Blockchain is a distributed (decentralized) database of records or public ledger on network of nodes with no single point of failure. New records are appended to the previous/connected transaction using a cryprographic hash and forms of a chain of blocks, creating a - Blockchain. Blockchain is the underlying technology of the crypto currency Bitcoin.

In the year 2008, there was a publication by an author or a underground group/organization titled "Bitcoin: A Peer-To-Peer Electronic Cash System - Satoshi Nakamoto". As the popularity of Bitcoin grew, the Blockchain technology gained momentum and its use grew from finance to other applications.

Key features of Blockchain

Peer-to-Peer (P2P) communication

Distributed or decentralized network of nodes - avoiding single point of failure

Immutable - transaction will not change with time

Consensus-based - when majority of nodes verify and confirm validity of new data, a new block will be added to the chain

Transparency - technology enables tracability of the entire transaction

Bitcoin transaction can be used to explain the Blockchain technology. Bitcoin transactions use cryptographic key algorithms and digital signatures to manage transactions. The buyer/sender initiates a transaction (block) sending digitally signed private key to the receiver/seller's public key. The receiver of digital currency authenticates the validity of the digital signature of the sender's private key. Once the transaction is validated, it is broadcast to all the nodes in the Bitcoin network with new block that gets added to the chain. The Blockchain is recorded in the public ledger making it permanent and all actions are transparent.

Sender (Private Key) <=== Digital Signature ===> Receiver (Public Key)

Chain(Tr1) + Block(Tr2) <=== Copy All Nodes ===> New Chain(Tr1, Tr2)

Other validation such as the account balance of cryptocurrency of the buyer is verified such that there is required balance to process the transaction. Successful transaction will result in exchange of product and cryptocurrency between the two parties. The algorithms used are PBFT, DFINITY, Algorand etc. to reduce attacks and allow transaction processing.

Ethereum is other open source Blockchain technology that uses Ether as the cryptocurrency. It offers financial products such as DeFi, digital money and more.

Conventional Finance Mechanism and Technologies

The key reason Blockchain technology is taking off can be shown by the simple flow diagram below. In cash transaction, for small cash transations, it is accepted with minimum checks, typically visual and manual means via mutual acceptance. The seller accepts currency. For large currency exchange, typically certified checks are used, which are regulated by bank (source of money, type of purchase etc.).

Buyer (Cash) <=== Currency Regulated By Government Bank ===> Seller (Cash)

For credit card transaction, buyer provides a physical card or card numbers in a transaction. The card number is verified by a device that validates credit/debit card against the worldwide Payment Card Industry (PCI) protocol to be valid. Further the transaction can be flagged as valid or fraud at much later point in time. If it is fradulent, based on bank policies to protect customer against credit card fraud, it will end up taking the loss.

Buyer (Card: Amount) <=== PCI DSS Protocol ===> Seller (Amount)

The cryptocurrency and Blockchain is a P2P decentralized technology and with use of public/private keys, digital signatures and secure encryption standards. Thus cryptocurrency and Blockchain technology is the future of finance technology (Fintech).

References

1. Iansiti, Marco; Lakhani, Karim R., The Truth About Blockchain - Harvard Business Review, January 2017.

2. Ethereum Technology

3. Mohammad Sayad Haghighi, Cryptocurrency and Blockchain Technology - ITU-T Workshop, November 2017

3. Encryption   Cryptography