has this data encoded in the blockchain this would mean that a hacker who wants to own a piece of this asset would have to change the algorithms of data held by each user. This would take infinite amount of time as there are millions of people using this technology. In short, the more people use this tech, the more complex and secure it becomes.
Blockchain has had significant advancements in many fields varying from the supply chain market and the health sector to digital assets, NFT’s, and digitalisation of documents. The present COVID-19 situation has also pushed governments and private entities worldwide to explore the immense opportunities blockchain holds. Steps such as the COVID passports developed by IBM are just one of the many examples of how blockchain is going to be an indispensable part of our future. I hope that my readers have understood the basics of blockchain and have gained a preliminary understanding of the topic. My later works would focus on the various sectors influenced by blockchain and the latest craze over topics such as Non-Fungible Tokens (NFT’s) giving my audience a better and deeper understanding of the following. For now, I would like to end my article on the very key note which forms the basis of my article: the future is blockchain.