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What Is Blockchain

A blockchain is a distributed digital ledger that records transactions in near real-time in a verifiable way. It uses cryptography to allow each transaction to be securely added to the ledger in a way that is permanent and publicly viewable. For a transaction to be added, it must be validated by consensus of the network participants. This provides control over manipulation or errors and ensures data quality.

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Kansha Gupta
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0% found this document useful (0 votes)
63 views8 pages

What Is Blockchain

A blockchain is a distributed digital ledger that records transactions in near real-time in a verifiable way. It uses cryptography to allow each transaction to be securely added to the ledger in a way that is permanent and publicly viewable. For a transaction to be added, it must be validated by consensus of the network participants. This provides control over manipulation or errors and ensures data quality.

Uploaded by

Kansha Gupta
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
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What is Blockchain?

A Blockchain is a digital, immutable, distributed ledger that chronologically records


transactions in near real time. The prerequisite for each subsequent transaction to be added to
the ledger is the respective consensus of the network participants (called nodes), thereby
creating a continuous mechanism of control regarding manipulation, errors, and data quality.

Key Characteristics: Blockchain technology is defined by its


characteristics. In order to understand
 Distributed Ledger Blockchain, one needs to understand the
key features of the technology and how
 Digital they are interrelated.

 Chronological and time stamped


 Cryptographically sealed
 Consensus based

Distributed ledger: Digital: All the information on


Indistinguishable copies of all Blockchain is digitized, eliminating the
information are shared on the need for manual documentation.
Blockchain. Participants
independently validate
information without a centralized
authority. Even if one node fails,
the remaining nodes continue to
operate, ensuring no disruption.
Chronological and time-
stamped: Blockchain, as
the name suggests is a
chain of blocks – each
being a repository that
stores information
pertaining to a
transaction and also links
to the previous block in
Consensus-based: A transaction
the same transaction.
on Blockchain can be executed
These connected blocks
only if all the parties on the
form a chronological
network unanimously approve it.
chain providing a trail of
However, consensus-based rules
the underlying
can be altered to suit various
transaction.
circumstances.

Cryptographically sealed: Blocks created are cryptographically sealed in the


chain. This means that it become impossible to delete, edit or copy already
created blocks and put it on network, thereby creating true digital assets
and ensuring a high level of robustness and trust. Furthermore, the
decentralized storage in a Blockchain is known to be very failure-resistant.
Even in the event of the failure of a large number of network participants,
the Blockchain remains available, eliminating the single point of failure. Data
stored in a Blockchain is immutable.
Types of Blockchain:
 Public Blockchain:
Public blockchain are open-source. Anyone can be part of this type of Blockchain i.e. anyone can
participate in the transaction facilitated by the Blockchain, everyone can see what blocks are getting
added and thereby anyone can participate in the consensus process i.e. the process of what blocks get
added to the chain and what the current state is.

 Open Loop Blockchain:


The difference in a permissioned blockchain compared to the public blockchain is that the right to
validate the transaction is provided to only few pre-selected nodes. The right to read the blockchain
may be public, or restricted to the participants.

 Private Blockchain:
Write permissions are restricted to one organisation. Major applications include database
management, auditing i.e. areas specific to a single entity where there is no requirement to provide
the right to read or validate to public.

How Blockchain Works:

 Blockchains are essentially intended to securely exchange assets without any


middlemen. Blockchain networking is an evolution of “Peer-To-Peer” protocols (P2P),
such as those commonly used in BitTorrent or Napster.
 The blockchain data is served by decentralized distributed databases which work in
cohesion, to record a consensus of a transaction and store a collection of transactions
into a block.
 The major difference between the commit to a blockchain (ledger) and commit to a
database is the way the data gets committed. While databases use stored procedures or
functions to maintain the integrity and consistency of the data, blockchain uses
cryptographic hashing to maintain the integrity of the data. Though creating hashes is
trivial for a CPU, blockchain requires the hash values to have a specific form to get
committed.
 This content hash attached to each block makes it immune to any further tampering of
data, thus making the block ‘immutable’. Generating a specific hash requires many
nodes working together in full throttle.
 With each successful transaction to the ledger, participating nodes will be rewarded.

Blockchain Technology Stack:

The development and operation Smart contracts are one of the most important features of the Blockchain
support for a Blockchain is technology. They are essentially computer codes stored in a Blockchain to process
concentrated in the infrastructure pre-defined business steps and execute a commercial/ legally enforceable
layer of the technology stack. A transaction without involvement of an intermediary. Smart contracts can be
fundamental difference between executed in a cost efficient and secure manner, and in real time. Smart contracts
legacy processes and Blockchain have a far reaching cross-industry applications because they can automate
technology is in the way data is decision making especially when the outcome of a decision is based on the
stored and processed. Blockchain consensus reached between participating members.
has features of encryption and
verification inherent to its design,
with consensus on the network
being a required condition for a
transaction to be captured in a
block.

Need for Blockchain:


Problem with existing systems: Solutions offered by Blockchain:
1.Difficult to monitor and evaluate asset ownership and 1.In a blockchain the supreme advantage it ensures is that
its transfer in a trusted business network. each party has a record which is maintained in a ledger
available to each one.

2. It is a ledger widely passed between different users creating


a shared database which is replicated to these users and who
can access it only after they have the access right for it.
2. Inefficient, expensive, vulnerable: All these factors
extremely hinder the performance and thereby
destroying the progress.

Blockchain fit Assessment Framework:


Major issues that banks face today: The Indian banking industry today is faced with issues such as rising costs of
operations, increasing susceptibility to fraudulent attacks on centralized servers and challenges in ensuring
transparency. All this, primarily because most of the banking transactions – from opening customer accounts to
making global payments – may require intensive manual processing and documentation, involve costly
intermediaries and is time consuming as these transactions need to be validated by various participants at various
point in time causing the delay thereby resulting in almost lack of fraud proof real time solution.

What are banks looking for? Banks are continuously exploring new ways to perform transactions quicker for an
enhanced customer service, while ensuring cost efficiency in its operations and assuring transparency to
customers and regulators. For this, Blockchain potentially provides a solution for banks as it inherently helps
eliminate intermediaries, maintain immutable log of transactions and also facilitates real-time execution of
transactions. This could potentially reduce the TAT for banking transaction, reducing costs of manual work, and
leading to enhanced customer service and satisfaction. Like any other industry, choosing the right ‘use case' is the
key for Banks to leverage full value of Blockchain.

Framework:
Factor Assessment Framework Impact of Blockchain Fit
Intermediary • High fees for intermediary? • Latency Blockchain's distributed ledger
due to processing through intermediary? technology facilitates disintermediation,
• Does the intermediary exist due to lack thereby reducing costs and lowering
of trust? latency.

Transparency • Are multiple participants involved? • The hash/ pointers of the records written
Does increase in transparency into the on the Blockchain are immutable and
transaction help the participants irreversible, not allowing modifications
and eliminating risk of fraud.

Information Storage • Is the same information being stored in Blockchain's distributed ledger and
multiple locations? • Is data consistency consensus mechanism allows data
an issue? consistency across multiple participants.

Manual Processing • Does the process involve manual Blockchain maintains automated audit
operations? • Is the cost of trail of transactions, thereby reducing
Reconciliation high? manual processing for data validations
and reconciliations.
Trust • Is there trust among participants? • Do Smart contracts allow codification of
multiple participants have the right to business rules, validations and
modify transactions? • Is there a risk of reconciliation, thereby reducing manual
fraudulent transactions? processing.

Documentation • Is the documentation paper-based? • Smart contracts allow business


Is there a large number of documents / validations and automated reconciliation
reports required to be generated? for straight through processing.

Time Sensitivity • Will the transactions benefit from Blockchain enables the near real-time
being real-time or synchronous? settlement of recorded transactions,
reducing risk and providing an enhanced
customer experience.

Blockchain use case for Indian banks:

Manual documentation is required Time-consuming process due to manual processing of the transaction
throughout the lifecycle of a Vendor finance and lack of automation at any point, it takes minimum 4-5 days for
process right from raising purchase orders to vendor to collect funds from the bank against the relevant document.
raising bill of exchange by vendors and This affects the working capital situation of vendors as the funds remain
submission of invoices and transport blocked as long as the processing takes place.
documents to banks. This increases overheads
for banks and also makes the process tedious Potential of fraud as invoice changes multiple hands throughout the
for vendors. lifecycle of a transaction, there are high possibilities for frauds in form of
tampering of documents thereby causing delay in release of funds, funds
Lack of mechanism to track status of invoice being disbursed to wrong entity. Also, once such transaction happens, it
throughout the process Currently, all the is difficult to keep a track of such fraudulent entities/ practices.
participants (banks, client and vendors) cannot
simultaneously track transaction in real-time.
The status of invoice is known to the
participants only through mails.

Automated documentation Blockchain helps


eliminate the manual steps involved in the
company’s bill discounting process and the
entire transaction becomes paperless.
Real time-tracking of transaction with the
transaction being up on Blockchain, all the
relevant parties can view and verify the
processes. There is only one source of truth
and transactions cannot be processed
further unless all the relevant parties agree
and authenticate it.

Real time settlement of transaction


Clients can transfer invoices to the
Blockchain network using an external
technology such as Oracle and once it is
on Blockchain, smart contract rules can
be triggered, and then the bills are
discounted and funds disbursed to the
vendor within few hours. An automatic
debit to customer account is triggered

Challenges and Implementation: on the due date.

Cost Blockchain offers tremendous savings in Integration procedure and change adoption Blockchain applications offer
transaction costs and time but the initial cost solutions that require significant overhaul of existing systems. In order to
of investment in the technology might be high make the switch, companies must strategize the transition. It needs to be
and the payback period might be high. Hence, a consortium-based approach as banks need to make sure that all the
Banks will have to consider it from a long-term relevant stakeholders for the underlying use-case agree to come
investment perspective and make sure that the together on the platform. This will require conducting workshops with
investment is aligned to their vision statement. the stakeholders and educating them about usage and usefulness of
Blockchain based system.

 Although the potential of Blockchain is widely claimed to be at par with early


commercial Internet, banking firms needs to understand the key features of the
technology and how it can solve the current business issues as on one hand, internet
enabled exchange of data while on other, the Blockchain can involve exchange of
value.
 Banks need to identify opportunities, determine feasibility and impact, and test proof
of concepts.
 Due to lack of any precedence, banks will have to opt for a trial-and-error approach
either through internal trials or partnering with a specialized technology firm.
 However, the questions around regulations will have to be resolved through focused
discussions with competent regulatory authorities and incorporation of their thought-
process.
 They concluded that regulators should engage, intervene at early stage and shape the
innovation. This will allow them to understand the technology, assess the risk, and
enable the tailor-made solutions to their specific obstacles.

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