Published in Association with Indian Institute of Management, Ahmedabad
Currently, the financial system depends on a number of centralized trusted intermediaries. Until a decade ago, it was commonly assumed that these central hubs were extremely unlikely to fail. More importantly, it was supposed that they were too big to fail (TBTF), so that the government would step in and bail them out if they did fail. The Global Financial Crisis of 2007–2008 shattered these assumptions as many large banks in the most advanced economies of the world either failed or were very reluctantly bailed out.
Repeated instances of hacking of the computers of large financial institutions is another factor that has destroyed trust. When trust in the central hubs of finance is being increasingly questioned, decentralized systems like the blockchain that reduce the need for such trust become attractive.
The blockchain is a decentralized, replicated, tamper resistant (immutable), append-only ledger of transactions.
Benefits of the blockchain
- A full audit trail is available to all participants. Moreover, the inbuilt cryptographic integrity checks ensure that this audit trail is verified by all of them. The result is a significantly lower need for trust in central hubs.
- Second, the blockchain is partition resistant: if a few nodes fail or are disconnected from the network, the rest of the nodes can continue to function because they all have a copy of all the data.
Blockchain is still an evolving and therefore immature technology; it is hard to predict how successful it would be outside its only proven use domain of cryptocurrencies. History teaches us that radically new technologies take many decades to realize their full potential. Thus it is perfectly possible that blockchain would prove revolutionary in the years to come despite its patchy success so far. Read more…
Blockchain in Finance
Jayanth Rama Varma
First Published March 29, 2019
Vikalpa: The Journal for Decision Makers