By Ravi Kant
Milton Friedman once said, “the combination of economic and political power in the same hands is the recipe for tyranny. As a result, one of the key features of any successful free market based economy is trust. But what happens when this trust gets breached?
The failure of cash
Cash is the backbone of almost every transaction in the world today. The financial institutions involved in the clearing and settlement of trade, make sure that the cash and assets get to the new owner in time with the help of a ledger. This ledger constitutes a permanent record of all the economic transactions an institution handles.
[su_pullquote align=”right”]However, while their ledgers are now digital, the underlying structure has not changed significantly. [/su_pullquote]
Over time, financial institutions have transformed their paper ledgers into highly sophisticated data bases. However, while their ledgers are now digital, the underlying structure has not changed significantly. Each institution continues to own and manage a proprietary ledger. This is occasionally synchronised with the ledgers of other institutions. The reconciliation process, which involves who owns what and who owes what to whom, requires a lot of time and money. Through a standardisation of rules and data fields, nearly 20-30 billion dollars could be saved each year.
Crypto-Currencies to the rescue
After the crisis of 2008, public trust in banks fell sharply. People started looking for a medium that provided greater autonomy, more transparency and better redundancy. Most of all, they wanted something different. Crypto-currencies are one such medium that contain all the previously mentioned attributes.
The 2008 financial crisis to some extent shattered people’s trust in the banking system and led to the innovation and emergence of the Block Chain technology. | Source: Wall Street JournalThese currencies eliminate the need to rely solely on market participants for trust. Instead, they establish a new protocol, a set of rules in the form of distributed computation that ensures the integrity of data exchange. This is done by conducting the exchange without going to a third party. The rise of the crypto-currencies as a medium of exchange was mainly due to the technical innovation known as ‘Blockchain technology’.
A financial renaissance?
Blockchain is a distributed ledger that maintains a complete and unedited record of all information related to digital transactions. Thus, this ledger allows a network of computers to settle transactions almost instantly and securely.
It puts greater power into the hands of the public and is completely transparent. All the information is stored in a block that forms a chain. Crypto-graphic hashes secure information in every block. Further, this is then added to the previous block in a linear fashion. Thus, trust and transparency are maintained, as information in the ledger cannot be altered. The current resurgence of interest in Blockchain is a sign that major financial players have started to acknowledge its disruptive power.
Why are banks funding their rivals?
With cash off the table, digital is the way forward. And Blockchain has a great part to play. This is the reason that venture capitalists have invested nearly $1 billion in start-ups based upon Blockchain.
The world will only get more connected with the advent of artificial intelligence. Eventually, cloud computing and the internet of things will produce billions of data points. Further, none of this is too distant. In fact, the revolution is upon us. And in order to track this massive new internet of everything, we will need a ledger of everything. This is where Blockchain comes in.
The impact and application of such technology, apart from disrupting the financial world, is unimaginable at this moment.
But, it is clear that BlockChain is a Pandora’s Box, waiting to be unleashed.
Ravi Kant is an engineer who has a deep interest in Finance, Economics, and Cyber Security. He writes for various media outlets like The Market Mogul and many others.
Featured Image Credits: Flickr