Blockchain: how it works (part 2)
Distributed ledgers underpin the blockchain technology.
They vary from centralised and decentralised networks as the data, or transaction, is available to the system’s members. This is in contrast to centralised hubs favoured by legacy infrastructures.
Distributed ledgers can be innovated to suit the needs of their financial institution. This means each block of information added to the chain can be completely different to the one that comes before or after it. Better still, when two parties or more are transacting using the distibuted ledger system, they can set up their network to be compatible with any kind of computer device.
In effect, blockchain tech can serve any number of currencies, people and situations.
Presently, however, many financial institutions using blockchain underpin it with a cryptocurrency. This can be for security, as cryptocurrencies act like a buffer, or simplicity.
According to the European Central Bank, a virtual currency scheme: “can be defined as a type of unregulated, digital money, which is issued and usually controlled by its developers, and used and accepted among the members of a specific virtual community”.
For example, Tibado is a San Francisco-based payment company that uses digital fiat money and a centralised ledger. It, according to Innovalue uses ‘cloud-based architecture’ to enable payments and mobile or web transfers.
In contrast, the decentralised convertible digital currencies do not rely on a central authority but a distributed system of trust. This has made it difficult, if not impossible, for legacy financiers to embrace Bitcoin and its contemporaries, as there is no safeguard in place for deflation, inflation interest or exchange rates, as Innovalue’s report points out.
It is important to remember that blockchain is not fixed to Bitcoin. The technology can be shaped to accept any currency, and this is viewed as Blockchain 2.0. It is more of a movement than an explicit definition or explanation. Yet the term does well to encapsulate the blockchain evolution and mainstream adaptation, as it dulls the presence of Bitcoin. Regardless of the word choice, the core infrastructure of blockchain and distributive ledger systems (which can be spoken of as independent and complimentary concepts) remain unchanged from Blockchain 1.0.
Many people dislike the terms 1.0 and 2.0. This is understandable, as “1.0” in itself is still maturing so how can the fin-tech world claim an updated and secondary version? Mainly due to Blockchain 2.0’s digestible connotations: not necessarily connected to Bitcoin, with variations and known adaptation from the mainstream banking sector. In short, this Blockchain (2.) is socially acceptable.
Yet with each phase that blockchain and its spin offs go through, according to Innovalue, a literal “plethora” of financial opportunities will arise. In effect, anything that needs to be recorded can live on the public ledger blockchain. This includes voting systems, welfare payments and pensions, car hire, remittances and insurance.
It is an apt tool for the digital economy, especially since the distributive nature aids the creation of new information hubs that are easily accessible to the blockchain network’s participants. This particular point, Innovalue explains, could be extremely useful for peer-to-peer transactions and-or the documentation of “intellectual capital for an idea to provide proof of ownership during patent disputes”.