The blockchain is the new buzzword in today’s banking environment. A blockchain is basically a growing list of records, called blocks, which are linked using cryptography. Each block contains a cryptographic hash of the previous block, a timestamp, and transaction data (generally represented as a Merkle tree root hash). By design, a blockchain is resistant to modification of the data. It is "an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way".
Blockchain was invented by Satoshi Nakamoto in 2008 to serve as the public transaction ledger of the cryptocurrency bitcoin. The invention of the blockchain for bitcoin made it the first digital currency to solve the double-spending problem without the need for a trusted authority or central server. The bitcoin design has inspired other applications.
Though blockchain records are not unalterable, blockchains may be considered secure by design and exemplify a distributed computing system with high BFT(Byzantine fault tolerance).
How does it work:
- Transaction is initiated
- The transaction is unified like a block
- This block is shared across the network
- The network approves the transaction
- This irreversible, approved block is added to the chain
- Monetary exchange is completed
Banks are interested in this technology because it has the potential to speed up back office settlement systems.
Blockchain technology can be used to create a permanent, public, transparent ledger system for compiling data on sales, tracking digital use and payments to content creators, such as wireless users or musicians. Online voting is another application of the blockchain.
Currently, there are three types of blockchain networks
- Public blockchains
- Private blockchains
- Consortium blockchains
A public blockchain has absolutely no access restrictions. Anyone with an internet connection can send transactions to it as well as become a validator (i.e., participate in the execution of a consensus protocol). Usually, such networks offer economic incentives for those who secure them and utilize some type of a Proof of Stake or Proof of Work algorithm.
Some of the largest, most known public blockchains are Bitcoin and Ethereum.
A private blockchain is a permission. One cannot join it unless invited by the network administrators. Participant and validator access is restricted.
This type of blockchains can be considered a middle-ground for companies that are interested in the blockchain technology in general but are not comfortable with a level of control offered by public networks. Typically, they seek to incorporate blockchain into their accounting and record-keeping procedures without sacrificing autonomy and running the risk of exposing sensitive data to the public internet.
A consortium blockchain is often said to be semi-decentralized. It, too, is permission but instead of a single organization controlling it, a number of companies might each operate a node on such a network. The administrators of a consortium chain restrict users’ reading rights as they see fit and only allow a limited set of trusted nodes to execute a consensus protocol.
Blockchain technology, in the simplest terms, is a new approach to how databases can be shared by multiple individuals or entities. For example, unlike currently, when banks maintain individual databases, a blockchain is updated and maintained, not by a single company or government, but by a network of users. Developed as a tracking database in 2009, it’s now drawing interest from established players in the banking industry.
Key benefits of Blockchain technology are decentralization, security, and trust.
Many banking companies are opening new research labs dedicated to blockchain technology in order to explore how blockchain can be used in financial services to increase efficiency and reduce costs.
Also seeing a lot of traction in using machine learning algorithms for advanced detection mechanisms such as detection by signature patterns, DNS traffic monitoring, or behavioral analysis, patterns of fraudulent transactions can be detected on a blockchain.
Authored By - Lokesh SG
TCS Cyber Security Practice