How Bitcoin and Blockchain Cryptography are Upending Traditional Ideas of Investing
October 24, 2016
One of the biggest buzzwords within the banking and financial technologies at the moment is blockchain. Blockchain is decentralized technology that is revolutionizing the way people all over the world exchange currency and process financial transactions electronically. Although the concept of digital currency is still a lot for many to comprehend, when you take away the technical terminology, its concept is quite simple.
Blockchain technology is upending everything from investment banking to fiat currency. It could potentially change the way we make purchases and manage banking, with or without the banks.
Buying into Blockchain
In a day and age when consumers and businesses no longer trust lending institutions for making their investments due to bailouts, identity theft, plunging interest rates and skyrocketing fees, blockchain innovation seeks to bypass an institution or third party at all. This, of course, is causing a lot of controversy as financial markets in the United States make up approximately $1.223 trillion of the U.S. gross domestic product.
What is Blockchain?
The simplest way to think of blockchain is as a database, which contains a number of “digital ledgers” of transactions that are shared with a network of computers. Blockchain also uses cryptography, which allows for multiple users on the network to access and update the ledger.
The best way to think of this ledger is like a Google document or sheet that involves multiple users and collaborators making edits and changes to it. In fact, blockchain has reverted to the most basic banking practices but with today’s advanced technology and security practices.
Once a block of data is recorded on the blockchain ledger, it’s extremely difficult to change or remove. When a network user wants to add to the ledger, the proposed transaction must be validated. This process involves running algorithms using a series of nodes, all of which have to agree on the validity of the transaction. This validation process identifies the information in the blockchain’s history, rather than relying on an individual’s personal data or information. Once the transaction is validated and approved, it then gets added to the chain.
Blockchain to Bitcoin
Blockchain also allows for the secure transfer of currency to another individual or user through a private messaging system, and even via mobile apps or a computer, similar to transferring currency electronically, but without any third parties, fees or the need to provide your information. Blockchain is a more secure and easy way to process transactions, each with its own “combination lock”.
The digital form of currency that is transferred over the blockchain network is known as a bitcoin. Bitcoins are stored in a “digital wallet” on the cloud, which is similar to having a virtual bank account, but without the bank. Bitcoins can be used to make anonymous purchases, without the need to provide personal information.
Blockchain for Business
Despite the controversy, many businesses are currently experimenting with blockchain. In fact, according to an article published by The Wall Street Journal, more than 40 financial institutions claimed they were working with blockchain in the last year.
Although the use and implementation of blockchain is growing among enterprises, clear standards on how to implement blockchain across multiple enterprises have yet to be defined. And many questions surrounding the security and privacy still have yet to be answered. Some enterprises choose to operate on the bitcoin network, while others may choose to operate on semi-private blockchains. As blockchain becomes more popular, this will likely cause technological hurdles, regulatory challenges as well as a whole new world of cybersecurity threats.
Nate Nead is an investment banker with InvestmentBank.com. He works with clients across the middle market in assisting them in raising capital, buying companies or recognizing a liquidity event by selling. He and his team are also building a fintech platform for online investing. He resides in Seattle, Washington.