Hi👋, Today, let us go through the impact of Blockchain technology on the current banking system and how it will change (already changing) the digital transaction and user interaction of sales and exchange. We'll consider scenarios before and after the introduction of blockchain technology and understand the impact of blockchain technology in the world of finance.

Before Blockchain Technology

Barter System - before currency

Earlier, people used to exchange goods or services for other goods or services without using any other form of currency. For example, if one needed a bag of sugar, they had to exchange it for something with equal value in the current market.

credit: historyplex.com

Age of Currency

Then Government introduced the concept of currency (coins) that the general public can use to buy goods or services or earn in exchange for goods or services. Later, after some years, the concept of the bank came in, where they promised currency (coins) in exchange for gold or objects of similar or equal value. Considering the bank as the Trusted third-party body, it stores all the public's transaction history in a Ledger.

What is a Ledger? A ledger is a book containing all the users' transaction history consisting of all their debits and credits along with the specified time of transaction.

For more on the ledger, visit here.

However, Government has set many regulations on using their own money. Banks restrict users from freely spending and investing their hard-earned money in their needs and interests. Banks also set different charges for transactions and the transfer of funds. Moreover, there is a risk of fraud by these third-party bodies where there is a high chance that users might never get back their money. And solving these problems with a traditional system is nearly impossible. So came the blockchain technology that has solved most of these problems.

After Blockchain Technology - 🦸‍♂️Blockchain to the rescue

credits: comoganhardinheiro.pt

• Like Government, which keeps every unique transaction record using Blockchain technology, individual digital currency transaction is preserved in a Decentralized Ledger, utilizing blockchain for financial transactions.

• In 1991, Herbert and Sonatta, in their paper, mentioned: "How to timestamp a digital document." They said if we use a timestamp in a digital document and store it in a repository, we can maintain it as a record and secure it for the future. It is also a proper way to tackle the double-spending problem.

  What is double-spending? Double-spending is a problem that arises when transacting digital currency that involves the same tender being spent multiple times. Multiple transactions sharing the same input broadcasted on the network can be problematic and is a flaw unique to digital currencies. The primary reason for double-spending is that digital currency can be very easily reproduced. - corporatefinanceinstitute.com

  For example, let's say I have 10k $ in my account. I send the whole amount to person A, and the transaction will mark a timestamp in the ledger and, for our convenience, say 10:00 am. Now, suppose I, again after a period, try to send some funds to person B. In that case, the ledger will have a record of the earlier transaction made at 10:00 am, and it will reject the transaction, alerting me that I have insufficient balance in my account.

• So taking the point as mentioned above as a reference, Satoshi Nakamoto launched a white paper, where he gave the world's first Peer-to-Peer Electronic Cash System. He said that this would bypass the need for the traditional centralized system by introducing a few new terms like Peer-To-Peer Network, Hashed-based Blocks, etc.

A little information on Peer-To-Peer Network

The central concept is to place the ledger to every computer around the world in the form of hashed blocks. These hashed blocks are coded cryptographically in different systems across the globe. And changing these blocks or tempering is impossible because this chain is distributed in other systems. This form of network builds the systems' trust and integrity, making it a proper and most effective way of financing in the 21st century. These are the points put forward by Satoshi Nakamoto, which he named Bitcoin.

To read the full original white paper of Satoshi Nakamoto on Bitcoin, visit here.

credits: remitano.com/forum/in/post/295-peer-to-peer..

A small brief on Hashed based system

Hashing serves to make an object, document, legal paper unique by providing a digital fingerprint in the form of hashes. These hashes give proof of ownership to the respective owners without exposing the details of the product/object to others. SHA256 is an example of the hashing function used in Bitcoin, and SHA 256 always gives out a fixed length with a 256-bits size (32 bytes). These hashes are stored in the form of blocks and are added to the blockchain, distributed over thousands of systems (nodes) worldwide.

And tempering the information is impossible because as soon as someone changes (or tries to change) the data, the hash value changes, which doesn't match the hashes present in the blocks on the blockchain on the other systems. This mismatch of hashes in the blocks makes the block invalid, keeping the information safe and secure in the blockchain.

Conclusion

This blog focuses on the impact of blockchain technology on the finance industry, showcasing the changes and improvements it can bring to the industry. It handles the different aspects of how the traditional banking system function and what are the problems it creates for users around the world. It reflects that the banking system is currently vulnerable and how blockchain technology can solve most of its issues. How peer-to-peer network works and how hashing fits in a blockchain network.

There are many more important factors to be discussed and many essential aspects to consider when talking about blockchain technology. Although I haven't covered them all in this blog, I will surely make more blogs on the critical factors that make blockchain technology a fantastic innovation in the technology industry.

🌎Explore, 🎓Learn, 👷‍♂️Build. Happy Learning💛