What is Blockchain Technology and Why Does It Matter?

By Clayton Howes

Tech advances in finance seem to be popping up everywhere you turn these days. Marketplace lending, online loans delivered in seconds, fractionalized property investment platforms…

But one particular technology is being hailed “the next internet” by those in the know.

Blockchain technology is suddenly the next big thing, ready to revolutionise the way a whole range of different industries store and use their data.

But despite such grandiose predictions by the experts, surprisingly few regular people seem to know much about what blockchain technology actually is.

So what exactly is this new technology, and how will it impact you?

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Defining blockchain – the technical stuff

In simple terms, blockchain is a digital ledger of transactions. This ledger is open to the public and decentralized, meaning that the ledger is saved on many networks of computers around the world. No single entity (like a government or investment bank) is responsible for maintaining the ledger’s accuracy.

Each new ledger entry, which could be a stock trade, title of vehicle ownership, or a fund transfer, is added to the digital ledger and becomes a new “block”. The sequence of these blocks builds a “chain”, which can be used to verify the history of the record, and whether or not the transaction is valid.

So, how does it work?

The platform uses encryption to ensure that 1) every new transaction is valid and 2) the entire system agrees on the state of the digital ledger.

In simple terms, this means that all parties participating within the blockchain agree that transaction X left account A and is now in account B. The encryption also means that while all parties can see the balance of account A, they do not know who the account holder is. This ensures a level of privacy which is already in place within financial services.

What can I use it for?

Currently, the most widespread use of blockchain technology is for cryptocurrencies, like Bitcoin. Think of Bitcoin as a software application and blockchain is the operating system. The blockchain platform, thought process, and programming enables Bitcoin to exist.

More and more, financial firms are seeing blockchain as a disruptive technology which can fundamentally change the way financial transactions are completed.

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Think about it this way;

When you go to a bank today and request a fund transfer you must communicate with a teller, who must then enter the transaction into the bank’s system. The bank then must contact the receiving bank and confirm the transaction, then the receiving bank must make the funds available to the receiving party. There are a lot of pieces to that puzzle.

But by moving to a digital ledger that is constantly updated, we remove; the human error involved, the risk of hacking a centralized database, and the risk of the funds being in both accounts simultaneously. This transfer could be completed almost instantly, and the transaction would be added as a new “block” to the “chain” of digital ledgers across the network.

What are the risks?

In theory, there are apparently no risks with blockchain, and the system is invincible. Scholars have estimated that to effectively hack the blockchain system would require something like the world’s entire computing power working since the dawn of time.

In practically, however, blockchain is not completely failsafe.

There have already been several high-profile Bitcoin hacks which have resulted in millions of dollars’ worth of digital currency evaporating from client accounts[1]. The root of these hacks and the technological shortcomings which enabled them are still being investigated.

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The bottom line?

Blockchain technology is very exciting, but caution should be exercised by developers, investors, and the business community in general at these early stages of its deployment.

With any new technology, expect growing pains as blockchain makes its way to the mainstream.

Clayton Howes is the CEO of digital consumer finance firm MoneyMe (www.moneyme.com.au). He’s an expert in personal finance as well as small business and start-ups.

[1] https://www.bloomberg.com/news/articles/2016-08-17/the-wretched-endless-cycle-of-bitcoin-hacks