The Blockchain: a brief summary

The Blockchain (or distributed ledger technology) is a hot topic for discussion -  it has the potential to revolutionise domestic and international transactions - but of course also comes with its disadvantages.

The Blockchain was invented in the context of the digital currency, Bitcoin (which by now, most people have heard of). The Blockchain is a public ledger of all the Bitcoin transactions, which  continues to grow exponentially. Blockchain allows parties to transact securely in the absence of a third party intermediary and it is clear that some businesses recognise the potential savings connected to Blockchain or other distributed ledger technology.

So how does it work? Thousands of computers around the world are connected to the Blockchain, each holding a copy of the Blockchain history record. There is no official copy and no computer is seen as more valid than another - they each mutually verify the ledger and there is no centralised authority (such as a government or a bank). This decentralisation is one of the revolutionary aspects of the technology.

"Mining nodes" are computers connection to the Blockchain; they race to validate transactions, create new blocks and have these accepted by the network. The successful computer (or owner thereof) is rewarded in Bitcoin. Once accepted, each new block is sealed permanently and contains a link to a chain of prior blocks, making the chain more secure. Blocks can be added to the ledger but cannot be removed or corrupted.

The enhanced security of distributed ledger technology can benefit many - including (perhaps surprisingly) banks and financial institutions. For example, the system can facilitate the effective and secure transfer of ownership of digital assets (such as shares and bonds). Also, you can permanently embed information and data (not just financial data) into the Blockchain. The open ledger nature of the Blockchain means that financial institutions may be able to monitor a customer's payment history more accurately, in the context of making a decision to lend. From a customer's perspective, the Blockchain represents a more transparent system with the internal mechanisms not subject to "behind closed door" processes.

There has been inevitable criticism about the public nature of the Blockchain and its encroachment on individual privacy. Blockchain technology has also been criticised as a forum for use in illegal activities, and in particular the transfer of the proceeds of crime. There has been some question as to the potential applications of such technology beyond Bitcoin mining. Its distributed and decentralised nature makes it inherently more cumbersome than some other softwares especially as the "chains" grow in size.  Organisations will have to give considerable thought to where and how to apply the Blockchain. Nevertheless, the technology and/or its derivatives represent a real opportunity to all those connected with the future of business.

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