The Bank of England's recent report on payment technologies and digital currencies regarded the blockchain technology that enables digital currencies a'genuine technological innovation'which could have far reaching implications for the financial industry.blockchain technology
So what's the block chain and why are y'all getting excited?
The block chain is an online decentralised public ledger of most digital transactions which have taken place. It's digital currency's exact carbon copy of a top street bank's ledger that records transactions between two parties. Just as our modern banking system couldn't function without the means to record the exchanges of fiat currency between individuals, so too could an electronic digital network not function without the trust that originates from the ability to accurately record the exchange of digital currency between parties.
It's decentralised in the sense that, unlike a traditional bank which will be the only real holder of a digital master ledger of its account holder's savings the block chain ledger is shared among all members of the network and isn't subject to the terms and conditions of any particular financial institution or country.
So what? Exactly why is this preferable to our current banking system?
A decentralised monetary network ensures that, by sitting outside of the evermore connected current financial infrastructure you can mitigate the risks to be section of it when things go wrong. The 3 main risks of a centralised monetary system which were highlighted consequently of the 2008 financial crisis are credit, liquidity and operational failure. In the US alone since 2008 there has been 504 bank failures due to insolvency, there being 157 in 2010 alone. Typically this kind of collapse does not jeopardize account holder's savings due to federal/national backing and insurance for the initial few hundred thousand dollars/pounds, the banks assets usually being absorbed by another financial institution but the impact of the collapse may cause uncertainty and short-term problems with accessing funds. Since a decentralised system like the Bitcoin network isn't determined by a bank to facilitate the transfer of funds between 2 parties but rather relies on its thousands of users to authorise transactions it's more resilient to such failures, it having as numerous backups as you will find members of the network to make sure transactions continue to be authorised in case of 1 member of the network'collapsing'(see below).
A bank need not fail however to affect savers, operational I.T. failures such as for instance those who recently stopped RBS and Lloyds'customers accessing their accounts for weeks can affect one's power to withdraw savings, these being a result of a 30-40 year old legacy I.T. infrastructure that is groaning under the stress of checking up on the growth of customer spending and a lack of investment in general. A decentralised system isn't reliant on this kind of infrastructure, it instead being on the basis of the combined processing power of its thousands of users which ensures the ability to scale up as necessary, a mistake in any area of the system not causing the network to grind to a halt.Blockchains STELware Pty Ltd.
Liquidity is a final real danger of centralised systems, in 2001 Argentine banks froze accounts and introduced capital controls consequently of their debt crisis, Spanish banks in 2012 changed their small print to permit them to block withdrawals over a certain amount and Cypriot banks briefly froze customer accounts and used as much as 10% of individual's savings to greatly help pay off the National Debt.
As Jacob Kirkegaard, an economist at the Peterson Institute for International Economics told the New York Times on the Cyrpiot example, "What the offer reflects is that being an unsecured or even secured depositor in euro area banks is never as safe since it used to be." In a decentralised system payment happens with no bank facilitating and authorising the transaction, payments only being validated by the network where you will find sufficient funds, there being no 3rd party to avoid a transaction, misappropriate it or devalue the total amount one holds.
OK. You produce a point. So, how does the block chain work?
When someone makes an electronic digital transaction, paying another user 1 Bitcoin for instance, an email comprised of 3 components is done; a mention of the a previous record of information proving the buyer gets the funds to help make the payment, the address of the digital wallet of the recipient into which the payment will soon be made and the total amount to pay. Any conditions on the transaction that the buyer may set are finally added and the message is'stamped'with the buyer's digital signature. The digital signature is comprised of a public and a private'key'or code, the message is encrypted automatically with the private'key'and then sent to the network for verification, only the buyer's public key being able to decrypt the message.