Many may associate blockchain technology with just bitcoin.
However, the technology is more than that, it has since evolved to perform functions other than digital currency transactions and has started to infiltrate industry operations.
So, what exactly is this technology all about?
Blockchain is a distributed ledger used to store and track information or transactions.
But it is unlike traditional databases that have central authority (think: banks) to verify the transactions that happen on the platform.
Instead, a blockchain is a decentralised database where no single entity has control over the system.
Note: Network of nodes refer to miners
Simply put, the term blockchain refers to a series of blocks that hold transaction information that are linked (“chained”) together in a chronological order.
A separate party, the miners, help to maintain the integrity of the database.
Before a new block can be added to the chain, these miners will have to verify and confirm the information in the block.
In return, these miners collect transaction fees and block rewards such as cryptocurrency for successfully validating a new block.
This arrangement creates a trustless system where the participants do not need to trust a central authority to validate the information on the database.
Why use blockchain？
Blockchain technology has three underlying principles that differentiates itself from traditional data storage and transfer technologies.
All information on the blockchain is recorded permanently and cannot be altered.
They are also chronologically ordered, available for viewing by anyone on the network.
This structure ensures that all information is set in stone, reliable and counterfeit-proof (i.e. two of the same transactions cannot co-exist on the same blockchain).
Every single piece of information on the blockchain is accounted for and cannot be forged.
The information is also verified through miners who require large computational power.
The software of the public blockchain and history of transactions are completely visible to anyone on the network.
The above helps to instill trust in the blockchain system without a central authority.
As blockchain operates on a decentralised system, every user on the network needs to agree on the validity and verification of the transaction before a block is added.
This peer-to-peer network (P2P) ensures that there is no single point of failure as other miners can continue working even if a single miner stops.
Everyone is incentivised to maintain a validated network free from bias and inaccuracy as they are rewarded accordingly.
A growing market
Many industries are starting to recognise the benefits of using blockchain to improve security and efficiency.
In particular, the banking and finance industry stands to benefit greatly from this pivotal shift.
Antiquated transactional processes can be replaced and operations greatly simplified.
Fraud and hacks can also be prevented through the use of the new, secure system.
91% of banks have since invested in blockchain solutions by 2018.
According to research firm MarketsAndMarkets, the global blockchain market is expected to grow at a CAGR of 67.3% from 2020 to 2025.
The trend shows that the future of financial technology is set to flourish with the introduction of blockchain.
Check back next week as we detail practical applications for blockchain and its implications for you, as a Smart Investor.
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Disclaimer: Jia Yi does not own any of the companies mentioned.