In our first article on Cryptocurrencies “An Introduction to Bitcoin and Cryptocurrencies” we have already given you an overview on the topic. With this article we want to look at the underlying technology, the so-called Blockchain and the questions that surround it.
In 2008 Satoshi Nakamoto published a paper describing the cryptocurrency Bitcoin for the first time. Whether this name is used by a person or a group remains a mystery and is subject to on-going speculation, but in 2009 Nakamoto released the bitcoin software and the first units of bitcoins. The Bitcoin protocol uses a distributed database, which is operated by a peer-to-peer network of unaffiliated contributors and maintains a continuously growing list of data records that is hardened against tampering and revision in the so-called blockchain. Simply put, the database or distributed ledger records all transactions between users in the form of blocks. The technology of blockchain is therefore revolutionary and has the potential to be disruptive since control of the transaction process is spread out and provides for crystal clear transparency of its elements; intermediaries or authorities that usually execute and verify a transaction are consequently not necessary.
Advantages of blockchain
Blockchain isn’t only Bitcoin or cryptocurrencies though. One of its upsides is that is useful for a variety of applications and we are still in the process of discovering how it can be used. Santander last year publicly supported Blockchain technology research, saying it had identified 20 to 25 use case already where the technology could be applied including money transfers, trade finance, syndicated lending and collateral management.
In addition to its versatility when it comes to application, there are numerous other advantages of the blockchain:
Since every block is permanently recorded for all to see, blockchain makes the exchange of data easier and more transparent. The efficiency of the data management could make existing systems obsolete, thus save the banks annually up to $15-20 billion, as the Santander report pointed out and some believe that that cost saving could actually be even higher.
In the case of cryptocurrencies, it makes transfers also faster and cheaper than in traditional currencies as the intermediary is cut out. This obviously applies for all sorts of money transfers and transactions that incur costs and time.
The growing popularity of Bitcoin in developing countries, for example, also points out its advantage over in-stable domestic currencies.
Furthermore, because the distributed ledger of a blockchain does not exist on one centralised system but in the form of various copies across its network, it is less prone to problems of a single computer or human errors.
Another advantage of the blockchain lies in the use of so called “smart contracts”: The programme uploaded to a ledger instructs the automatic execution of certain clauses in a contract for a transaction based on the fulfilment of the respective conditions, e.g. the payment of fixed income products no longer needs to be entered manually (The topic of smart contracts is subject of a future post; watch this space for more on this soon!).
From a regulatory perspective, the technology reduces the risk of fraud and increase AML standards as all information is visible and therefore makes KYC and KYCC easier.