So what is Blockchain and all of these other cryptocurrencies?
To name a few of them, you have the infamous Bitcoin, the underdog Ethereum and others such as Stellar, Dash, Litecoin, Ripple to introduce a couple more. There are currently over 800 such cryptocurrency programs in the marketplace.
You’ve also heard that Blockchain is going to change the world and disrupt everything in its path. But what is it and why do we want it? Or not?
So here are some of the opportunities with Blockchain technologies:
- There are no legal requirements to navigate through in order to make a payment to someone – no Know Your Customer and Anti-Money forms to complete (yet!)
- Transferring currency usually costs a tiny fraction of what you would pay if using traditional payment methods and remittance methods – and it’s usually a flat fee, not a percentage based commission fee. It’s also instantaneous – no clearing houses to traverse and pay additional commissions to.
- The payment management and transacting network is completely distributed, unlike transaction payment methods. So, a Blockchain based transaction is usually safe from harm of outages, for example, that traditional payment methods are susceptible to.
- Reconciliation issues that occur (about 1 in every 250k transactions) in traditional payment methods do not exist in Blockchain payments.
- You can establish escrow procedures with a Blockchain payment to protect against non-delivery of products or service.
And here are some of the challenges with Blockchain technologies:
- While most security experts in the field talk about the fact that a Blockchain cryptocurrency is hard to attack, there has not been a wholesale test of most Blockchain systems at the level that traditional payment systems have endured – and for the length of time. Major hacks have occurred in the exchanges of Bitcoin for example, and there is no set standards in place for Blockchain management – and you would not expect there to be at this early stage (we say ‘early’ – remember the protocols for today’s traditional payment methods were born in the early 1970s).
- Adoption of one Blockchain over another and utility of spend. Just like any traditional currency there needs to be a transactional velocity of the currency for it to exist and then continue to survive. And organisations supporting that currency either need to make a profit from supporting the currency or derive a cost-saving over some other method of currency transfer, in order to continue supporting it.
- Accounting standards – while a Blockchain records all transactions, it doesn’t necessarily describe them. An auditor still may be needed to confirm the classification of transactions and this makes it just as difficult for regulators to adequately trace and source transactions.
So let’s explore this a little further. And let’s choose Bitcoin as it is the most prevalent of Blockchain currencies out there at the moment.
A Bitcoin is a store of value and one Bitcoin will cost somewhere between $1800 and $8000 AUD depending on how you are going to pay for it. (While Bitcoin has a currency value, you have to obtain it through a marketplace and depending on how you pay for it (for example, cash, credit card, Moneygram, PayPal – even Nike gift cards) will determine the swap rate that you will be paying for that Bitcoin.
However, unlike cash, a Bitcoin isn’t actually a physical currency. And it’s not a digital currency either. While cash is the currency of choice for most transaction bases, the vast majority of the world’s currencies are now digital in nature. Those currencies can be exchanged out of the digital world to the physical world at a 1:1 rate.
But Bitcoin is a cryptocurrency and can only be traded out for another type of currency – and usually at a cost, similar to manner in which you bought in to it in the first place. It’s not a digital currency and it is not a physical currency.
Here’s a clear graphic on how Blockchain works.
Why are Blockchain currencies such as Bitcoin referred to as a ‘cryptocurrency’?
It is simply because they use a cryptography method as their manner of security.
Let’s explore a traditional transaction first.
In a traditional payments transaction, the details of the transaction itself are left as a whole. An encryption shell is wrapped around the transaction to protect it. The parties to a transaction validate and verify the encryption of the transaction and hold the security keys.
In a Blockchain, the transaction is encrypted and then added to other transactions that are also encrypted and then turned in to a block. The blocks are passed through the whole of the network – to everybody, not just the two parties to the transaction. Multiple blocks are combined together to form a chain – hence the term ‘Blockchain’. With this method, everyone is kept honest! And that’s the reason why Blockchain technology itself is gaining ground as a method of transaction processing.
Getting a bit more technical
In a Blockchain, each transaction in the set that makes up a block is fed through a program that creates an encrypted code known as the “hash value”. Hash values are then further combined together in a system (known as a “Merkle Tree”) – the result of all of this hashing goes in the block’s header, along with a hash of the previous block’s header and a timestamp.
The header then becomes part of a cryptographic puzzle solved by manipulating a number called the ‘nonce’. Once a solution is found, the new block is added to the Blockchain. Sounds simple, right?!
If you think that Blockchain is a fad, then think again. Below is a chart of financial services firms investing money into Blockchain. Just about every credible bank in the world today has a team working on Blockchain.
Source: Thanks to the Anand Sanwal and the great team at CBInsights for the graph.
Whatever your strategy, we can assist you in selecting and the right Blockchain technologies and illustrating how they may be of benefit to your organisation.