Block chain technology smashing down our tradional banking systems

Hi Steemians its Geofrey again, as i mentioned in my introduction i am  thrilled and fanatic about this whole concept of blockchain and all its benefits. So i prepared this to add to your knowledge about blockchain, if you're a banker you will appreciate the great competitor you now have.

 What is a block chain?
A  block chain is a type of distributed ledger or database that puts a  number of digitally recorded data transactions into data packages called  blocks. These blocks of data are recorded and stored together in a  linear chain. Each block is chained to another block using the  cryptographic signature. It’s because of this complied data of  transactions in the block chain that makes it a ledger. 

Block-chain  also verifies and authenticates transactions using what we call  consensus (or in bitcoin language, it’s called Mining). Most people when  they think of block-chain they think of bitcoin but block-chain is more  than just bitcoin. This technology plus the full distributed ledger  technology will do more than what internet has to information. 

 In  his published article in 2008, the anonymous inventor of block-chain  and bitcoin wanted to create a system that facilitate a peer to peer  transaction without any financial intermediary. Literally, this  technology has the potential to bypass banks, Money transfer agents like  western union, Money gram, express money and other related third  parties. This is has been successfully achieved through the bitcoin  Cryptocurrency and other cryptocurrencies out there. You can easily  transfer money in form of bitcoin to your relative anywhere in the world  as long as he/she is registered on the bitcoin block chain at 0.0001btc  or $0.29 transfer fee and the transaction will only take 10 minutes to  be confirmed. 

 Distributed ledger technology. 

 A block chain is a decentralized, public and a trusted Ledger. 

In  a decentralized block chain, ledgers are not kept solely for a single  entity or user. Transactions recorded are secured and maintained in  servers called nodes (in case of bitcoin ‘Mining  nodes) all over the world. So in the process of creating a transaction  e.g a bitcoin transaction, different nodes/miners use energy intensive  super computers to solve a mathematical algorithm that will produce a  single bitcoin transaction. This process is competitive with over 6000  computers throughout the world trying to update the same ledger by  adding a block of a transaction. Once one node finds the solution, the  transaction is then broadcasted to the network of miners for  authentication and when 50% of nodes confirm that the algorithm is  solved( reach a consensus) , a block of that transaction is then added  to the block chain. This is done from all different parts of the world  (decentralized) and publicly registered on the block chain ledger. This  usually takes only 10 minutes to update the ledger. However, with new  and faster block chain it can take even a minute to confirm and publish a  transaction. It is secure, decentralized, public and trusted.  That’s  how bitcoin and cryptocurrencies work. You trust the block chain, every  detail is public, sending and receiving money is cheap and takes only 10  minutes. Its transparent, audited and Trusted.

 How do our banks work?

Banks  use a centralized system. You put all your trust in the bank. Banks  keep a ledger just like bitcoin. However, their ledger is closed to the  public and therefore they are your trusted third party. Each time you  deposit in your account they credit it and debit it whenever you  withdraw. You don’t have access to what is transpiring in the banking  system, you also need permission to withdraw or receive some amount  through your account. 

 Banks need to change the outdated banking system and adopt a block chain distributed ledger technology. 

 

Let’s  consider what happens when you want to send Money from your country to  another county. Banks use what’s called corresponding banking to swift  your money to your desired receivers account. Corresponding banking is  expensive and inefficient especially in this fast economy.

If  A wants to send money from Lets say Crane bank Uganda to receiver B in  NAB Australia, Sender A will request for a swift which will be initiated  by his bank to go to another bank in UK (corresponding bank) this  process will include changing Uganda shillings into Euros charges will  apply. While in that process, receiver B will be anxiously waiting to  receive the money in his account which wont happen any sooner until  another step is undertaken. You assured him that you sent the money two  days ago and your bank A confirmed it but he hasn’t received the money.  Where is the money? So, UK bank (corresponding bank) will swift the  money to NAB bank (receivers bank) which will also require exchange rate  charges from Euro to AUD. Finally, after 3 to 5 working days money is  received in Receiver B bank account.
 

In  that illustration we did not consider the amount you spend in transfer  charges, we only looked and the effect of time in business.

 What does a decentralized system offer? 

 Just  imagine what would happen if all banking institutions were registered  on the same block chain enabling faster and cheap transfer of funds  throughout the world without any need for corresponding banking and lots  of paper work.  A block chain will authenticate, audit and update the  ledger for all banking transfers. It will also minimize hacking and  security concerns “distributed  ledgers are inherently harder to attack because instead of a single  database, there are multiple shared copies of the same database, so a  cyber-attack would have to attack all the copies simultaneously to be  successful. The technology is also resistant to unauthorized change or  malicious tampering, in that the participants in the network will  immediately spot a change to one part of the ledger. Added to this, the  methods by which information is secured and updated mean that  participants can share data and be confident that all copies of the  ledger at any one time match each other.”

Alternatively,  each bank or a few banks can decide to run their own block chain, it  will still serve the same purpose. Another benefit of this is; when one  bank gets to the verge of collapsing due to under capitalization, it  would  be very easy and faster to get funding/investors from other banks  on the same block chain because each banks historical performance is  publicly recorded on a distributed ledger.

 So, where is your trust? In banks, PayPal, Okpay? They keep your ledger and charge you tremendously. Or will you trust the block chain, pay less and access your money any time you want? 

 This  is just an introduction to block chain and a simple illustration of its  applicability in banking systems. Block chain can be applied in many  fields and sectors including, smart contracts, voting, data storage,  governance, protection of intellectual property, e-tax, e-business,  supply chain auditing, Internet of things, cryptocurrencies and all form  of digital money and many more. So many articles related to above areas  will be published, so look out for our next article on Block chain and  smart contracts. 

Geofrey Kafeero.