A block chain is basically, data packaged in what is referred to as Blocks. These data blocks are interconnected to form a huge ledger or super record. The ledger/super record is accessible to anyone anywhere. Thus, block chain is described as distributed ledger technology. There is not just one block chain but a collection of interconnected block chains.
Each block contains data, the hash of the block and the hash of the previous block. A hash is a number generated from a string of text. The hash is generated by a formula. It is extremely unlikely that some other text will produce the same hash . The hash is a unique identifier or finger print of a block. Thus each block will contain its ‘finger print ’and the ‘finger print’ of the previous block.
Changing data in a block causes the hash (finger print) of the block to change and it is no longer the same block. Changes in a block will not overwrite the existing data. Changes are stored in a new block, indicating what changed, the date, and time when changes occurred. Data in a block is there forever and almost impossible to change i.e. it is immutable
A complex mathematical puzzle must be solved to create a new block. The computer that solves the mathematical puzzle shares the solution to the other computers on the network. This is “proof of work”. The computers verify the “proof of work “, if correct, the block is added. This ensures new blocks are trustworthy.
For a person to tamper with the block chain, they need to tamper with all blocks in the chain, redo proof of work for all blocks and take control of at least 50% of the network. Only then will their tampered blocks be accepted by everyone.
The block chain ledger is distributed across numerous computers and each computer has a copy of the ledger. No one can cheat the system or tamper with the records as everyone using the system is watching. This facilitates security.
The Block chain is censorship resistant. No central authority runs it. No one can shut it down or change terms of service. If something goes wrong there is no customer care or anyone to sue. The fact that Block chains are immutable, trustworthy secure and decentralised, revolutionises how transactions can occur.
In transacting there needs to be trust between parties. The buyer needs to trust the seller has disposal/selling rights of the instrument, owns it and settlement will occur. The seller needs to trust the buyers payment abilities.
Intermediaries facilitate this trust. They provide assurance of ownership, disposal/selling rights, settlement, and paying ability. Intermediaries include banks, clearing and settlement entities, brokers, government institutions, regulators, exchanges, lawyers etc.
The block chain ledger provides historical records of ownership, disposal rights of an instrument, settlement and paying ability. These records are incorruptable, decentralised and accessible to both parties. Consequently, anonymous parties can carry out transactions over the block chain without independent intermediaries to establish trust.
Without intermediaries, transaction costs reduce and transaction speed increases e.g. if a transactions settlement time is three days, block chain technology could reduce this to 0 seconds. If transactions settle in seconds, then intermediary settlement functions are unnecessary.
Furthermore since individuals can exchange value over the block chain e.g. bitcoin, without needing permission or regulation traditional payment and remittance channels become superfluous .
Block chain technology is basically setting up a source of immutable truth where anything valuable can be stored securely, unregulated, moved transparently and managed anonymously by a worldwide mass of computers.
WANGARI MUCHUI is an internal auditor.