10 Jan Digital (Fools) Gold

Digital (Fools) Gold

Needless to say if you like everyone else is receiving emails about the opportunity to buy bitcoin (also known as crypto currency), it is a scam, so don’t click on the link

With all the current mania about bitcoin (it has been called by some digital gold but in my mind with current trading activity it is really digital “fools” gold), I thought I would kick off an explanation of what the concept actually is. The concept is not bitcoin itself, but the system backing it Blockchain which does has transformational abilities for the way transactions are processed & data can be accessed/stored. To explain it more properly though however I will need to give you the back story to the financial system & as to how it works. This will take a little while to work through, but believe me the wait will be worth it.

When I first met my darling Silvia in 1982 she was the “Ledger Queen” of the Franklin Street Branch of the old, old, old State Bank Of South Australia. In those days cheques and deposit slips were delivered to each branch first thing each morning (with the total values of the cheques & deposits provided) and then were manually posted to a clients account via the ledger machine. Each client had a ledger card with a carbonated statement on the front (the cheques and deposits were recorded on the statement and ledger card at the same time). The ledger machine then issued a trial balance each day to ensure that total transaction posted equaled the values of the deposits & cheques. All transactions would need to be posted as early as possible as you were dealing with the previous days banking. Statements would then be issued to clients when they were filled up, unless they had a specific requirement (i.e. weekly or monthly). If the ledger balances didn’t match the cheque/deposit values that day we had go back manually checking each deposit to see where the discrepancy was & correct that customer’s account.

If you move forward to today cheques and deposits are no longer provided to branches and are processed electronically, but the same basic system applies as existed back in 1982 before you receive the value of deposits or have cheques confirmed. Your financial information (data) is stored by your financial institution – they maintain money balances and transfers. When you make a withdrawal from your account and transfer the monies online to another account they briefly lock access (or decrease the balance) while they make a transfer, then update the other side, then re-open access (or update again). This is why if you transfer monies from your account today to another person, your account will be debited today, but the other person will not receive the value until tomorrow (although the transaction will show up under the previous days date on their account). Think about it if you deposit a cheque in your account today it might take 3 days before your financial institution gives you free access to these monies (confirming the transaction), as the cheque may be “bounced” by the other institution.

With me so far ?

Under blockchain financial transactions will be virtually instantaneous. Once you decide to transfer monies they will be transferred immediately from your account and the recipient will receive the value straight away. How do they do this though ?

Blockchain technology allows a list of transactions to be shared among a number of computers, rather than on a central server, and the secure ledger updates in almost real-time across all the systems in the network. These networks can be either public or private.

When a transaction is requested it is verified by a peer to peer network of computers (also called nodes) through use of known algorithms & the users status. Once verified the transaction is added to others to create a “block” which is then added to the existing “chain”. Once this new block is added to the existing blockchain it is permanent & cannot be changed or corrupted.

Information held on a blockchain exists as a shared — and continually reconciled — database. The blockchain database isn’t stored in any single location unlike your current financial transactions which are only stored by your financial institution, meaning the records it keeps are truly public, easily verifiable and infinitely more difficult to manipulate or corrupt – No centralized version of this information exists for a hacker to corrupt. Obviously for security purposes your personal financial information will be heavily encrypted to add further security and only be accessible by you & your financial institution.

Now that sounds so simple doesn’t it now…..

Let me try to put this into more layman’s terms

Let’s say I email you an excel spreadsheet or word document. You can open the spreadsheet or word document and make alterations and then email me back the spreadsheet/document. The problem with this is that I need to wait until receiving a return copy from you before I can see or make other changes because I am locked out of editing it until the other person is done with it (or there are 2 completely different spreadsheets/word documents with different data). That’s how databases work today. Two owners can’t be messing with the same record at the same time.

Now lets move forward and say that we are using one of the newer online sharing platforms – Dropbox or Google documents. With these applications both parties have access to the same document at the same time, and the single version of that document is always visible to both of us. It is like a shared ledger, but it is a shared document (the “block). The distributed part comes into play when sharing involves a number of people (the “chain”).

Blockchain technology is like the internet in that it has a built-in robustness. By storing blocks of information that are identical across its network, the blockchain cannot:

1. Be controlled by any single entity.
2. Has no discernable single point of failure.

This has great ability to transform business in the way of some of the following: –

• Document storage and management – decentralized data will allow easy streaming of the data and protects from being hacked/corrupted. Banks in reality are just data storers, so blockchain could make it extremely easy to transfer loans, accounts, etc. from one institution to another.
• Identity (Births, Death, Marriages, etc.) – Better management of identity/anti-money laundering procedures. Think about Digital Passports and the ease that you could then move through Airport screenings, or opening bank accounts at new institutions
• Confirming or “Tracing” transactions i.e. think barcodes on items you buy or RFID tags – Say you lose your receipt and wish to return a product. The price and store where you bought it from could be easily identified & product replaced or refund generated.
• Completing financial transactions such as land title registration or buying/selling shares, transfer of monies – Buying/selling houses is still a paper driven process. Once finance is approved and banking/security documentation completed settlement could be almost instantaneous
• The ability to sell or trade your own data to companies to be able to obtain better deals – The Productivity Commission is expected to recommend this to the Federal Government in it’s upcoming report, as well as encouraging an open data banking system. Just think at present you provide Facebook, Twitter, Snapchat, etc. your data for free which they use to their own commercial advantage.
• Surveys/Elections – as your identity can be verified and you can vote and have your vote verified, the whole process can become more simple to manage, transparent & just think not having to line up at a polling booth, or having postal votes/plebiscites. Not only that but election day could be all over by 30 minutes after the polls close as all the votes (or majority) will be in, reconciled and verified.

Lots of companies and countries are already developing processes for using blockchain. The Australian Stock Exchange is one of those, who hope to use it in future moving to virtually instantaneous settlement (as distinct from current 2 days).

So Blockchain is here to stay and will become more widely known and user friendly in future, even if Bitcoin bites the dust !!