Finance Monthly - January 2022

Blockchain explained First things first, let’s recap what blockchain actually is. Blockchain is a kind of database that gathers data in groups called blocks. All of these blocks have a fixed storage capacity, and, when filled, are chained onto an existing block to create a chain— i.e., the term blockchain. A key feature of this is that, once a block has been filled, it is given an exact timestamp of when it was added to the blockchain. Every event that happens on it is recorded on a public ledger, which is essentially a record-keeping database that ensures the participants’ identities are kept secure and pseudo-anonymous. They can only be identified by private keys, which are strings of letters and numbers needed to make a blockchain transaction. An example: Bitcoin To demonstrate blockchain in action, it makes sense to look at the most famous example of a technology that uses one: Bitcoin. The cryptocurrency exists on a blockchain across thousands of computers worldwide, all operated by different groups of people. These computers are called ‘nodes’, each of which has a record of every transaction that has taken place on it. This has many benefits, with perhaps the main one being that, if one node has an error in its data caused by a fraud attempt, the blockchain can reference the other nodes to correct the database. Consequently, every transaction is accountable, secure and irreversible, with no de-centralised organisation being able to control things either. To make a Bitcoin transfer, you need two Bitcoin addresses (known as public keys) to send the crypto to and from. The person transferring it is required to sign a message using their private key, which contains the input, output and amount being sent. This transaction is then broadcast to the rest of the Bitcoin network, with the nodes checking whether the person’s private key is able to access the input by matching the public key number. After doing so, mining nodes will add the transaction to the blockchain. How does blockchain facilitate global payments? People can use blockchain to send money across the world as they would for transferring cryptocurrency to one another. For example, companies like Stellar and Tempo offer 1:1 backed fiat tokens (also called stablecoins) that individuals and companies can convert their government- issued currencies into and send via a blockchain. The receiver can then accept the digital currency and convert it back into their own currency. Blockchain is rivalling conventional transfers This type of system allows people to enjoy the benefits of blockchain- like more secure and transparent transactions. It, therefore, has significant advantages over conventional cross-border payments, which are often F i nanc i a l Innov a t i on & F i nTech 60 Finance Monthly.