A recent report by the Bank of England on payment technologies and digital currencies examined blockchain technology, which allows digital currencies to become a “true technological innovation” that could have far-reaching implications for the financial industry.
So what is a chain of blocks and why are you all excited?
The blockchain is an Internet-decentralized government ledger of all digital transactions that have taken place. It is a digital currency, equivalent to a parent bank’s book that records transactions between two parties.
Just as our modern banking system cannot function without the means to record fiat currency exchanges between individuals, so too can the digital network not function without the trust that comes from being able to accurately record digital currency exchanges between parties.
It is decentralized in the sense that, unlike a traditional bank, which is the sole owner of an electronic general ledger of an account holder’s savings, a chain ledger is common to all network members and is not subject to the terms of a particular financial institution or country.
And what? Why is it preferable to our current banking system?
A decentralized money network ensures that by sitting outside the constantly connected current financial infrastructure, one can mitigate the risk of being a part of it if things go wrong. The 3 main risks of the centralized monetary system, which were identified as a result of the 2008 financial crisis, are lending, liquidity and operational failure. In the United States alone, 504 bank failures have occurred since 2008 due to insolvency; in 2010 alone, there were 157. Usually, such a collapse does not jeopardize the account holder’s savings through federal / national security and insurance for the first few hundred thousand dollars / pound. Bank assets are usually absorbed by another financial institution, but the effects of a collapse can cause uncertainty and the timing of the problem with access to funds. Because a decentralized system like the Bitcoin network does not depend on the bank to facilitate the transfer of funds between the two parties, but relies on tens of thousands of users to authorize transactions, it is more resilient to such failures, so it has as many backups as there are network members. , which provide transaction authorization in the event that one network member “crashes” (see below).
However, the bank does not need to be exposed to depositors, operational IT failures, such as those that recently stopped RBS and Lloyds customers from accessing their accounts for a few weeks, can affect a person’s ability to withdraw savings resulting from 30-40- summer age. an outdated IT infrastructure that is groaning under the pressure of lagging behind customer growth and lack of investment in general. A decentralized system is independent of this type of infrastructure, instead it is based on the combined computing power of its tens of thousands of users, providing the ability to scale as needed, failing any part of the system that does not cause the network to grind to a halt.
Liquidity is the ultimate real risk of centralized systems. In 2001, Argentine banks froze accounts and introduced controls on capital as a result of the debt crisis, Spanish banks in 2012 changed the fine print to block withdrawals by a certain amount, and Cypriot banks briefly froze customer accounts and used up to 10% savings individuals to repay national debt.
As Jacobs Kierkegaard, an economist at the Peterson Institute for International Economics, told the New York Times, “The deal is that being unsecured or even secured by depositors in eurozone banks is not as safe as before.” In a decentralized system, payments are made without assistance and transactions by banks, payments are checked only by the network, where there are enough funds, and there is no third party that would stop the transaction, misappropriate it or depreciate the amount contained by one.
GOOD. You make a point. So how does a blockchain work?
When an individual makes a digital transaction by paying another user, for example, 1 bitcoin, a message is created consisting of 3 components; a reference to a pre-record of information confirming that the buyer has the means to pay, the address of the payee’s digital wallet to which the payment will be made, and the amount to be paid. Any terms of the deal that the buyer can deliver are finally added, and the message is “stamped” with the buyer’s digital signature. The digital signature consists of a public and private key or code, the message is automatically encrypted with a private “key” and then sent to the network for verification, only the buyer’s public key can decrypt the message.
This verification process is designed to ensure that the destabilizing effect of “double costs”, which is a risk in digital currency networks, does not occur. The double cost is when John gives George £ 1 and then goes on to give Ringo the same £ 1 (Paul didn’t have to borrow £ 1 for a few years). This may seem incompatible with our current banking system, and indeed, the physical act of exchanging national currency prevents John from giving away the same 1 pound twice, but when he is dealing with digital currencies that are just data and where it is possible to copy or edit information regarding simple, the risk that 1 unit of digital currency will be cloned and used to make multiple payments in 1 bitcoin is real. The ability to do so will destroy any trust in the network and make it useless.
“The deal reflects that being unsecured or even secured by depositors in eurozone banks is not as safe as before.”
To ensure that the system is not abused, the network accepts every message automatically created by the buyer, and combines several of them into a “block” and presents them to volunteers or “miners” for verification. Miner compete with each other to be the first to authenticate a unit, special software on home computers that automatically seeks to verify digital signatures and ensures that the components of the transaction message logically follow from the previous message used to create it, and that it, in its the queue displays the previous block that was used when it was created and so on and so forth. If the sum of the previous components of the block will not be equal to the whole, then, most likely, an unintentional change of the block was made, and it can be stopped from authorization. A typical block requires 10 minutes to verify, and so the transaction can pass, although this can speed up the buyer by adding a small “tip” to encourage the miner to quickly verify his request. Miner solves the “puzzle” of the block. rewarded with 25 bitcoins plus any “tips,” so the new currency is put into circulation, this incentive ensures that volunteers continue to maintain the integrity of the network.
By allowing anyone to check the proposed change in the book and test it, the chain of blocks eliminates the need to manage this central authority, such as a bank. By removing this intermediary from the equation, you can avoid many savings in terms of set transaction fees, processing times, and restrictions on how much and to whom a transaction can be made.
It seems to be true.
That is, each type of system has its own special risks, decentralized is no different. The main threat to the decentralized Bitcoin network is the “51% threat,” 51% refers to the number of total network miners working together in the “pool” of mining to verify transactions. Due to the fact that people are becoming more expensive in terms of time and processing power to successfully validate a transaction as a result of network increase, and more mature individual miners are now joining “pools” where they combine their processing power to provide less but more regular and consistent return. In theory, if the pool grows large enough to make up 51% or more of the total number of network users, it will be able to check mass transactions at double cost or refuse to mass check real transactions, effectively destroying trust in the network. While the system has built-in more incentives to legally extract bitcoin than to destroy it by fraud, a 51% threat poses a risk to such a decentralized system. To date, mining pools have taken a responsible approach to this issue and have taken voluntary measures to limit the formation of monopolies, because it is in everyone’s interest to maintain a stable system that can be trusted.
So … despite this risk, does the Bank of England like something that seems to deprive them of their business?
BoE not only looks at payments in bitcoins and digital currency, but also provides ways how a blockchain can make existing financial products and platforms more efficient and add value to them. You only need to look at existing financial assets, such as stocks, loans or derivatives, which are already digitized but placed in centralized networks to assess the capabilities that exist in a person by removing the intermediary …
… and become your own stock broker. Colored coins are a project that aims to allow anyone to turn any of their assets or property into something that can be traded. Think “Antiques Road Show.” I like this show, especially when the little darling discovers that she is using a 14,000-century Ming Ming dish worth £ 200,000 to keep the fruit on the buffet. Colored coins allow the owner of a dish (either their car or home) to have one or more of their bitcoins representing part or all of the value of their asset so that they can trade in exchange for other goods and services, a single bitcoin holding a value of £ 200,000 , or they issue 200 coins, each worth £ 1,000.
Similarly, businesses can issue shares represented by digital currency directly to the public, which can then trade without the need for an expensive IPO or traditional exchange, and shareholders can vote using a secure system similar to how transaction notifications are generated. Patrick Byrne, CEO of one of the largest U.S. retailers, which has become the 1st major retailer to accept international bitcoin payments, is currently exploring plans to create such an exchange that operates on a blockchain basis, and he hopes undo topical issues such as “offensive bare short selling” when traders can sell stocks that don’t belong to them, which lowers stock prices and which has been felt to have contributed to the fall of Lehman Brothers.
Asset digitization could also revolutionize the crowdfunding industry. Kickstarter is an example of a platform that facilitates product financing through micropayments from stakeholders, often in exchange for small memos after the project is completed, such as signed goods or a copy of one of the first products released. For example, investors can more easily digitize an asset and issue shares in it, as well as all future profits.
The potential of the block network will improve the way we communicate, bank management, manage our assets, etc. Huge and limited only by the imagination of people like Vitalik Buterin and the Ethereum community, and the willingness of current institutions to change.