"Economy
forces and technology delivers"- the trend is evident from the inception
of markets and even before. Our world has moved from barter system to dealing
with currency , from physical payments to online transactions, and many more
such cases. The most recent innovation has been seen in the form of crypto
currencies- Bitcoin, blackcoin, auroracoin etc. Most famous of these the
bitcoins allows to transact cash directly from one party to another without any
intermediaries or controlling agencies.
To
implement such an electronic currency the dynamics of physical currencies and
regulatory intermediaries needs to be modeled onto the network of transactors. The
first dynamics of these networks is the Trust based model followed by double
spending problem and the threat of attackers which may try to control the
network to gather undue gains.
The
Blockchain architecture try to provide viable solution to all these issues
leading to a robust systems of distributed online transactions. This
architecture can further be expanded to various other transaction system and
contracts & agreements opening complete new form of trust dynamics on
internet.
The
three basic concept that govern this architecture are: Decentralized consensus,
Block chains and Trustless transactions.
1. Decentralised
consensus:
Decentralized
consensus scheme challenges the regime of a centralized control that governs
all the transaction networks throughout the globe. A decentralized scheme, on
which the bitcoin protocol is based, transfers authority and trust to a
decentralized virtual network and enables its nodes to continuously and
sequentially record transactions on a public “block,” creating a unique
“chain”: the blockchain. Each successive block contains a “hash” (unique timestamp
mark of the transaction) of the previous code and these hash codes are used to
secure the authentication of the transaction source and validation of the whole
transaction. The combination of hash code (developed under the domain of cryptography)
and blockchain technology together ensures a solution to the double-spending
problem (duplicate recording of the same currency).
2. Blockchains:
A
blockchain design is a packet of data/information appended with a chain of
information about the previous transactions that happened on the packet. The
timeline of the ownership of entity can be verified by anyone on the network by
unbundling the chain that contains the timestamp information and signature of
the holders.
In
case of bitcoins this entity is the coin and in other transaction it can be
anything from a contract to some private message. Though anyone can see the
ownership of the entity only the owner can access as only he has the key to the
information.
The
blockchain acts like a private database except the header which is visible to
the public. This system provides a value transfer system without any mediator. The
agreement has a public visibility but a private access.
3. Modelling the Trust
of transactions:
When
you combine the concepts behind the blockchain and decentralized consensus its
explicit how trust is building up in the system. The function of
intermediaries: validation, compliance, law, contacts etc. are being
transferred to the network. This even reduces the risk of biasness of the
intermediary that was difficult to model in the system before. Such
functionalities modeled on the system lead entities (computers) to develop
trust on a deeper level.
Those
who fear that such a system will put the intermediaries out of job need not
worry. As these persons can work on a more high level to build robust contracts
with a definite level of objectivity ingrained so that machines can execute
those. This takes out the mundane part of the job handled on the distributed
network and executed with a greater level of trust.
Smart contracts and
smart properties:
The
projects like Ethereum, namecoin etc. tries to extend the concept of
Blockchains on other fields like Contacts and Agreements, that require trust modeled
on top. With the advent of these projects vast areas of application of
Blockchains have come to picture like betting, notarized legal deals and areas
which require declaration of ownership for e.g. patents, properties etc.
The
presence of such an architecture obsoletes the role of mediators which
guarantee the enforcement of these contracts. The system can automatically
enforce the contract on completion as the rules are coded beforehand. For
example, If we have a bet on whether the price of commodity such as wheat, this
can be coded on Blockchained platform and once both the parties agrees on the coded
conditions the bets can be executed when time comes reading the price from
exchange and transferring deliverables to the winner from loser.
A
unique feature of such an architecture is the resilience of the network against
the attackers. This resilience is intrinsic to the design of transaction
approval system (popularly known as proof-of-work) . This makes it beneficial
for the attackers to play by the rules rather than controlling the system as
the network grows. Such a built in resilience is another key feature in
modeling trust more robustly in the network.
The future of
markets and trading system:
The
present day HFT (High Frequency Trading) systems which relies on the speed of information
about price change from the Exchanges will see a paradigm shift in its
operations with the application of blockchain architecture. The really high
frequency traders which deals with nanosecond ticks data makes money on the
spread and liquidity of the markets. For traders located on various parts of the
world and having low economies of scale it becomes impossible to trade using
such methodologies. In
addition to this trading at such high frequency affect the market micro-structures leading to increased transaction cost for general public which still deals
trades with longer time periods.
The
blockchain architecture will provide power to general public to execute trades
at par with these giants. In addition to this, the performance of trades can be
made independent of the location from which it is executed as the nodes spread
across the globe.
Besides
this an electronic distributed transaction system comes with a larger benefits
of reduced transaction costs compared to centralized & regulated exchanges.
The
waves which started with the crypto-currencies has the ability to reshape the
economic activity across the globe as we see it. But it comes at a cost of
higher risk of attacks on such networks that deal with money and trust of
people. And a more robust model of trust in such a system will be the key.
References:
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