While shopping online or using internet banking services, most of you might have worried about the misuse of your personal information. Actually, since online transactions have become popularized, massive personal information leakages from banks or card companies have been troubling customers. Recently, an innovation called ‘Blockchain’ has emerged as a solution to this problem. In this article, the Sungkyun Times (SKT) explores this promising system, focusing on how it can benefit our real lives.
Introducing Blockchain
What is a Blockchain?
According to the Oxford dictionary, Blockchain is defined as a digital ledger in which transactions made in bitcoin or another cryptocurrency are recorded chronologically and publicly. Being a combination of the words block and chain, it is a concept about the way that data is stored. A ‘block’, which refers to a group of data of every financial transaction that happened in a certain period of time (mostly within a period of 10 minutes) is formed every 10 minutes, and it is connected to a former block like a “chain”. This chain of data is stored on the computers of all users who have agreed to make a transaction based on this system. Since every user will have the same copy of data on their own computer, Blockchain is often referred to as a “distributed transaction ledger”.
How does Blockchain work?
(Centralized Transaction System(left), Decentralized Transaction System(right) / auriga.com)
Originally, a financial transaction has required ‘a trusted third party’, such as a middleman. After approving that a transaction is valid, the third party makes a record of that transaction on a central server. People pay commission to this third party for
managing the information of a transaction. A bank or a credit card company can be good examples of this. All payments by credit card must get approved by the credit card company first. Likewise, deposits and withdrawals from bank accounts should also be validated after. However, Blockchain facilitates direct transactions between traders, without any third party on the process of transactions. Some might question that there may be some privacy issues if everyone were to share data equally. Thanks to the hash function, however, blocks that have been encoded are made almost impossible for it to be possible to check the content of the block. The hash function is a function which encrypts the data by producing a unique individual code. As a result, even for the third party, it is almost impossible to figure out the individual information, not to mention other normal users. The blockchain system uses a peer-to-peer (P2P) network, in which every user’s computer server is linked with each other, and the third party will only provide the platform on which this P2P network between computers can be constructed. In the blockchain system, if a person tries to make a new financial transaction, transaction data which are related to new transation are stored as a block after being applied with the hash function. After a block is formed, this block is compared with other blocks in other users’ computers. If it is same as more than half of other users’ blocks, it is permitted and becomes linked with an existing chain of blocks.
How does a transaction take place under a blockchain system?
Suppose there are three people; A, B, and C who have ten dollars each in their bank accounts. Firstly, A sends B five dollars. This transaction and the new balance on A’s and B’s accounts are saved as a block in every user’s computer. Next, A tries to send C ten dollars. Nevertheless, the fact that A only has five dollars in their bank account is already obvious according to the other ledgers. Consequently, this transaction would not be approved. That is, it will not be connected to the chain of data.
Advantages of Blockchain
Financial Field
•Increased Security
The biggest merit of the blockchain is that all data stored in the chain will be strictly secured. A traditional payment system, which is centralized, would be in danger if the whole system was paralized. Since all information is stored in one place, there is a greater possibility of it being hacked. Blockchain has challenged common sense in that the best way to strengthen security is to “conceal” the data inside with complex programs and passwords. What if all transaction information is opened, and all users have the copy of the data? Even if the data that belongs to a certain user has been falsified, it would be soon found out because it does not match with the data which the majority of users have. This means that the more users participate in the blockchain system, the more a person can consolidate their data’s integrity.
Let’s think about a small farming village. Every day, the village people sell their crops. Under a centralized transaction system, there should be someone to write down everyone’s transactions in a record book, so people have to visit one by one after the transaction. Therefore, it is possible to hide the transaction or pocket some crops by falsifying the account book when the person recording the transaction is not monitoring the book. In the blockchain system, however, we could imagine that every villager could check their transactions together in the village square after a transaction is made, and write it down in their own account books. If a person tries to falsify the transaction, then they must take a risk of stealing the majority of residents’ individual account books. (by news.naver.com)
Simplicity in Transactions and a Decrease in Costs
From the bank’s point of view, there will be no need to construct and maintain a massive central server, which will lead to a decrease in operating costs. Security costs can also be reduced as well since there is less possibility of being hacked. According to a report by McKinsey, a global management consulting company, a decentralized data system will save operating costs of financial institutes approximately $23 trillion a year worldwide. From the consumer’s point of view, they would not have to wait a long time which is unavoidable when a third party has to handle every transaction. The National Association of Securities Dealers Automated Quotation (NASDAQ) adopted the blockchain system last year for demonstration, naming it the ‘NASDAQ Link’ for this service. Consequently, the processing time for trading stocks, which was about three days before, was cut down to only 10 minutes. Furthermore, the high commission rates, which were quite a burden on customers, would not be charged anymore.
Other Fields of Society
•Flourish of Micro-payment Market
Currently, every financial payment is charged with substantial commission which makes micro-payments uneconomical. That is, if a customer wants to pay a small amount of money, it would not be profitable for the service providers. Therefore, the service was unnecessarily provided on a large scale. For example, most of the pay-per-view news sites receive a monthly fee for subscription. If the blockchain system was introduced, then it would become possible for customers to pay a small amount of money to see each article instead. In other words, users would be charged a more exact amount based on the service they have used. In particular, online or mobile content markets where micro-payments are common, are expected to benefit.
•Restoring the Right of Eligible Parties
Under the current transaction system, often the person directly involved in a transaction benefits less due to the high commission rate. Blockchain makes it possible to recover rights for them by directly connecting service providers and service users. The music market is a good example. Currently, music download sites and record companies are intermediating between customers and artists receiving high commission rates. As a result, artists might not be fully paid for their creative works. Imogen Heap, a famous British singer, argues for “fair trade”, to give artists more ownership over their finances. She recently released a song called ‘Tiny Human’ on a site named ‘Ujo Music’ which works based on the blockchain system. The blockchain system can also be useful when sending foreign aid. Every year, about one-third of the money sent abroad for relief is lost somewhere in the middle. It is because sending money abroad requires the payment of a high commission rate. Some are misused as expenses of relief organizations or embezzled by local officials. Blockchain can make global aid more efficient and transparent, since the money can go directly to local residents. Moreover, since people can find out how their money is used through the open ledger, it would also serve as a monitoring function.
The Past and Present of Blockchain
Current Status of Blockchain Blockchain, although a comparatively new concept, is drawing a lot of attention worldwide because of its various merits. The World Economic Forum (WEF) predicted that by 2025, transactions which are worth 10% of the whole gross domestic products (GDP) will be based on the blockchain system, and governments will start to collect taxes using this system. China is one of the countries which is actively investing in this technology. Recently, a seven to ten year project began in China to build a smart city near Hangzhou in which every transaction will be based on the blockchain system. Like this, there are many start-up companies and governments trying to develop a better blockchain system, leading to sharp market growth. The Blockchain market is estimated to have grown more than four times over the past year, worldwide. Compared to global trends, the Korean blockchain market is still in its fledgling stage, but there is also a movement to introduce Blockchain in many social areas. While Blockchain is expected to be mainly used in the financial sector, it can be widely applied to diverse fields in the environments in which identification is needed. The type of data stored in the system is not limited to financial transactions. It can also be individuals’ personal information. KB Kookmin Bank is the first Korean bank to introduce the blockchain system for identification. Through the ‘simple selfcertification service’ which started last November, customers can easily identify themselves by using their cellphones instead of using an authorized authentication certificate. Blockchain is also used in the political field. This January, Gyeonggi-do, was the first province to hold an online vote through the blockchain system. Traditional voting is relatively costly since it takes a lot of effort and expenditur to manage voters’ information. On the other hand, Blockchain does not require a large amount of money, because the identification process will be automatized. This would enable votes to be more frequently held and Gyeonggi-do is now expecting to receive more active feedback on their policies from its residents.
Tasks Yet to be Solved
Despite the positive outlook over Blockchain, there are some hardships that follow while popularizing it. Since Blockchain works by checking all user’s data, every time a new transaction is made. Therefore, as users of the service increase, the time for processing data will also rise. With the current technology level, it is hard to accommodate massive amounts of transactions. Many experts, however, claim that this limitation can be overcome by development of the technology. Therefore, it would be important for the government to offer enough incentives to encourage financial institutions to develop a more sophisticated blockchain system and apply it to their services.
Have you ever thought of life without the internet? Although the internet is now considered as a necessity which is closely related to all of our lives, it took almost ten years for the internet to become popular after it was first introduced. Even though blockchain is not really familiar to most people for now, it will take some time to demonstrate its full potential. Hopefully, blockchain will work as a trustworthy safety guard for all in the near future.