Blockchain 101: Assessing the Potential of the Building Blocks Behind Bitcoin

Written by: Currency Cloud
Published on: April 13, 2015

For months now, every week brings a slew of Bitcoin news both positive and negative. Every positive PR story of an endorsement from a major online business or service provider seems to be tempered with a setback to the crypto-currency’s future in the form of volatility warnings, failed exchanges, even connections to criminal and terrorist organisations.

It’s fair to say that Bitcoin still has stability issues to iron out before it (and the concept of virtual currencies as a whole) becomes an entirely normalised financial medium that is understood and acceptable in the public’s consciousness. However, while Bitcoin’s future remains in muddied waters, the blockchain, the technology that powers it, has the potential to make an even greater impact on the world of international online payments than the crypto-currency itself.

What is the Blockchain?

The dual attraction of Bitcoin as an alternative to fiat currencies for online payments has always been speed and security. Without needing to use a central bank or currency exchange, the sending and receiving parties can agree to a transaction which moves money over the internet in near real-time simply, efficiently and securely. The blockchain technology is both the distributor – which allows the transaction data to be exchanged between the synchronised network nodes – and the ledger – which keeps track of said exchange, noting the value of the data being moved between the sender and receiver.

Each part of the network maintaining the ledger keeps a copy of it. Approximately six times an hour, a new group of accepted transactions — a block — is created, added to the chain and broadcast to the other parts of the network. In this manner, all transactions are recorded and linked and thus can be traced. It is nearly impossible to modify past blocks in the chain, providing the system with a simple yet undeniably effective security feature.

Blockchain technology provides additional security due to its decentralised nature. The vast number of competing computers (known as miners) which make up the network are geographically disparate and growing in number as the creation of new Bitcoins incentivises more miners to join. Therefore, more miners and more validation nodes makes the network less prone to single points of failure. Since no single entity owns the network there is no way for malicious agents (hackers, cybercriminals) to bring it down by targeting an individual system.

While the blockchain keeps track of every Bitcoin transaction in its universal ledger system, the Bitcoin itself is simply the container which carries the value of the data being exchanged. Blockchain technology could power the online exchange of any currency, virtual or fiat, just as easily. In fact, leading blockchain advocates believe that its exchange protocols could and should be used to alleviate one of the major headaches facing international businesses today: moving money quickly and securely across borders.

Exchanging funds internationally can prove to be a cumbersome process, especially if there are currency exchanges involved and underdeveloped domestic banking systems to navigate. Even the most routine transaction utilising traditional international payment services can result in a delay of several days along with attendant banking charges to pay. Blockchain protocols could allow such payments to be programmed in the same way a piece of code would be programmed to run over the internet, allowing the exchange to occur in near-real time without the need to route the payment through a complicated trail of banks and clearing houses.

Exchanges made through blockchain have no concept of a domestic or foreign payment, the construct is truly global without domestic barriers to navigate. This gives the system the potential to cut through a swathe of complications which affect innumerable cross-border payments every single day due to the complex weave of agreements made between the major financial institutions of individual countries.

It isn’t difficult to see how improving the speed and security of cross-border payments in this way could lead to even greater changes to the increasingly interconnected global economy. Being able to move money almost instantly at a mere fraction of the traditional cost could lead to a remarkable increase in the speed and surety of business transactions being performed worldwide.

All too often the completion of an important deal or project is unnecessarily halted thanks to inefficient payment systems leaving one party out of pocket as they wait for their money. This can lead to strained business relations or even the cancellation of transactions or collaborative efforts. Knowing with certainty that agreed terms of payment can be honoured quickly and efficiently could help businesses move forward with greater confidence, regardless of the scale or complexity of their international operations.

Clearly, the technology’s potential has already begun to pique the interest of major fintech operators who are aware of its benefits and prepared to investigate its feasibility further. IBM has already begun a round of discussions with a number of central banks about the creation of a blockchain-based digital cash and payment system for major currencies. In a similarly explorative vein, Intel has begun to discreetly assemble a team as part of its special innovation projects group with a view to: “investigate hardware and software capabilities that advance the performance, robustness, and scalability of open, decentralised ledgers”.

Granted, these exploratory efforts are still in the early stage of development. The establishment of a truly interconnected global system handling the world’s major currencies – not just Bitcoins – would undoubtedly have major political and economic implications. This means that there are all manner of regulatory issues which need to be accounted for, as the somewhat marred track record of Bitcoin itself has repeatedly highlighted what can go wrong with a system lacking accountability.

While the blockchain has the potential to be cheaper, more transparent and more reliable than the current system of utilising trusted 3rd party record keepers like banks, its sceptics worry about the technology’s ability to handle high volumes of transactions. As the blockchain is copied and held across the whole network, the cost and complexity of maintaining it will rise as it grows, meaning that some of the more interesting applications of the system may not be economical to implement widely. Added to the high potential for market manipulation through the system’s inherent price volatility, these translate into serious concerns regarding blockchain’s limitations when applied on a global scale.    However, blockchain relies on trust, on competing computers within the network all agreeing on a definitive answer to each equation in order to keep a coherent record within the universal ledger. While market manipulation remains a viable concern, as it does with fiat currencies and stock exchange trades, as blockchain technology attracts increasing levels of attention from governments and big businesses it also moves towards becoming regulated to ensure fair and open competition. 

Establishing a solid regulatory framework for blockchain technology which protects both the sending and receiving parties and limits the potential for malicious agents to conduct illegal or fraudulent activities anonymously will be an essential requirement if it is to achieve any real and lasting market penetration. Fortunately, the interest of internationally respected fintech players in blockchain tech means that international regulators are already turning their hand towards its effective regulation.

US and UK regulators have already been eyeing Bitcoin, seeking to support its innovative nature while preventing criminal use. As part of the UK’s 2015 budget the government announced its intention to collaborate internationally to incorporate existing anti-money laundering regulations and develop a set of best practices and standards for digital currency businesses to ensure consumer protection.

Developing effective regulation regarding the potentially revolutionary application of blockchain technology will no doubt be a long and carefully considered process. However, with the discussion well under way and more fintech institutions turning their attention towards it, the evolution of Bitcoin – and more importantly the technology that powers it – has become more relevant than ever.