The Blockchain solution for digital assets
(Read Part I here)
For digital assets, whether it be intangible electronic data files (such as computerised video, contract documents or artworks); cryptocurrencies such as bitcoin; asset-backed stablecoins such as tether or non-fungible tokens (NFTs), the records of ownership of the original digital media are usually securely held on a decentralised electronic ledger – a database – called a blockchain.
According to US-based GlobeNewswire, the blockchain technology market is set to reach about $20 billion by 2024, growing at a CAGR of almost 70% between 2019 and 2025.
The Blockchain Solution
The blockchain for digital assets involves creating unique digital representations of assets defined beyond traditional financial instruments, recorded in blocks of data ‘chained’ together in a specific order and protected using complex computer ‘hash’ codes.
This structure, according to the Financial Times, “enables the transfer of digital assets without the need to go through a central party, such as a bank, broker or intermediary. This can make transactions quicker and easier.”
“Managing the full lifecycle of…digital assets on a secure, scalable platform” is crucial, according to IBM and should be carried out “with risk and compliance programs, to reduce the friction involved in the creation, buying and selling of securities.”
How does a Blockchain work?
Whenever a new transaction is made on the digital ledger, it is verified by an interconnected network of computers – or nodes – before being validated and added to the ledger. The verification process involves solving complex mathematical problems and is validated only when a majority of the network reaches a consensus.
At all times, each node is privy to the entire set of information on the network, whilst competing against each other to be the next node to validate transactions. This makes the blockchain database completely decentralised, without the presence of any one individual ‘master’ version.
As each consensus-verified transaction is added to the block of data, the blockchain continues to be built up as a database of time-stamped transactions with each block concurrently getting connected to each other in a chain.
Image Source: Euromoney Learning
Each new block appended to the blockchain contains a unique computer-generated code called a ‘hash’ which acts almost as a digital fingerprint ensuring it is connected to the previous block in the chain with a matching hash. In practical terms, this all but guarantees that the chain is in correct order and makes it almost completely unalterable.
On the security of the process, FT explains:
“If any attempt is made to tamper with the contents of a block, this will generate a new hash for that block, which will then differ from the hash of the previous block-breaking the chain. In order to conceal this tampering, a hacker would have to recalculate the hash code held in the next block in the chain, which would have the effect of changing that block’s own hash, requiring the next block’s hash codes to be recalculated, and so on. Every hash in every subsequent block in the chain would therefore have to be recalculated — a process requiring so much computing power that it would be extremely difficult. The database is therefore, in effect, “append-only” — it is not possible for anyone to go back and revise it later.”
Applications of Blockchain Technology
Built originally as a digital cryptography-based mechanism to solve the double-spending problem in digital currencies such as bitcoin, the appeal of blockchain today is far more widespread, with possible applications being noted in several other fields.
Several aspects of finance such as money transfers would become a lot more inexpensive – and quicker – than otherwise if blockchain technologies were to be used. This holds especially true for cross-border transactions which often end up being slow and expensive.
Several companies, over the years, have also been offering decentralised crypto exchanges which wouldn’t require investors to deposit assets with a centralised authority, thereby ensuring greater security and control.
Lenders can also use blockchain to set collateralised loans using smart contracts. According to The Motley Fool, “smart contracts built on the blockchain allow certain events to automatically trigger things like a service payment, a margin call, full repayment of the loan, and release of collateral. As a result, loan processing is faster and less expensive, and lenders can offer better rates.”