June 27, 2016 by Ed Kennedy
Blockchain explained: The fundamentals of the ‘new’ finance technology
Financial investors and tech observers alike would be hard pressed to not come across coverage of blockchain. In the day and age where innovation and a premium is placed upon the agile delivery of goods and services, a financial transaction system that promises faster transactions was always set to win ample press. Yet, just what is blockchain exactly? Read on to find out.
Though the technology for blockchain has been around for a while, coverage over the past year in a number of major markets has rapidly grown attention and discussion of the financial tech. At the same time, the wider complexities of the blockchain tech have made its ability to ‘cut through’ a challenge.
Here is what it is and what it does in straightforward terms:
Blockchain replaces the central distribution model share registries currently use, and replaces it with a peer-to-peer system. Similar to the setup on file sharing servers and torrents, because the blockchain system establishes itself on the computer of each trader who uses it, the capacity to settle transactions far more quickly from one another to user is offered.
A good example to understand this is to think of a navy ship with military bases around the world. Rather than having to sail back to its home country every time it makes a move, with blockchain that ship can sail from one military base (in this case one financial trader) to another. This cuts down time spent moving between two points.
The core advantage of blockchain is the promise it offers in making transactions on the stockmarket quicker and more instantaneous. For example, a trade on Australia’s ASX that would typically take 3 working days to finalise after a buy or sell order would now take just moments.
While for an infrequent investor in the market – say someone who buys shares once a year with their tax return and then leaves them for at least 5 years before selling – the advantage of such a new technology may not appear as revelatory.
Yet, even so, while events such as Switzerland’s 2015 unpegging from the Franc – or the turmoil seen from Breexit are are events – the rising popularity of forex (and share trading generally due to the ease of online platforms and access to them) means the prospect for retail investors to desire and wish to use such an instantaneous form of technology should not be dismissed.
Yet, for those who trade frequently, be it financial firms by the second, day traders by the hour, and even the keen investor who moves some money about the market once a week, the chance to have your transaction finalised quicker offers the promise greater control and flexibility when it comes to investment decisions.
The great advantage of this system is it can be more seamless and efficient, the challenge comes with concerns about security that comes with the adoption of a new technology. While via use of bitcoin transactions via blockchain can be encrypted, when people who currently trade shares with a bank or a broker – and may not adore the brokerage fees but feel it’s ‘better the devil you know’ – asking for them to make the shift to use of a new technology shall take some time.
In turn, by virtue of its peer sharing setup, blockchain would provide a transparent system of trading that allows every user to see the transactions. While on the one hand this could be a beneficial thing for parties, on the other hand it does give rise to problems surrounding the right of a trader to privacy.
Neither of these problems are necessarily unassailable – and many traders would find no problem with them – but it does mean those hoping for a full scale and widespread rapid adoption of a ‘new financial order’ may be waiting for some time yet. In the interim, just like bitcoin currency has began to be accepted at a number of brick and mortar ‘real world’ businesses as a form of currency, so too is a gradual introduction of blockchain the most likely occurrence at present.
The Bottom Line
In sum, just the same as online trading did away with the need to check the newspaper and call your broker when you wished to make a market move, so too does advent of blockchain bring with the promise of another step forward in the delivery of a more seamless, fluid, and intuitive trading experience for investors across the board.
In this regard, it is not dissimilar to the weariness of online shopping that many consumers felt in the 90’s and early 00’s – a weariness that soon after dissipated with the rise of Amazon, eBay and consumers subsequent readiness to embrace a more seamless and fluid technology – such is a challenge for blockchain at present.
Ultimately, to what extent blockchain can be successfully ‘sold’ to investors, implemented into the current financial trading system, and also monitored/regulated by national governments shall all loom as big questions in the months and years ahead.
Nonetheless, just as online gaming via Playstation and Xbox and online stream via platforms like Netflix and Amazon has brought about a change in the way we consume media, any who bet blockchain couldn’t find a place in the future of our day to day financial transactions would be making a big bet indeed. A ‘watch this space’ then.
Ed Kennedy is a journalist and web designer proudly from Melbourne, Australia. Say hi to Ed via email@example.com or on Twitter @Edkennedy01