Blockchain for Bankers
Blockchain technology holds tremendous promise to improve financial services, offering faster, cheaper services that can help promote financial inclusion, drive economic growth, and support the role of the U.S. Dollar as the global reserve currency.
What is Blockchain?
Blockchain or Distributed Ledger Technology (DLT) is a ledger. Like any other ledger it is used to record ownership of assets (both digital and physical). Unlike traditional ledgers, blockchain is distributed, meaning it is written and and maintained by the network using the ledger rather than a central authority.
The Evolution of Ledgers
Blockchain ledgers store data in a series of blocks that are chronologically linked.
- Block: A block is a set of ledger entries or transactions that are approved in a batch.
- Chain: Each block is tied to the previous block by a cryptographic timestamp. This allows for tracing of transactions through time. It also ensures that participants cannot alter previous transactions as blocks can be added to the end of the “chain,” but not replaced.
Why is blockchain different from other ledgers
- Shared ledger: Blockchain creates a shared ledger viewable to all participants.
- Ownership of digital assets: Blockchain allows a single entity to establish ownership of a digital file without relying on a central entity or database (like a courthouse or central bank) to verify records.
- Connected real-time: Blockchain acts like a shared excel spreadsheet. Network participants agree on transactions in real-time and all have access to the same shared ledger that reflects the current state of the world.
- Immutable: Unlike traditional ledgers, it is difficult to change prior ledger entries. Edits to a blockchain can typically only apply to the most recent entries. For example, you may be able to refund a fraudulent transaction (by creating an offsetting transaction) but you can never erase the record that the original transaction occurred.
Benefits of Blockchain
- Coordination: A shared ledger can break down silos between organizations and facilitate real-time collaboration by multiple parties in a transaction. When institutions use the same shared “excel spreadsheet” to record events they are all agreeing on the same version of the truth. In traditional ledgers, each party maintains their own record of events which must be reconciled against others.
- Security: Because it is very difficult to alter past entries into a blockchain participants can trust that past entries to the ledger are valid.
- Resilience: Blockchains operate as a network and live in the collective memory of their participants. As such, if a single participant goes offline there is no impact on the operations of the blockchain.
Digital assets are units of measure that are recorded, transferred, and held on a blockchain ledger. They can represent any form of value from real world assets to intangible value.
Digital Asset Market
Types of blockchain
- Permissioned vs permissionless:
- Permissionless: Open networks where anyone can engage.
- Permissioned: Gated networks with access criteria for who can access the ledger and who is allowed to change the ledger.
- Public vs private
- Public: Anyone with an internet connection can view the shared ledger and current account balances.
- Private: Only certain entities are allowed to view transactions and balances on the network.
- Wallet = account: A wallet is an individual account whose value is represented on the blockchain.
- Public Key: This is your account address that can be used to identify your account. Public key = email address.
- Private Key: This is used to secure your account and is required for transferring money out of a wallet. Private key = password.
- Node = computer: A node is how individual participants connect to a blockchain network. Nodes facilitate all kinds of activity on a blockchain. Critically, nodes can store a copy of the blockchain’s records. The blockchain ledger exists in the collective memory of the notes operating on the network.
- Validator = validators are the entities that write new data to the blockchain, recording payments. Validators identify legitimate transactions and complete those transactions by creating a new block with the updated account information. Transactions only occur when all validators agree on the validity of a transaction.
- Validators are incentivized to only approve valid transactions. To approve transaction, validators typically incur a cost that is only returned if they approve valid transactions. This cost can be in the form of computational power (proof of work), posting collateral (proof of stake), or a legally enforceable contract (proof of authority).