(Video from Goldman Sachs)
Blockchains, and distributed ledgers, have been some of the hottest buzzwords in fintech and financial circles in recent years. While the first widespread use of blockchain technologies has been world’s first decentralised crypto-currency Bitcoin, blockchains do have other important use cases and applications, especially in financial services.
What is a blockchain (or distributed ledger technology)?
From the name alone, the term blockchain already gives a good hint as to what exactly it is, and what it does. This is also true for another commonly-used term for blockchain: distributed ledger technology.
A blockchain is essentially a digital ledger of transactions shared among a distributed network of computers. Blockchains use cryptography to allow the addition of new transactions to the ledger, removing the need for a central authority. There are countless potential use cases for blockchain technology with financial services, insurance, logistics and identity management being a few of the first widely explored opportunities.
“Validated blocks of ledger transactions, chained together, and distributed amongst network participants”
(Image: BTC Keychain/Flickr)
Thus, a blockchain must involve validation to ensure that all posted transactions are valid and allowable by the network rules (to ensure no fraudulent transactions are allowed), and then committed and recorded to the chain. This chaining also means that each successive block that is relayed to network participants contains a reference to the directly preceding block to ensure that no malicious participant can rewrite the committed blocks in the blockchain.
Therefore, all transactions are append-only, and once each transaction is validated/confirmed in a block in the chain, they can no longer be erased or changed. Even if an original transaction might have been made in error, the only way to rectify it would be to have a succeeding transaction that corrects the error. Due to the append-only nature of blockchain transactions, both the original transaction and the rectifying transaction would be visible in the chain history, providing an immutable audit trail.
Not only is the audit trail immutable with blockchains, these ledger records are distributed amongst networks peers, ensuring that the data cannot be lost due to any centralised point of failure.
In a nutshell, a blockchain is a ledger of transactions that:
- Secures transactions in an immutable fashion
- Shared among a distributed network of computers to ensure availability of the records
- Leverages cryptography to ensure that only validated transactions can be entered into the records
How do blockchain technologies benefit you?
When participating in crowdfunding, one of the key tenets is regarding the transparency of the campaign offers, and the enforceability of the legal agreements that needs to be entered into. With the use of blockchain technologies, the relevant corporate structures can be represented in a transparent manner on the decentralised ledger, while a combination of cryptographic signatures and linking of real-life identities to these cryptographic identities on the blockchain allows the signing of legal contracts without the need for physical wet signatures.
Moreover, with suitable choice of blockchain, complex financial instruments may also be crafted by participants in the form of smart contracts, where the execution of the instruments are carried out on the blockchain. This will allow for increased liquidity for your investments, as such instruments will open up previously unavailable markets in crowdfunded investments, such as secondary markets, futures markets, options markets, etc.
(Video from BNP Paribas)
(Video introduction from The World Economic Forum)