What is blockchain technology : How it Can Be Used By Banks
know what is blockchain technology: Due to continuous technological advancement and the changes brought about by the new digital resources, new concepts and new tools emerge all the time. These innovations span virtually all sectors of society, with business being one of the most affected. The blockchain is yet another one of these disruptive innovations, whose use is growing worldwide.
Eliminating intermediaries, ensuring greater security and simplicity is Blockchain’s promise to the financial market. There are a number of opportunities to use Blockchain and the trend is for all banks to adopt this technology in the coming years. It is, after all, an excellent resource for optimising services and securing the competitive potential of financial institutions. And you, you know what Blockchain is and how it works? Keep following and find out!
DEFINING BLOCKCHAIN TECHNOLOGY
Literally, the word “blockchain” stands for “block chain” and is a technology for a new generation of transactional applications that build trust, accountability, and transparency while efficiently streamlining business processes.
It is a distributed database, being virtually invulnerable to failures and tampering, and the multiple utilities take off from the technology of the bitcoin cryptomonad – for which it was created.
Before the development of blockchain technology, accounting records were maintained in centralised and non-public databases. People needed to trust the database’s suitability to make sure there were no changes to the records (account balances and transactions).
With the blockchain, the data is distributed among all the participants, with total transparency and decentralisation. It is, therefore, unnecessary to rely on a third party so that the accounting data are recorded correctly and there is no danger of fraud.
HOW BLOCKCHAIN WORKS
In distributed accounting, computational techniques create a chain of block blocks for the registration of operations. It is a kind of public ledger that keeps the list of who owns an asset (be it a currency, shares, real estate or any other good) on the Internet or private business network. When performing the digital transfer of the asset, the system triggers a network of “confirmers”, which must enter into a consensus to validate the transaction. Each of the parties involved has a cryptographic key to access the data and assemble the information block, giving reliability to the process. “It’s as if the transaction were held at a meeting table. Each part manifests itself and the “witnesses” confirm the business, without intermediaries, exemplifies Marcelo Frontini, Director of Bradesco’s research and development department. Blockchain gained prominence in the financial sector and was the subject of an article in Cab Febraban magazine ( Club 62 ). This definition and quotation were presented in a story about blockchain.
Each independent user is called a “miner” and it has the function of validating and recording the transactions. This process is called “mining.” As a reward for this validation and registration, the miner can create new units in the registered block. Transactions are transmitted to the network through software. An example of a financial transaction:
The miners confirm the validity of the transaction and add it to the next block in the block chain. Every 10 minutes, a new block is added to the blockchain by a miner. The block chain receives the new block that contains different recent transactions, including the one that brings the information that the receiver Valter now has + R $ 500,00 and the player Luis has – R $ 500,00.
Blockchain does not depend on trust between the various users, referred to as “network nodes”. Any user can control and monitor a system node. It is run and maintained collectively by the various nodes of the peer-to-peer network to record the transactions. Open-source encryption is used to ensure basic security functions, avoiding excessive spending, forgery, and database tampering. Blockchain performs open accounting without the need for a central authority of maximum confidence.
PURPOSE OF THE BLOCKCHAIN
From the way of operation, it is easy to conclude what the purpose of blockchain technology is. Like all technology, blockchain intends to optimise processes, giving greater agility to transactions and greater security in the control and access of information, without the need for third-party intermediation, or a centralised system.
Each block in the chain has references to the immediately preceding block and is stamped with a code, or hash, on the network. In addition to having all the information about the transactions and the reference to the previous block, each block has the Proof-Of-Work solution that allows the acceptance and validation of the block by all network participants.
The blockchain is a large and unique ledger, shared by all members of the system. Transactions are recorded irreversibly, in a direct relationship with time: the older the block, the more impracticable the reversal of operations. This means that the possibilities for fraud are drastically reduced as time goes by – and as network time is measured much more dynamically and responsibly, the chances of tampering and failure become virtually nil.
This infographic, created by BTC Media, is a mapping of the blockchain ecosystem and bitcoin in 2016, designed in the form of a city! In the upper right corner, we observe the big banks that are already studying and using the blockchain.
ADVANTAGES OF BLOCKCHAIN
The blockchain system offers several advantages, such as:
- Record in chronological order of all transactions occurring in the network;
- Compilation and validation of the information by the participants themselves, the miners;
- Public system, exclusive, replicated and shared by users;
- Maintenance and updating happen on a voluntary and decentralised basis;
- Reward program (registry of new values) to users who are dedicated to the task of mining;
- Greater independence, security and agility in the operations and transmission of information, since there is no need for a “trusted third party”;
- Reduction of transaction costs in the financial sector;
- Optimised payment system with accelerated settlement time;
- Greater transparency in services.
We have separated some opportunities to use the blockchain, especially for the financial sector, in this article: The opportunities of Blockchain use by banks
BANKS AND BLOCKCHAIN
Banks and Institutions around the world are studying the adoption of this type of encryption. According to Camille Ocampo, director of financial services for Capgemini in an interview with Club magazine, “Blockchain represents the financial sector a revolution equivalent to file-sharing in peer-to-peer networks in the music business.”
Marcelo Frontini, Bradesco, highlights the use in applications for contract management. Blockchain would, in this case, be the means used to legally authenticate a transaction for the parties involved – removing the need for bureaucratic stages such as registrations and recognition of firms in notary offices. Another advantage is the possibility of automating the execution of these documents, developing systems able to verify if the rules and conditions are being fulfilled.
Despite the different applications that blockchain can support, the financial application, launched by the encrypted currency (bitcoin) is the one that is having the most impact at the moment. Many banks already carry out experiments in order to adapt the system to their own interests and needs. Decentralisation brings different benefits to financial institutions, contributing to improve activities such as:
- Liquidation of transactions in the financial market;
- Cross-border payments (national bank – foreign investor);
- Registration of securities;
- Storage of documents and contracts;
- Transaction tracking;
- Payments with people who do not have a bank account.
- Secure data from network clients
The results are already being felt or predicted with great precision. Blockchain technology has been playing an important role in the stock market and has definitely transformed the face of trade. According to studies carried out under co-authoring by Banco Santander, the blockchain system can eliminate up to 20 billion dollars of bank costs. The bank, which is the 10th largest in the world, also ensures that it is possible to use the blockchain in more than 25 banking applications.
Citibank (headquartered in the United States), Goldman Sachs (based in the United States), BBVA (based in Spain), Westpac and Commonwealth Bank (based in Australia) and many others are already Investing in the new technology aimed at reducing expenses and greater efficiency in the negotiations.
Check out banks and companies that invest in blockchain technology:
- The Dutch Central Bank is developing an internal prototype of the blockchain system, the DNBCoin, for the application of its own digital currency;
- In Japan, Mizuho Bank, along with Fujitsu and Fujitsu Laboratories, underwent a 3-month trial using the blockchain;
- Deutsche Bank (headquartered in Germany), HSBC and Barclays (based in England) use blockchain technology developed by IBM and other companies;
- KRX, the stock exchange operator in South Korea, plans to open a blockchain platform to stimulate off-board transactions;
- The American startup R3 CEV has formed a consortium of 25 investment banks aimed at developing a private blockchain system that replaces internal systems;
- ICAP, the UK’s financial services company, is also already using blockchain technology;
- Credit card companies prepare to launch blockchain applications;
- IBM also develops projects aimed at perfecting the blockchain system, with the creation of a new algorithm and a more adaptive architecture, including a cloud version.
- Nasdaq, where shares of tech companies are traded in New York, has been using blockchain technology since December to record stock exchanges of companies not listed on the stock exchange.
Read More: The Definition of Information Technology