Blockchain: An amazing technology for the financial sector

Can you imagine the Financial sector without a transactional database? No, you can’t imagine. Banks can not be imagined without transactional databases.

Now think about the security of transactions in databases. For almost every financial sector transactions are one of the biggest assets. What if transaction loss happens due to hardware? What about the trust we are having on transactions stored in the database? The answer to all these problems is “Blockchain technology”.

Today, the blockchain is the main technology used in the transaction of cryptocurrency. Blockchain is known as the heart of bitcoin transactions. In digital transactions, blockchain solves the problem of double-spending of digital currency. Blockchain eliminates the requirement of trusted third party verification and authentication. For this purpose, Blockchain does decentralization of the data stored for the system and verification process of the system used. Decentralization creates security and trust in the system.

Blockchain contains nodes which keep the track of the decentralized information and transactions. These nodes verify the authenticity of the transaction. For verifying a transaction, these nodes solve a complex mathematical equation. These nodes can join and leave the chain at any time with the largest verified chain accepted as proof of work. All the transactions are time-stamped by the network of nodes as they are hashed to a continuous chain of hash-based proof of work forming record. A particular record is unalterable until the proof of the work is redone. Data is encrypted using a public key of the receiver and stored publicly using an asymmetric key encryption technique which is sent via sender to receiver. The authenticity and integrity of the data are handled using hashing technique and digital signature. Here, the data is visible publicly but it can be altered only by authentic users privately. Finally, we can get public visibility and a private inspection approach.

Let’s explore blockchain by the means of first providing present ways of recording transactions of data and how blockchain makes them better!

1st Problem: Centralised

Traditionally, a single ledger is kept to file all transactions. This is similar to how a google docs works, each person can see it, but one individual can edit it at a time, and there are various tiers of access. A single ledger or database is difficult to manipulate and co-ordinate with too many users of various access, and a central ledger is a single point of failure. If your google document were hacked, the information could be altered easily.

Solution: Decentralized

A decentralized ledger contains all parties in a network having identical access to edit and manage transactions. So now, everybody has permission to access and edit the google document at the same time. If that is the scenario, then how do people to agree on which transaction is valid? This can be done with the use of a consensus mechanism or a manner that allows people to agree on which transaction is valid. A decentralized ledger removes the possibility of a singular failure, as a hacker would need to change information from all ledgers in everybody’s system, at the same time.

2nd Problem: Closed ledger

A ledger of records in a corporation or centralized organization isn’t shown to users, consequently, we do no longer recognize what goes on at the back of the scenes. A centralized authority might devote fraud or might mismanage transactions without customers knowing.

Solution: Open distributed ledger

An open distributed ledger that every user node can download, so users gain transparency into transactions. Transactions on a blockchain can be downloaded easily. This open ledger will enable users to get additional transparency on the management in their data and get data on the history in their products.

3rd Problem: Fraud transactions

As shown earlier, a fraud organization with a central ledger might edit or control transactions incorrectly. They can change transaction details 3–4 months earlier to achieve certain malicious goals, and being a centralized ledger, it wouldn’t have any problems. So, a centralized ledger can be vulnerable to manipulation.

Solution: Immutable transactions

Blockchain involves the usage of cryptography or cryptographic hash functions, whereby every new set of transactions is created with an acknowledgment from the preceding set of transactions. These units of transactions make a block. Each unit of transactions are linked to one another via cryptography, it makes a blockchain. Finally, Distributed ledger becomes immutable and impossible to change, because each unit of transactions are cryptographically secure and tied to the previous block. For someone to make false records or transactions, they would need to decode the block they want to hack, in addition to all preceding blocks.

In this way, Blockchain is more suited for financial use cases because of security and transparency.