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What is Fintech part 2 ? Blockchain

• 2022-01-27
• Maciej Szczerba

I have been exploring blockchain technology and models and the principles of cryptocurrencies for about 2 years now. As you know I am not a technical person, so for me understanding these concepts was not easy. And certainly it was not easy to put the subject in a short and comprehensible way for everyone. But I did it, and you can judge.

As a lover of historical approaches to the analysis of problems, let me start with history. Throughout history, money-monets have been minted by princes, kings and emperors.

Until the time of American President Nixon, since the time of the Roman emperors, that is, for some 2 000 years, money minted by feudal lords, and finally by democratic governments, was always convertible into gold. This was supposed to stem inflation (and even succeeded) and thus build confidence in the institution of money.

In the same way, all state records, such as the land register, or other records on which taxes have been collected from 2000 years to the present day, and on records containing all our data (birth, death, marriage and other registers) are recorded by a central unit appointed by the state.

Can we imagine that both money and other socially relevant data are not recorded by a state organisation, or any central organisation, but by a self-regulating community of citizens ?

We have historical and anthropological evidence that this is the case. On the Pacific island of Rai, the local community, completely different from our old Western World as well as from the Eastern cultures bordering our world (we all created money based on a central mechanism - a prince, a king, a central bank), for over 500 years excelled in the area of payments without any institution of the state. And without any central institution.

The inhabitants of Rai created a network of stones (mostly round with a hole in the middle, link to Wikipedia below) on the island, which each member of the community knew represented a certain material value. Dowries were brought in by the community's recognition and change of ownership of the stone. Even if a stone sank on a boat in a storm, the community recognized that the stone existed on the seabed and was still a legitimate "means of payment", as we would say today. For more information, see Wikipedia:

https://en.wikipedia.org/wiki/Rai_stones

One could say that blockchain is such a modern Rai stone. The development of blockchain, like the development of fintech, is also the aftermath of the financial crisis of 2008/2009. It is linked to the manifesto for the virtual currency Bitcoin, which was published in 2009 by a certain Satoshi Nakamoto (never identified).

Satoshi created the concept of the Bitcoin virtual currency. In telegraphic shorthand, but enough to be understood, it goes as follows.

Each subsequent user who purchases/generates, for example, Bitcoin signs each subsequent transaction. If someone wanted to disrupt this cycle by generating fraudulent transactions or "printing" too much cryptocurrency, they disrupt the entire chain of previous records and the previous members of the chain know about it. Therefore, the risk of fraud is significantly reduced and no central authority (as above) is needed to authenticate the value/truthfulness of the currency. As a university computer scientist would say: "Bitcoin is an example of a distributed database".

Bitcoin can unfortunately be hacked anyway. For this reason, there are participants called "miners" who monitor the "block network". These are virtual machines that monitor the entire network, looking for incorrectly added blocks. In return for detecting them they receive additional Bitcoins. This method of verifying the blockchain network ( jargon called "consensus method") is called "proof of work".

Satoshi never used the term blockchain in his manifesto, only Bitcoin. Bitcoin is currently the world's main virtual currency (cryptocurrency). The second (and significant competitor to Bitcoin) is the virtual currency Ethereum (creator: Vitailik Buterin).

Ethereum works on a slightly different model than Bitcoin. The so-called consensus method, which in the case of

Bitcoin "proof of work" is currently being refined here as "proof of stake". In the "Proof of stake" consensus method, the last person in the cycle "adds" the last block, which makes it impossible to breach and forge the entire chain.

Blockchain need not only be used to create cryptocurrencies. For example, blockchain technology can be used to create various types of community-controlled records. A startup can use blockchain to distribute its shares instead of on a traditional stock exchange. A company that wants to capitalise its real estate can use blockchain. We can also imagine a non-profit start-up raising funds for its business by selling blockachain certificates.

What are the risks of blockchain ?

The "proof of work" model requires enormous computing power and therefore a gigantic amount of electricity. Miners' computing centres use a similar amount of electricity as the Republic of Ireland (a country of 4 million people). Such high energy consumption has a negative impact on the environment.

All the time blockchain is exposed to hacking attacks.

Neither blockchain systems nor cryptocurrency exchanges (into inner cryptocurrencies or into tredy currencies) have sophisticated KYC ("know your customer") or AML (anti money laundering) procedures. Cryptocurrencies can hide the identity of criminals or terrorists.

Blockchain, although it has been around for over 10 years, is still at the beginning of its journey. However, it is certainly a developing technology.

Our next post will be about the impact of AI on Fintech development. Stay tuned !