Venkata Kamesh Thatikonda & Yogesh Sharma, TCS Financial Solutions
The financial services space is resounding with a gradual but fast building crescendo about Bitcoin’s blockchain technology, specifically in its noncurrency applicability. The industry is abuzz with news about large banks and market infrastructures investing in Blockchain, and discovering new ways to utilize and adapt it—all of which can be best described as disruptive an unconventional.
The most significant takeaway from all of this being that Blockchain demonstrates how decentralization of authority can take place while still maintaining order in a new democratic form—where anyone can participate, everyone is equipotent, and no one trusts anyone. The fungibility and traceability of all block chain transactions right to their seed bring in hitherto unseen transparency in the space. Add to that privacy and anonymity of all users. Well, the upside sounds good, but is there a downside? Yes, there are a few.
One being the lack of scope for arbitration or dispute redressal, delays in transaction confirmation, the possibility of reversal of previously confirmed transactions, no sequencing guarantee of transactions, the likelihood of a 51% brute force attack, and a collapse due to reduced community participation and lack of sufficient revenue generation. The Bitcoin community seems to be fine with all of this and works with the credo that a balance can be achieved between community needs and its willingness to accept the risks entailed therein.
In a simplified view, blockchain is a digital file comprising logical stacked sheets and a peer-to-peer file transfer program, which transfers this file to all participants. Participants publish transactions to the network for inclusion in the ledger. Special participants, called moderators/miners, group these transactions, create a new sheet (including a reference to the current top sheet) and add the new sheet on top of their copy of the blockchain digital file. The peer-to-peer file transfer program pushes these updates to all other participants.
All communications in the network are secured by encryption. Tamper-proofing and non-repudiation is ensured with the use of digital signatures. Community models and their needs vary widely. A single moderator, a.k.a. trusted third party, is at one end of the spectrum and represents the traditional model in use today, such as in stock exchanges or with a CCP or a CSD. While multiple anonymous moderators and anonymous participants are at the other end of the spectrum, like in Bitcoin. In this case, as multiple moderators update their copy of the blockchain digital file simultaneously, diverging (forking) situations arise when two or more new sheets reference the same top sheet.
The community soon attempts to close the fork and arrive at a consensus by building onto the longest chain and orphaning the rest. In this case, therefore, to ensure equipotency among moderators and to remove the risk of dominance by any single moderator/group, the right to add to the top of the blockchain digital file has to be earned by solving a mathematical problem, thus spreading the probability equally among moderators.
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