What is blockchain?
What is blockchain?
Blockchain is a technology that allows us to distribute and synchronise data across different parties, using cryptography (including encryption) to secure the data and ensure any tampering is evident.
This is a type of distributed ledger technology and, in financial services specifically, can be used to decentralise trade processing by enabling simpler direct peer-to-peer transactions.
In this example, traditionally when a trade occurs a record of each transaction is logged by a third party, such as a financial market infrastructure (FMI). This third party also checks the validity of the transaction. However, blockchain is a way of making and keeping a record of a transaction without a centralised third party being required, as all the parties involved can see the record of a transaction, although not necessarily the details of the transaction itself (see also “is blockchain safe?”). This is what is called a “distributed ledger”.
Watch Barclays’ blockchain experts demystifying some of the myths around the technology
Within financial services, blockchain uses a computer system to record, share and synchronise information about trade transactions. There are three stages to the blockchain:
First, a record is made of each trade that happens.
Second, the record of an individual transaction is checked by the computers in the network to make sure that it is valid. If this is confirmed, then the individual records are bundled together into what is called a ‘block’.
Finally, each block contains a hash (a unique encrypted code) that links it to the other blocks to form a chain – hence the name, ‘blockchain’.
Because of how the records are bundled and chained together, once a record of a trade or transaction has been added to the system, it is nearly impossible (see “is blockchain safe?”) for it to be altered or removed from the network.
There are three different technical mechanisms that enable blockchain to work:
1. Chaining – there are chains that link all the data (i.e. the records of transactions) to previous transactions
2. Consensus – this is how agreement between different parties is achieved on the synchronisation and validity of data within the chain
3. Replication – this is how the data is shared, and the degree of data sharing varies between different blockchain applications
Blockchain can use cryptography to encode all transactions within the network, to ensure that they are unreadable unless you have an appropriate key. This option means that, whilst every transaction is recorded and marked within a blockchain, these individual transactions cannot be ‘read’ by other parties within the chain.
To some extent, however, the safety of blockchain depends on how and what it is being used for, and applied to.
Some people argue that the bitcoin blockchain network is the most secure in the world, and therefore the safest. However, the security of such a network essentially depends on whether the economic incentive of supporting the integrity of the platform is greater than the economic incentive of breaking the platform. This has meant what are known as the ‘permissionless public blockchains’ have seen occasional issues, for example there was a widely-reported attack in 2016 on a program called The DAO running on the Ethereum blockchain.
Separate to this are ‘private permissioned blockchains’, that many view as more secure. This is because in these private systems all parties are known actors, and the blockchain is governed and operated by either an institution or group of institutions that have enterprise security processes and networks.
Barclays is exploring this technology within ‘private permissioned blockchains’ alongside other known organisations, including other financial institutions, central banks, and also regulators, through the use of ‘sandboxes’. This is a tool, originally created by the UK’s Financial Conduct Authority and now adopted worldwide, that allows innovative new ways of using blockchain to be tested in a safe space.
Collaboration with regulators is key, as blockchain is an emerging technology with a rapidly growing number of use cases, many of which require different sets of rules. As an institution with over 300 years of history, our role goes beyond exploring the different applications of the technology, as we also play a crucial role in defining industry standards to ensure the technology is used consistently and responsibly.
Blockchain came into the public consciousness about ten years ago, with the invention of bitcoin. Bitcoin is a new kind of global payment network that allows value to be transmitted electronically directly between peers. But aside from bitcoin and other cryptocurrencies, there are multiple potential applications of blockchain. The underlying technology is already used across a range of industries, including financial services, aviation and healthcare.
Some people have suggested that blockchain could even be applied to optimise how we vote. The reality, however, is that there are certain applications of blockchain that are more relevant than others. At Barclays, we have been focusing on cutting through the hype and identifying how blockchain can be best applied to business (see ‘Blockchain at Barclays’).
Blockchain is the technology that enables cryptocurrencies to exist and be traded. A cryptocurrency is a new, digital form of value that leverages broad consensus and cryptography to verify transactions and transfer of value. The most well-known cryptocurrency is bitcoin.
In other words, blockchain is not a cryptocurrency in the same way that the Internet is not a website. Cryptocurrency is an application that uses blockchain technology, in the same way that a website is an application that uses the Internet.
Over the past few years, Barclays has explored the underlying technology of blockchain, to understand how it can be applied in different ‘use cases’ to simplify processes and remove inefficiencies. We are exploring different applications of blockchain technologies, from the simplification of payments infrastructure to the use of smart contracts to improve post-trade processes. We are particularly excited about our role as an investor in the development of ‘Utility Settlement Coin’ (USC), which will unlock opportunities to make trading processes more efficient and reduce risk.
And we are also proud to be supporting innovative blockchain companies through our fintech ecosystem. For example, through our Eagle Labs, as well as through the Barclays Accelerator powered by Techstars programme and our Rise platform. As well as pioneering new uses of blockchain themselves, these companies are in turn introducing new ways of thinking to Barclays.
The expectation is that by leveraging blockchain, we will improve our processes by reducing variation, simplifying processes and reducing he need for reconciliation, which in turn will deliver a better experience to customers and clients.
Watch how Barclays and other companies are using blockchain
Blockchain has the potential to change financial services in several ways, for example:
In the long term, the deployment of new uses of blockchain could dramatically improve the efficiency of a wide range of important processes, which would fundamentally transform many aspects of our industry.
And in the short term, the interest and promise in blockchain technology has meant that existing financial services providers have had to think about how their established services could be adapted, updated or improved in order to keep up with the competition that will come with the future landscape of financial services.
Blockchain is an emerging technology, which was invented about ten years ago. So, while it is continuing to promise exciting new ways of doing things at a rapid rate, it’s key that we understand the implications of applying it to business processes.
And for this, collaboration is key. The future of blockchain in the financial services industry relies on our ability to test and learn. And this also includes sharing learnings with other players in the market, including with regulators, as this helps spread understanding of the technology.
One thing that can definitely be said about blockchain is that it has brought together the financial services industry, and will continue to do so in the years to come.