Knowledge instead of trust: the potential of the blockchain

We have summarised the most important information about blockchain technology for you in our white paper here. As a decentralised system that documents transactions in a way that’s traceable and tamper-proof for all, blockchain technology opens up new opportunities for cross-company collaboration as well as new avenues to explore for the finance industry.

Imagine your flight is cancelled and, without having to do anything, you get the ticket refunded automatically. The technology behind this could be a blockchain, handling the case through a simple if-then relationship: a predefined source confirms the failure and the payment is triggered. Hamburg-based entrepreneur Frank Bolten gives this example (German article) and explains the promise of the blockchain: “It’s about automating business processes and synchronising data.”

No headquarters, no manipulations

Like the internet itself, blockchains are decentralised. They store and synchronise data in peer-to-peer networks from node to node. Because the architecture functions without an attackable control centre, there are a number of advantages: the systems are very stable; they are independent and resistant to attack; they’re accessible and performant; and they are difficult to block and censor. In business, all these factors create trust in cross-company contexts. This confidence is also due to the fact that all transactions within a blockchain can be checked: the tamper-proof transaction chain can be traced back to the first link. It is clear to all parties who did what and with what result. Basically, business partners in such systems do not have to trust each other – and certainly not blindly – because they know what the others are doing.

In general, blockchains provide a high level of security. Issues like data manipulation and subsequent changing, or smuggling of falsified values into transactions, can be ruled out from the outset, meaning that all participants can be sure that the transactions in the blockchain are valid. When the worst happens, security holes in banks can lead to massive amounts of account access credentials falling into the wrong hands; this cannot happen thanks to the decentralised nature of the system: blockchain users control their addresses and transactions, instead of their identity and credentials being stored in large central databases.

High processing speed

The best known applications of blockchains are in cryptocurrencies. While some of the press coverage about cryptocurrencies has resulted from a frenzy of investment speculation, the original concept behind bitcoin and others is about peer-to-peer payments. Since cryptocurrencies do not need central hardware and no bottlenecks have to be passed apart from the throughput capacity of the network, the individual steps in a payment transaction are usually implemented extremely quickly. Thanks to their decentralised architecture, the kinds of hardware failures that recently triggered payment chaos at Visa are not a threat to blockchains. Furthermore, since cryptocurrencies do not depend on a centralised system or gatekeepers, payments operate 24/7/365 instead of being dependent on any clearing system or date/time availability.

When individuals or companies directly process their payments through blockchains, intermediaries are eliminated. This saves time and reduces costs. In the case of payments, however, the transparency of blockchains proves to be a double-edged sword, as it raises question marks over individual privacy. Here, approaches to create private payment cryptocurrencies such as Zcash and Monero could point the way.

Another challenge for practical payments using cryptocurrencies is that the individual transactions are practically set in stone. User-friendly methods of reducing errors, improving approval processes, and allowing refunds or corrections must be established before we will see more mainstream adoption. All in all, the opportunities of this technology outweigh the critical aspects, for which pragmatic answers will surely be found thanks to the invisible hand of the market. Although some benefits may take longer to emerge than the current hype would suggest, it is worth all financial institutions putting this topic on their agenda. We have summarised the most important aspects for banks in our new white paper.

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