Fintech is an emerging industry. Most have probably heard of the terms “blockchain,” “cryptocurrency,” and “bitcoin” – used together or separately. Some assume that they all refer to the same thing.
However, they can be distinguished easily.
Cryptocurrency is a digital currency exchangeable for goods and services. Thus, cryptocurrencies do not depend on banks or regulating authorities. Encryption techniques control and verify transactions.
Meanwhile, Bitcoin is the first and most popular cryptocurrency.
Lastly, blockchain is the technology behind cryptocurrency. It is also our topic of focus today.
How blockchain works
A blockchain is a decentralized ledger. It records transactions between two parties in four steps.
Step 1: A transaction is requested. It is then broadcasted to a peer-to-peer (P2P) network of nodes or computers.
Step 2: The network verifies the transaction using programmed algorithms. Verified transactions can include cryptocurrency or any information.
Step 3: The transaction, combined with other transactions, forms an encrypted data block.
Step 4: The new data block adds to the growing ledger. This completes the transaction.
Furthermore, we can trace all verified transactions back to their origin. This makes it impossible for individuals to alter information, which creates an immutable and secure model.
Three types of blockchain
Public blockchains are the most decentralized, followed by consortiums and private blockchains.
An example of a completely decentralized public blockchain is Bitcoin. Anyone can read, write and download data.
On the other spectrum, a single organization controls a private blockchain. Users need permission to make transactions regulated by the firm’s rules. Organizations usually use it for internal collaborations.
Additionally, consortium or permission blockchains are like hybrids of the public and private ones. While users can grant permissions, there is no dominant organization. Hence, users can keep their data private.
Many focus on cryptocurrency for good investment returns. However, there is value in knowing the underlying technology too.
Blockchain can transform the way we do things – beyond the impact of cryptocurrencies on financial markets.
We can digitally embed important information in robust and open databases using the technology. Everything we do can be recorded, validated, and shared.
Lawyers, bankers, and other intermediaries will no longer be needed for legitimate transactions. Eventually, anyone and everyone can make transactions freely.
Possible applications include the following:
- Financial services
- Non-fungible tokens (NFTs)
To conclude, blockchain is likely to bring many benefits.
However, businesses have to consider its complexities, especially in their industries. Barriers to adoption and implementation are some challenges.
In other words, managers need to consider investing in blockchain technology.
Regardless, blockchain will affect all businesses in some way. We do not know the precise timing of disruption.
Yet, firms can get a step ahead by developing capabilities for blockchain today. Being agile will be vital in the ever-changing world.
Written by: Shermine Ong