The continual development of modern technology has meant that almost every industry has been subject to changes in their business operations and processes on a day-to-day basis. The banking world is no different.
The introduction of Bitcoin – a completely digital currency – in 2008 has meant that the way individuals and businesses operate their banking has rapidly transformed in recent years.
However, with a digital currency, there needs to be a means of tracking data, balances and transactions, which is where the block chain comes in. Here, we take a look at what the block chain is and what the future holds for it and the Bitcoin currency.
What is a block chain?
If you’re at all familiar with Fintech, then you may already have some understanding of how Bitcoin transactions work. It’s a fairly simple process to get started; by installing a Bitcoin wallet on your computer or mobile phone you create your first Bitcoin address, which can then be disclosed to other parties allowing you to pay or receive funds from other Bitcoin user accounts.
Once a payment is confirmed, it then becomes part of the block chain, which is a shared public ledger for the entire Bitcoin network. The block chain records all confirmed transactions within the network allowing the Bitcoin wallet to automatically calculate balances through cryptography.
The block chain works as a linear and chronological account of all transactions in the Bitcoin network, so once a transaction is confirmed, it is then linked to previous transactions and can’t be altered or adjusted as this would affect the entire block chain.
In order to protect and secure the block chain, innovative technology and advanced mathematics has been applied to the system called cryptography. This high level code prevents other user’s wallets from being hacked and used for unauthorised spending by other Bitcoin members in the network, which can corrupt the block chain. Furthermore, cryptography can be used to encrypt a wallet so that it can only be accessed and used for transactions by entering a password.
In addition there are other technological software processes put in place to prevent double spending on an account – spending Bitcoins with two different recipients at the same time. This is where Bitcoin mining and the block chain play a crucial role. Bitcoin mining is where the hardware on a computer will conduct mathematical calculations to confirm a transaction and pass the data on to the block chain. If there are duplicate transactions from one Bitcoin wallet, this data is then fed back to the network to create a consensus to decide which of the two transactions to validate.
In order for any transaction to be confirmed and processed, it must be assigned to a block that fits high-level cryptographic specifications that are then verified by the network.
It’s the use of complex cryptography and the block chain in the Bitcoin network that makes it function so well. Having protection and coding to ensure secure and legitimate payments is vital to a successful digital currency. The presence of the block chain allows for an all-encompassing public ledger of all historical and current transactions for every Bitcoin wallet address. As each transaction is sectioned into blocks it reduces the chance of corruption in the block chain and gives greater transparency and security on all transactions through the Bitcoin network.
It’s clear that the block chain plays a vital role in the current operation of the Bitcoin network and is likely to do so for the foreseeable future. No doubt as the Bitcoin network expands and adapts to the market demands and technological advancements, the complexity of the block chain and the innovative software it uses will adapt also.
However, one thing remains consistent: without the block chain, mining and cryptography, there would be no legitimate way to track, monitor and regulate the Bitcoin currency and would make it far more susceptible to corruption and manipulation.
What will be interesting to see is how Bitcoin and the block chain will be further incorporated into our everyday banking transactions and how we operate. There are already significant developments in how we use passwords these days, with new technology like PixelPin, as discussed on FusionWire (powered by Misys), so with more and more people and businesses using Bitcoin for day to day transactions, will we see a complete transformation in how we use currency and a move towards the virtual currency?