Everything about Blockchain Technology and its Application to Finance

Blockchain is another crazy technology that is so digital of its kind and has been called the new internet.

Today many believe that Bitcoin is Blockchain, but Blockchain applications go far beyond cryptocurrency and bitcoin.

It has numerous applications in it, and Bitcoin is just one of those.

Bitcoin, as you must know, is a form of cryptocurrency, and is driven by blockchain technology.

But most cryptocurrencies are often not quite as private as it seems.

However, bitcoin is one of the most popular privacy-focused cryptocurrencies that has gained attention and popularity over the years.

Privacy-focused cryptocurrencies are immune to counterfeiting and don’t require any third-party authority to process a transaction.

They are also protected by a strong and encryption algorithm.

Today security has become a nightmare in the internet world because every other technology developed to secure information is being broken by hackers.

And that is where the research has come out with blockchain technology.

Blockchain technology is constantly evolving to make this world a safe and secure place to transact digitally.

Defining a Block in Blockchain Technology

A block is usually an individual record that contains the data and these blocks exist on the nodes.

Nodes are compared to servers or computers that store and preserve blockchain data and transaction history on a device.

Blockchain’s data can only be accessed with a node.

And depending on the validity of the signature, a block actually enters other nodes on a distributed network.

The people who create the block is called the miner and the process of adding a block to a blockchain is called mining.

These miners broadcast the block to all the nodes on the network where a block is either accepted or rejected by a node based on the block’s legitimacy.

Elements of a Block:

Block consists of three elements they are data, hash, and hash of the previous block.

• Data consists of senders, receivers, amount, timestamp, etc. and the data stored inside a block depends on the type of blockchain.
• Hash is a unique code for a block where every block has its own code and no two hash can ever be the same.
• And the hash of the previous block effectively creates a chain of blocks that point to other blocks in a chain.

As we know that hash is unique for every block, it does not match with any of the other blocks created in a network.

So once a block is created it generates a new code of its own called the hash.

The block’s final element is the hash of the previous block, which acts as a linkage between two blocks i.e the current block and the last block.

In a blockchain, changing a block or tempering a block will change the hash to alter its identity.

Therefore it becomes no longer valid for the following block in the chain unless it is validated again.

The chain on the other hand is referred to as a public database of these blocks, stored as a list.

What is Blockchain?

According to Wikipedia

Blockchain is an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way

Fundamentally what that means is, unlike a normal database, a blockchain is an open-source database system.

It is based on a ledger on which transactions are recorded and stored permanently in a highly secured environment.

And this ledger forms the basis of blockchain.

The ledger is broadcast to all the parties on the network as soon as a block representing the transaction is created.

And because it is a public distributed ledger, it uses the cryptography technique to protect and secure transactions that are open to all.

It uses two keys, a private key, and a public key.

The public key is shared with the world, and the private key is shared only with the owner.

With the private key, the transaction is done by the owner, and with the public key, everyone can see it, but the target person can only decrypt it with the private key.

The public key is considered as the open address of a block and the private key that is similar to a password is used for sending or receiving information in that block.

The private key uses a hashing encryption algorithm that is digitally signed by the user.

And this enables users to complete a transaction without having to deal with wallets, banks, or any other third-party applications.

Blockchain Technology: Public Versus Closed Blockchain

Blockchain simply means a public blockchain, because according to most critics a private blockchain is not even a blockchain.

To know about a public or a private blockchain, let us know how blockchain exists on various networks.

A blockchain either exists in the form of a centralized, decentralized, or a distributed network.

• A centralized network connects all nodes under a single authority
• A decentralized network does not have a single authority but has multiple authority
• And a distributed network is independent of each other

But it is important, however, to understand that decentralized networks should not be confused with distributed networks.

While a blockchain is inherently distributed (i.e. ledgers are shared and distributed to all the parties on the network), it is not inherently decentralized.

The decentralized network makes blockchain independent of server-based technology and no one has authority over the system.

Therefore the main purpose of blockchain technology is decentralization and that is where the public blockchain comes in.

However private or close blockchain is not usually meaningful because closed blockchain technology can be substituted by a client-server technology in any enterprise.

However, depending on the need of an enterprise or a business, it is a matter to question whether a business should adopt a closed blockchain or an open blockchain.

Public Blockchain:

A public blockchain is a transparent distributed ledger that is decentralized and public.

However, depending on a ledger that is either public or private only permission entities may read and write the ledger.

Here information is encrypted and stored on multiple devices and immutable for hackers to tamper or alter transactions in any way.

Blockchain simply means a public blockchain that is open to a large number of users.

Public blockchain can be viewed by any person that has access to the blockchain because data is public and is open to all.

Hence It doesn’t require any permission to view records because the ledger is shared and transparent in this case.

These blockchains are governed by communities and anybody can participate in the development of the project.

Everyone is allowed to join a public blockchain and when a new member joins he gets a copy of the Blockchain.

The new block of the miner gets shared with everyone on the network through a digital signature.

And every node has to verify the block to make sure it has not been tampered with.

Private Blockchain:

Private blockchains allow organizations to employ distributed ledgers in a centralized way lacking decentralization.

A private blockchain is otherwise also known as a closed blockchain because it is not open to the public.

And only permission entities may read and write the ledger as long as they follow certain rules.

The only members who have access to the network can use the private blockchain and no outsider can invade or participate in it unless invited.

The private blockchain network is protected by encrypted walls and a user actually needs permission to get access to this network.

A private blockchain is run by an individual entity and therefore all users are controlled via users’ access to information.

How Safe or Secure is Blockchain?

A public blockchain is very secure compared to a private blockchain.

The public blockchain is a decentralized network therefore information is shared and stored on every node or say the devices.

The more the number of users a public blockchain has the more secure it becomes, therefore it is almost impossible to hack a public blockchain.

On the other hand, a private blockchain can be vulnerable to hacking as it can be altered by owners of the network.

Hash can detect any type of change to a block and alter its identity so this element makes Blockchain safe and secure.

SHA-1, SHA2, and SHA-256 are some of the secure hashing algorithms that are associated with blockchain technology.

Therefore a public blockchain is strongly immutable and unchangeable.

While hashing or hash encryption is considered as one of the main elements for blockchain to be secure.

It is not enough to prevent the tampering of blocks in a public blockchain.

But sometimes it cannot prevent tampering because efficient computing can alter all the required hashes. and make a tempered block valid again.

Therefore another aspect of blockchain security that comes into play is the proof of work that allows the process to slow down its calculation while validating a new block.

So the security of a blockchain comes from its creative use of hashing and the proof of mechanism.

Elements of Blockchain Technology

There are 5 core elements to a blockchain that actually allows you to create, verify, and update information in a Blockchain.

And these elements make blockchain the safest and most secure network in the world of blockchain technology.

a) Peer to Peer Network (P2P)

Blockchain uses the decentralization strategy, which is called a P2P network or the peer-to-peer.

It is actually based on a decentralized and distributed shared ledger that actually takes consent from all the nodes on a network before updating a ledger.

And no one can force a blockchain to force a particular entry to be valid as when other users on the network disagree with it.

This can be seen as a challenge because as long as the transactions are validated by everyone the ledger won’t update on any of the nodes.

And once validated by all the members it seamlessly gets updated distributed and shared with everyone on the network.

With a p2p blockchain, you can have two distinct parties that do not necessarily know and trust each other.

But they can transact securely between entities without the need of having any intermediaries.

Blockchain is very secure for one of the reasons i.e. blockchain transactions contain the “hash of the previous block” element.

That means if one of the blocks is targeted by the hacker, then the hash alters, and then the next block’s “hash of the previous block” doesn’t match with the targeted block.

As a result, the block is ignored and won’t make it to the chain ultimately making every other block invalid.

b) Cryptography

Cryptography in blockchain ensures that data is only accessible by the intended receiver and ensures that there is no modification of data.

Blockchain uses two types of cryptographic algorithms technology for encryption and decryption and these are

• The asymmetric key algorithm that uses a public key and private key
• A hash function that is a one-way cryptography

In cryptography, the concealed information is usually termed plaintext, and the process of disguising the plaintext is known as encryption.

This encrypted plaintext is known as ciphertext and is usually processed by various rules known as encryption algorithms.

Usually, the encryption process relies on an “encryption key”, which is given to the encryption algorithm as input along with the information.

Similarly using a “decryption algorithm”, the receiving side can retrieve the information using the appropriate “decryption key”

This is how Blockchains make use of asymmetric key algorithms for safe and secure transactions across a public blockchain network.

But on the other hand, hashing is not encryption or a decryption key.

Hashing algorithm (SHA-256) converts a ciphertext to a hash value that cannot be reverse-engineered.

For example, in technology such as Bitcoin, it takes 20 minutes to alter or create a block.

Hence if one tries to tamper with the block, he needs 20 minutes for the proof-of-work but by that time hash changes permanently.

This hashing process is irreversible and a slight change can transform a hash into a whole new puzzle.

c) Consensus Mechanism

A consensus mechanism is a way to ensure that a transaction is valid in a network without the need for a central authority.

The consensus is actually a type of algorithm that allows a user to agree on a set of rules on how we add or create a new page or a block called a record.

There are several consensus algorithms in blockchain technology such as Proof of Work, Proof of Stake, Proof of importance, Proof of Activity, etc.

Bitcoin uses a consensus algorithm known as the Proof of work that requires computational energy to calculate or solve a mathematical problem.

So whenever hackers tamper with a block they will need to solve a cryptographic puzzle to validate a block and this makes the computational process slow down.

This is the reason that makes blockchain permanently immutable for hackers.

On the other hand, a member who solves the problem should raise his hand, and therefore he is allowed to create the block.

And with the consent of every other member on the network, all can move to solve the next block.

Similarly, whoever again solves the computational problem for the second block will validate the next block and this is how the whole team moves forward until all the blocks are validated.

This is called the Proof of Work and this mechanism makes it impossible for hackers to change a record.

Altering any existing block is not an easy task because of the presence of consensus protocol in the blockchain.

Proving and verifying the work in a network will also require re-mining to add the blocks again to a chain.

e) Tokens

Tokens are rewards that are provided to users on the network whoever solves the consensus or each time a block is added.

But since everybody is free to join a public blockchain, there will be always some bad actors.

So what if someone doesn’t follow a rule?

People who try to alter or break the rules are punished as they are the defaulters.

As a matter of fact, for those who are default, their token may be taken away.

And they will lose their coins on computational power trying to reach the consensus.

But good actors are rewarded with a token of appreciation for the proof of work for finding the solutions to the math problem.

d) Smart Contracts

A smart contract is basically a digital contract that is put on a blockchain.

Smart contracts are actually pieces of code embedded into the blockchain to bring transparency to a valuable transaction.

It shares a common agreement between all the parties on a network and removes any middleman to occur a transaction.

Smart contracts usually work as valid documents in financial contracts such as loans, deeds, rent, etc.

Thus creating a smart contract may be used to automate the process of raising an invoice on the due date.

And update the wallets of users on the blockchain in a timely manner.

These digital contracts can be created to trigger and execute the value when certain specific conditions are made.

Blockchain Technology and Development

Blockchain is a combination of mathematics, economics, and computer science.

Building a blockchain application and putting it to work from scratch is actually a challenge.

Because there are many elements to a blockchain.

Therefore applications and frameworks such as  Bitcoin Core, Ethereum, HyperLedger, IPFS, Corda, Multichain, etc have been made available for public development of blockchain projects.

And Ethereum is one such framework that already consists of all the elements of a blockchain to make blockchain development easy.

Ethereum blockchain technology has a big developer community in terms of building blockchain-based applications

Because it is a general-purpose blockchain application with a very active community on the internet.

It supports the smart contract where you can create a complete blockchain application having a rich ecosystem for development.

The language require to develop Ethereum is called Solidity, a full-stack programming language for blockchain development that targets the EVM (Ethereum Virtual Machine).

Other programming languages used to develop blockchain applications are javascript, Python, Go, Rust, and C++.

And the libraries and frameworks that support the backend of these languages include Node.js, Truffle, Metamask, React.js, etc.

More detail on Ethereum can be found at https://ethereum.org/en/

Details on Solidity can be found at https://docs.soliditylang.org/en/v0.8.0/

Applications of Blockchain Technology

Blockchain provides a way to securely and efficiently create a tamper-proof log of sensitive activity.

Therefore, Blockchain isn’t confined to Bitcoins. It covers almost all the fields ranging from finance to healthcare.

• Today, the mammoth records that the healthcare industry records years of data for a patient can be secured using blockchain technology and any doctor across the world can use the patient’s history, to treat them accordingly.
• Payment system: Bitcoins has become the synonym for Blockchain technology, and who knows, Bitcoin may erase the traditional currency in many economies shortly.
• The Internet of Things (IoT) is another trending technology in the world. It has many applications coupled with security loopholes. Hackers can steal your data. But Blockchain colored IoT adds a greater level of security.
• Vote tampering is a common concern in elections. But today, with the evolution of Blockchain technology, it should not be a matter of concern. West Virginia used Blockchain technology to collect votes from non-residents.
• Digital lockers and Digital signatures have become a modern trend. It saves data and is visible to anyone in the world. It is also the personal identity and personal authority over documents.

Applied Blockchain Technology in Finance

Blockchain can be one of the best alternatives to the banking and finance industry when it comes to financial transactions.

Therefore Blockchain is forecast to disrupt the finance sector in a huge way beyond 2021.

Blockchain is more relevant to finance and accounting because it is based on a decentralized ledger technology (DLT).

However, it can be a private ledger or a public ledger.

The financial industry is practically based on currency transactions and these records of transactions are maintained and managed on computers in the form of ledgers.

Therefore blockchain technology seamlessly integrates with finances because it is also based on a decentralized public ledger.

Unlike accounting software and apps, blockchain technology usually makes use of dApps i.e. decentralized applications to handle blockchain transactions in Finance.

And these dApps make use of cryptocurrency for making transactions that usually occurs through wallets in dApps installed by users on their devices from across the world.

Therefore whenever a transaction occurs through blockchain a ledger usually gets updated that is visibly a digital wallet.

These updates occur on each and every other node that aggregates and authenticates every single transaction before it is updated.

So today Blockchain is fueling the entire finance sector with applied blockchain technology such as:

a) Cryptocurrency

Blockchain facilitates the use of cryptocurrency but what exactly is cryptocurrency?

Cryptocurrency is actually a digital currency as like the paper currency and coins that we use in our day to day life.

But cryptocurrency is different from normal currencies because it exists only in the form of digital assets and it is intangible.

Cryptocurrency is a combination of the technology cryptography and the digital currency that embeds together.

That is how the term cryptocurrency was formed and it is designed to work individually without a middleman in between such as the banks.

The transaction in cryptocurrency occurs from wallet to wallet.

And the process of creating a new type of cryptocurrency coins requires building a new blockchain.

Major types of cryptocurrencies include Ethereum, Bitcoin Cash, Ripple, and LiteCoin.

b) Payments

Payments are the most important part of the world of finance and trade.

Now that you know what is cryptocurrency, the applied blockchain technology in finance is completely based on transactions and payments using cryptocurrencies.

The traditional payment methods include net banking, debit cards, credit cards, and other third-party apps to make a payment digitally.

However, Bank transactions could fail due to several issues such as technical problems, hacked accounts, and transfer limits, etc.

Because these are centralized payment modes that include the use of banks in between.

But with blockchain technology, the payment system has become more sophisticated and reliable in trade eliminating the banks.

The P2P network independently operates payments across the world making financial transactions legit in a blockchain.

For example, cryptocurrencies such as bitcoins are use to make payments for goods and services.

Because Bitcoin is a form of currency; but the blockchain is the database that enables the bitcoin to make payments in a trade.

With DeFi, companies can upload the invoices on the blockchain through smart contracts and all information that is available on the invoice can be saved on the blockchain.

So as soon as the vendors pay the bill, the smart contract will update the invoice status to Paid.

And the notification will be sent to both parties that the payment has been made.

c) Decentralized Finance (DeFi)

One of the offerings of blockchain that has attracted much hype is the DeFi.

DeFi is short for decentralized finance which is basically taking existing financial products and moving them over to the blockchain.

It is built on cryptocurrency platforms such as Ethereum and Cosmos.

Ethereum and dApps are already available today to build financial applications but have not reached such heights.

However, it is predicted that the adoption of DeFi will increase in all slices of the financial sector sooner or later.

And more financial products and services will be available in the future that will make use of DeFi.

DeFi will also disrupt the financial industry because it can make use of simple to more complex value transfers.

This will eliminate the use of banks and brokers and instead utilizes smart contracts on blockchains.

Conclusion:

Blockchain creates a permanent and immutable record of every transaction.

Therefore tech industries consider Blockchain as a revolution in the modern world of the internet and Web 3.0.

Blockchain technology is yet to unveil new possibilities in space for the future world that includes both centralized and decentralized models.

Blockchain applications are also increasing day by day, and the improvement is clearly visible.

Worldwide spending on Blockchain technology is increasing faster where companies, banks, and governments have already started implementing blockchain.

Blockchain will help to improve trust, bring transparency, and cut down costs.

Today’s world needs a kind of technology where the human can feel secure and trusted.

And Blockchain technology is one for sure.

Blockchain will also fight cybercrime and enhance cybersecurity.