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