Blockchain was first conceptualized by Satoshi Nakamoto in 2008,
followed by implementation in 2009 with the Bitcoin.Block chain is an open
distributed ledger that can record transactions between two parties efficiently
and in a verifiable and permanent way. For use as a distributed ledger, a
blockchain is typically managed by a peer-to-peer network
collectively adhering to a protocol for validating new blocks. Once recorded,
the data in any given block cannot be altered retroactively without the
alteration of all subsequent blocks, which requires collusion of the network
How it works?
A blockchain system is
composed by two types of entities:
• Participants, who perform transactions.
• A peer-to-peer network of nodes, who validate transactions and participate
in the consensus process.
To understand where the name “blockchain” comes from, it is
necessary to visualize how validated transactions are recorded. Transactions
are grouped into blocks that are submitted to a network of validating nodes.
Every time a block is validated, it is broadcasted to the network and added on
top of the blockchain. Since every block contains a timestamp and a reference
to the previous block, the blockchain is fundamentally a time stamping system
represented by the chain of all blocks, starting from the first block.
The peer-to-peer network guarantees transactional security
throughout the consensus process. Every time a new block is validated, each
node verifies the block and updates its local copy of the database, adding a
new block to the chain. Nodes follow the protocol that is embedded in the
blockchain software, which determines a single state of the database even if
there is no single authoritative copy of it. While in a centralized
architecture there is a single authoritative database operated by a single
entity, in the blockchain every node has a local synchronized copy.
Once a block is validated, it is infeasible2 to change the
blockchain without any tampering evidence. Immutability property is achieved
throughout the combination of public-key cryptography and digital signatures.
• A private key, which the user must not reveal, since it is used to
sign transactions and to unlock cryptocurrency funds.
• A public key, which corresponds to the address of the associated
account. It is used from participant to identify the receiver of a transaction.Also it uses cryptographic hash functions and consensus mechanism to
guarantee transaction security and ledger integrity.Cryptographic hash functionBlock chain is tamper evident ledger, to achieve this feature it
uses cryptographic hash functions, this function maps inputs with a fixed size hash tags. Any minor
differences in the input will exhibit major difference in the hash tag, thus
creating tamper evident structures. Consensus mechanismBitcoin follows a standard majority consensus, where each miner may
choose which block in the chain to append to, and eventually the longest chain
sustains. It is widely believed that as long as honest parties control majority
of the computing power, the longest chain will grow and outperform other forks.
Also each node is required to perform a certain amount of computational work in
order to create a valid block, controlling a large part of the network for a
malicious actor would be costly, difficult and would probably lap the gained
advantage.Classification of blockchain ledgersBlockchain architecture may be classified broadly into three
categoriesPublic blockchains:A public blockchain is a blockchain that allows anyone in the world
to read, send and participate in the consensus process – the process for
determining what blocks get added to the chain and what the current state is.
As a substitute for centralized or quasi-centralized trust, public blockchains
are secured by cryptoeconomics. These blockchains are generally considered to
be “fully decentralized” and permissionless network.Private blockchains: A private blockchain requires permission from either network starter
or authorised party involved. Depending on the usage, existing participants may
decide new entrants, or a consortium and regulatory authority could make
decisions instead. But once entrant has joined the network, they maintain the
blockchain in decentralized manner.Consortium blockchains: Consortium blockchain tries to remove the sole autonomy in private
blockchain. So Instaed of having one in charge, we have a group involved, which
come together and make decisions for the
best benefit of whole network. Such groups are called consortiums. consider a
Central Bank which allows only specified, trusted Banks to provide the
necessary calculations and thus verify transactions before adding them to the
block. Thus making it partially decentralised. Applications of blockchain in banking and finance:A Permissioned blockchain technology is often far more appealing to
enterprise and financial services. It has potential to address certain
limitations of current process by simplifying the traditional design of the
industry.Know your customer process:According to a Thomson
Reuters Survey , financial institutions spend on average $60 million
on KYC and customer due diligence while some banks spend up to $500 million per
year. Thus by developing KYC processes on Blockchain technology, banks can
reduce operational costs and also can increase efficiency of compliance process
as when one bank verifies a new client , it can be accessed by other banks and
accredited organizations , without the need for the KYC process to be started
all over again by each individual party.A report given by investment bank Goldman Sachs states that a 10
percent headcount reduction would be achieved by introducing blockchain
technology in KYC procedures, which would result in annual saving of $160
million. Reduction of fraud
One of the primary issues that the banking sector is facing today is
the increase in fraud and cyber-attacks.