The world has become very excited about Bitcoin and now it is becoming even more interested in its underlying technology Blockchain.
Blockchain is a distributed ledger system. A ledger resolves transactions. Blockchain does the same on a digital platform which keeps a permanent unalterable record of the transaction.
What this means is that having a secure, unchangeable record of an agreement between two or more parties secures the transaction. It can be made legally binding. If a transaction can be made legally binding it on a digital platform then its application can be endless.
One could buy a currency, sell a house, pay for a service, engage a professional, pretty much anything can be transacted using Blockchain.
Financial services firms operate on trust. I want to sell a particular amount of something from a particular asset class, say 10 year UK Government Bond or 1,000 ozs of gold. If I use Blockchain to transact a deal then the buyer tied in to the deal because there is a permanent unalterable record that the deal was done.
As an explanation of how it works Bitcoin.org says: "To be confirmed, transactions must be packed in a block that fits very strict cryptographic rules that will be verified by the network. These rules prevent previous blocks from being modified because doing so would invalidate all following blocks. Mining also creates the equivalent of a competitive lottery that prevents any individual from easily adding new blocks consecutively in the block chain. This way, no individuals can control what is included in the block chain or replace parts of the block chain to roll back their own spends." Source www.Bitcoin.org
Another explanation comes from Barclays Bank’s Simon Taylor who issued a paper on the potential of Blockchain in the financial markets and other areas.
"Blockchain technology, which underpins bitcoin, has a number of interesting attributes. There are two main types of Blockchain Technology 1. Unpermissioned 2. Permissioned (sometimes ‘distributed ledgers’ or ‘replicated shared ledger’) An Unpermissioned blockchain is an open, decentralised ledger which records the transfer of value. Every transaction is cryptographically chained to the previous transaction. The result is a permanent, immutable and verifiable record of truth that everyone can see. This is useful when no central entity is available to verify a transaction.