In October 2008, the whole world was facing a financial crisis due to inefficiency in the centralized baking system and the failure of central banks and governments to have a check on them and the economy. Almost at the same time, a new concept was introduced which was named Blockchain by an unknown person known with pseudonym Satoshi Nakamoto in his white paper research
So, what is blockchain?
In simple words, a Blockchain is a system that records information in a way that makes it difficult or impossible to change, hack or cheat the system.
A blockchain is essentially a digital ledger of transactions that is duplicated and distributed across the entire network of computer systems. Each block in the chain contains several transactions, and every time a new transaction occurs on the blockchain, a record of that transaction is added to every participant’s ledger. The decentralized database managed by multiple participants is known as Distributed Ledger Technology (DLT).
Blockchain is a type of DLT in which transactions are recorded with an immutable cryptographic signature called the hash.
So how blockchain is better than centralized databases and cloud databases? How secure blockchain is?
All blockchain transactions are secured by cryptography. Each block contains essentially a unique and private key that can be verified with a public key. If there is a change in transaction-related data, the block unique key becomes invalid. As a result, the block is discarded from the chain.
Blockchain technology is secure as it is decentralized and distributed. There is no single point of failure, which makes it much harder to corrupt. Hacking into one part of the system cannot affect other parts. However, in the case of a private blockchain, this advantage is partially lost as they have a single point of control and a limited number of nodes. This restricts users from making changes to the ledger. Organizations operate these kinds of blockchains for their internal use, as it allows the company to control its processes.
All blockchain technology operates through a consensus model, which verifies that a transaction has taken place and legitimizes it. Most consensus models run on protocols that include proof of work, proof of stake, proof of authority, etc.
What is the connection between the 2008 crisis and blockchain?
If we break down the 2008 crisis you will notice, that the deep cause of the subprime mortgage crisis was too much trust in the central institution, their record-keeping systems, and their practices. Because of this trust, bankers were not caught when they manipulated their ledgers to resell assets with little or no value over many years. The issue comes down to the complexity and the outdated nature of bank accounting. When things went wrong, the firms hid its troubles by engaging in shady accounting practices.
This is where blockchain technology can help to prevent future crises like the one from 2008. If every asset's value and ownership are securely recorded in a shared ledger that is entirely transparent and immutable, the corrupt practices that allowed institutions to hide their struggles will no longer be possible, according to the report. Blockchain expert Alex Tapscott has also argued that blockchain technology can enhance the transparency of capital flows, thereby helping to prevent future financial disasters.
So, this implementation of blockchain technology in a centralized banking system led to the new word decentralized finance.
Now this word leads us to a whole new world of products and services.
So, what is decentralized finance?
What are the benefits of decentralized finance over a conventional banking system?
What are its scope and potential?
Blockchain is the foundation on which a whole new world is being created, to know more about it, stay in tune, for our next article.