With the increasing buzz around blockchain technology, in the form of platforms, cryptocurrencies or ledgers, the concepts of distribution and decentralization aim at disrupting current financial and technological models. Current models are starting to look and feel outdated and the purpose of revolutionizing them is to improve efficiency in both the financial and technological perspectives. I'll explore in this article the reason why blockchain technology will improve current models and potentially help humanity in so many ways.
To understand the future ahead, we need to do a recap of the past. How far in the past should we take into account? Far back as when we hunted and kept a record of the food? I mean, that's the beginning of bookkeeping pretty much so I think is good to start there but is not necessary to go into too much detail, it is necessary to know that we have come a long way since the early days of bookkeeping, from symbols and drawings, to chronologically ordered single entry bookkeeping when we didn't separated income or outcome in different columns, rather just recording them in one single column as they appeared. After all of this, our current bookkeeping techniques have evolved by separating assets and liabilities and capital, income, outcome, margins, taxes, cash flow I mean the list goes on with how meticulous our financial organization is structured.
Our bookkeeping methods have suffer and always had suffer from the biggest cancerous problem we can still see today: corruption and with corruption comes distrust. All accounting models are based in trust , whether is computerized accounting or manual bookkeeping, we need to trust the person that is running the numbers. That's why the role of an accountant became so important. Still, even though is hard to trick the system to alter the books, it is still possible to do so and get away with it. If there is an interest or ulterior motive behind manipulating numbers, people will always manage to do it.
Blockchain in essence, is removing the trust we need to have in a firm or entity, by sharing the ledger with everyone and confirming transactions in a transparent way. Every block in a chain can be seen as a page in a book. These “pages” or blocks by being encrypted and sequential are impossible to alter after a few confirmations that act as an ultimate stamp that seals the transaction forever. Of course there has been ways and techniques people can still trick the security features of a blockchain, but that depends on the hashing power a chain has, how distributed are the miners and how big the network is, this of course in the case of proof of work algorithms. In the case of proof of stake algorithms, security tends to be less vulnerable, but at a risky price: centralization. A proof of stake chain can be more centralized than a proof of work chain, and that still has its exceptions but I'm going off track here...the point is, the security features of a blockchain overcome any security features of normal accounting methods.
The fun in my opinion, is when we introduce cryptocurrencies in a blockchain. A blockchain could be fully functional without the need of a crypto. But what is revolutionizing the fintech industry is the concept of value transfer. Information can be secured in a more efficient way thanks to blockchain technology, but what about money? This is the first time in history when money can be transparent, verifiable, secured and easy to manage by everyone thanks to the advancements in blockchain technology. The internet revolutionized the way we transfer information in a high speed and low cost, and blockchain is revolutionizing the way we transfer money and improving the way we transfer any type of information by adding decentralization and security. Third parties or middlemen such as banks act as the bridge between value transfer, thus being vulnerable to risk. Blockchain by being a trustless system, avoids risks like trusting a third party, corruption, altering the databases for certain reasons, changes in the monetary policy for the interest of a few, etc.
You may wonder, but we can trust our institutions and companies, if not world wide commerce wouldn't be possible. That's right, we wouldn't be able to transact with a stranger merchant or seller if it wouldn't be possible because of these intermediaries. But the intermediary scenario still requires trust and for them to secure that trust their services often are expensive to run and can be time-consuming. These two aspects can be improved with blockchain technology. The validation of transactions is in real-time through all the nodes in the network and confirmations of these transactions can happen within minutes (this is where scalability comes in), and the cost of verifying transactions is much less than other systems.
However, mining costs and scalability are issues that blockchain technology are currently facing. But this forms part of the trilemma of blockchain: how to balance decentralization, security and scalability? That's subject for another post but is definitely needed to know to understand the current developments being done in the space to address this issue.
