♠ The Internet has transformed the world. Of the several boons that Internet gave us, two of them deserve to be accentuated, namely “World Wide Web” and “Email”, which today are perhaps the most valued things of everyday life. Both are remarkable innovations which have changed the manner in which we live, work, communicate and do our businesses. The enabling infrastructure of the Internet and the transmission of data has further enabled several other useful applications and one such application is “Commerce On The Internet”.
♠ The world began making use of the internet for doing anything and everything that is needed for creating and completing business transactions. Very soon the buzzword “e payments” began humming in every dimension of business and financial institutions began catering the role of trusted third parties in processing such electronic payments. These “Trusted Third Parties” garnered significant importance in every business process since they provided the needed comfort for guaranteeing the authenticity behind the transaction. Failures on part of these “Third Parties” resulted in corresponding business failures and caused economic losses. It is this loophole in the system of over-dependence on “Third Parties” that has caused invention of “Blockchain Technology”.
What Is Blockchain Technology:
- The Blockchain technology is probably the best invention since the internet itself. Blockchain technology addresses the long-standing challenges related to economic development and expands opportunities for exchange and collaboration by reducing reliance on intermediaries.
- Let’s demonstrate the utility of Blockchain using a hypothetical example where two people Mr.A and Mr.B bet for Rs 5 Lacs each on tomorrow’s day end NSE Nifty Index. Mr.A is confident of the index to cross 11,000 mark while B disagrees. Today we have three options to manage this transaction:
1. A & B can trust each other and the losing one will give Rs 5 Lacs to the winner. But there is a risk which is at the end of the day one may not easily pay the other.
2. We can have another option which is A & B enter into a contract. With a contract in place, both parties will be more prone to pay, however, should any of the two decide not to pay, the winner will end into legal battles calling for unwarranted legal expenses and further the verdict might take a long time.
3. We can also have a neutral third party. Each will gives Rs 5 lacs to a third party, which will, in turn, give the total amount to the winner. But then again A & B need to have trust in this third party!!.
- Time is proof to the fact that both “Trust” and “Contract” have their own inherent limitations, which are that, we cannot trust strangers and, enforcing a contract requires time and money. Here comes the utility of Blockchain technology which is secured, quick and cheap. Blockchain allows us to write a program running on the Blockchain, to which both A & B can send Rs 5 lac each. This program will keep Rs 10 Lac safe and then check tomorrow’s day end NSE Nifty Index and accordingly transfer the whole amount to the winner. Each party can check the contract logic, and once it’s running on the Blockchain it can’t be changed or stopped. It thus allows value exchange without the need for trust or for a central authority.
Technology For Layman:
- One of the famous application of the Blockchain technology is “Digital Currency”, like say Bitcoin which can be used to procure products and services, just like United States Dollar (USD), Euro (EUR) and other currencies. Let’s use this application of the Blockchain technology to understand how it works. One Bitcoin is a single unit of the Bitcoin (BTC) (Like One Rupee is a single unit for currency “Rupees”).
- To keep track of the amount of Bitcoins each of us owns, the Blockchain uses a “Ledger”, which is a digital file that keeps track of all Bitcoin transactions. The ledger file is not stored in any central entity servers, like a bank, or in a single data center. Instead, the ledger file is distributed across the world via a network of private computers that are both storing data and executing computations.
- Let us take a hypothetical example where Mr. C wants to purchase an antique piece of jewelry from ABC Ltd and send 7 Bitcoins to ABC Ltd as a consideration for the purchase of that antique piece. What Mr. C will do is he will broadcast a message to the network. This message gives the command by which the amount of Bitcoins in Mr. C’s account would go down by 7 BTC and the amount of ABC Ltd’s account would go up by 7 BTC. Each of these computers represents a “node” of the Blockchain network and has a copy of the ledger file. Each node in the network will receive the message and the ledger maintained by a group of connected computers will be updated. Before executing the transaction, the verifying node needs to ensure two things:
1. Mr. C owns the digital currency and,
2. Mr. C has sufficient digital currency.
- In contrast to routine Banking System where we only know our own transactions and account balances, in Blockchain everyone can see everyone’s transactions. Thus Blockchain creates a trusted public ledger which can be examined by everyone, but which cannot be controlled by a single user. Participants collectively keep the ledger up to date, it can be amended only according to strict rules and by general agreement. This gives birth to a “Digital Data” which is replicated, shared, synchronized and spread across multiple countries or institutions geographically spread across the globe. The entire architecture makes use of three prime things namely “Advanced Cryptography”, “Peer-To-Peer Network” and “Consensus Algorithms”(process or set of rules). Thus no trust is needed and security, reliability is obtained via special mathematical functions and code.
- In the Modern Time, Technology has got inextricably woven into the business. In taking a plunge into any piece of technology, one may get deterred by pretentious jargons which are part of the technology. However, the purpose of any Technology at its core is to make the life for every species on this planet a joyful journey. Above article is an endeavor to go beyond the jargons and make readers, friendly to the concept behind the technology thereby facilitating embracing the benefits which technology has to offer.
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CA.Rajeev Joshi (CA,CISA,DISA,BSc).
The Author is a partner with YSP & Co LLP with over 20 years of experience in myriad areas of GST, Direct Tax, System Audits, Controllership and CFO Functions.The author could be reached at firstname.lastname@example.org / 8356097618 / 9619912774.