Subject 3. Financial applications of distributed ledger technology

A blockchain or a distributed ledger network is a public ledger of all bitcoin transactions that have ever been executed. A block is the "current" part of a blockchain which records some or all of the recent transactions, and once completed, goes into the blockchain as permanent database. Each time a block gets completed, a new block is generated. Blocks are linked to each other (like a chain) in proper linear, chronological order with every block containing a hash of the previous block.

To use conventional banking as an analogy, the blockchain is like a full history of banking transactions. Bitcoin transactions are entered chronologically in a blockchain just the way bank transactions are. Meanwhile, blocks, are like individual bank statements.

Benefits of blockchain technology are:

  • As a public ledger system, blockchain records and validate each and every transaction made, which makes it secure and reliable.
  • All the transactions made are authorized by miners, which makes the transactions immutable and prevent it from the threat of hacking.
  • Blockchain technology discards the need of any third-party or central authority for peer-to-peer transactions.
  • Decentralization of the technology.

Applications

Blockchain eliminates the need for an intermediary to handle financial services like money transfers. A cryptocurrency uses cryptography for security. It makes it easier to transfer funds directly between two parties in a transaction, without the need for an intermediary (e.g. bank). Funds transfers are done with minimal processing fees.

A blockchain, with its immutable nature, can remove risks, uncertainty, and complexity associated with regulation. Once data is saved into the chain, no one can modify or delete it. This is the reason companies use blockchains as irrefutable proof of the transfer of any digital asset. Regulators don't need to confirm the authenticity of records. On top of that, a blockchain allows regulators to review the original document of the actual transaction rather than manifold copies.

Tokenization is the process of representing ownership rights to physical assets on a blockchain. A single, digital record of ownership is created - it can be used to verify ownership title and authenticity, including all historical activity.

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