Imagine I have 1 pencil with me, I give it to you. You now have one pencil and I have zero. That was easy, right? ​

Close Observation on what happened:

My pencil was physically put into your hand. You know it happened. I was there, you were there – you touched it.

Miss Sarah or any other third party’s presence was not needed to confirm that the pencil went from me to you.

The pencil is yours! I can’t give you another pencil because I don’t have any. The pencil left my possession completely and is beyond my control. You are fully authorized for that pencil. You can give it to your friend, friends of friend and so on.

That’s how an in-person exchange functions. It is almost the same, whether I give you a pen, a book, or any other currency…

Coming Back to Pencils!

Now imagine I have 1 digital pencil. And I give you my digital pencil. Interesting isn’t it?

Now how do you state that digital pencil which used to be mine, is now yours only? Think about it! Not that simple, how do you know that I didn’t send that pencil to Miss Sarah as an email attachment first? Or your friend John? Or my friend Juliet too?

Maybe there were a couple of copies made of the digital pencil on my computer and shared. Maybe I put it up on the internet and innumerable people downloaded it.

As you see, this digital exchange is a bit of a problem and isn’t similar to sending physical pencils.

Few geeky computer scientists have named this dilemma as double-spending problem. But without worrying about it and understanding the probable solution to track these transactions.

Public Ledgers

Think about tracking the digital pencils in a ledger. It’s nothing but an accounting book where you track all transactions.

This ledger, since it’s digital, needs to live in its own world and have someone in charge of it.

Just like Blizzard, the guys who created the online game World of Warcraft, have a “digital ledger” of all the rare flaming fire swords that exist in the game. So, cool, someone like them could keep track of our digital pencils. Hurray – mystery half solved!

Another Side to the Mystery

Another side could be:

1) What if some guy over Blizzard could add a couple of digital pencils to his balance whenever he wants!

2) It’s not the same as it was the other day. It was just you and me then. How can I just hand over my digital pencil to you in the usual way?

Is there any way to closely replicate transaction digitally? Seems a bit tough…

Thinking of a Solution

What if this ledger is given to everybody? Instead of the ledger living on a Blizzard computer, it’ll stay in everybody’s computers. All the transactions that ever happened will be recorded, from all time, in digital pencils.

You can’t cheat it. You can’t send digital pencils you don’t have, because then it wouldn’t sync up with everybody else in the system. It’d be a tough to beat. Especially if it got really big.

Plus, it’s not controlled by one person, so I know there’s no one that can just decide to give himself more digital pencils. The rules of the system were already defined at the beginning.

The code and rules are open source and for the smart people like us to maintain, secure, improve, and check.

Anyone can participate in this network – updating the ledger and making sure it all checks out. For the trouble, you could get like 25 digital pencils as a reward. In fact, that’s the only way to create more digital pencils in the system.

Simplified quite a bit … But that system I explained exists. It’s called the Bitcoin protocol. And those digital pencils are the bitcoins within the system. And the system or public ledger as we call it, is nothing but, Blockchain Technology. So, you see how easy it was?

Blockchain & Bitcoin Facts

1) Its open source, with total number of pencils defined in the public ledger at the beginning. Everyone knows the exact amount that exists within the system, and is limited (scarce).

2) When I make an exchange I know that digital pencil certifiably left my possession and is now completely yours. It was not possible before, but now it will be updated and verified by the public ledger.

3) Because it’s a public ledger, I didn’t need Miss Sarah (third-party) to make sure I didn’t cheat, make extra copies for myself, or send pencils to someone else…

Within the system, the exchange of a digital pencil is now just like the exchange of a physical one. It’s now as good as seeing a physical pencil leave my hand and drop into your pocket, the exchange involved two people only.

In other words, it behaves like a physical object. But you know what’s cool? It’s still digital.

We can now deal with 1,000 pencils, or 1 million pencils, or even .0000001 pencils. It could be sent with a click of a button, and dropped in your digital pocket if I was in California and you were all the way in New York.

Implications of Blockchain Technology on Banking & FinTech

Blockchain being a single, authoritative record of confirmed transactions stored on the peer to peer bitcoin network. Even with top-notch digital encryption, if there is no central registry to show that certain bitcoins had already been “paid” to someone else, you could sign over the same coins to multiple people in a double-spend attack, like writing cheque for more money than you have in your account. Normally this is prevented by a central authority, the bank, keeping track of all the cheque you write and making sure it doesn’t exceed the amount you have in your account. The bank has to spend a lot of money protecting those central records, whether they are in a physical or digital form.

The blockchain fixes all such problems by creating single master registry of the already-cryptographically-secured bitcoin transfers, verifying them and locking them down in a highly competitive market called mining.

The financial sector always impeded for delays in clearance and settlement, blockchain technology will improve transaction speed while negating these concerns. Currently, plans to adopt such technology may be in the initial stage, but implementation of distributed ledger is unavoidable.

Apart from this, blockchain technology will empower users and clients allowing complete transparency of each and every transaction. Ultimately creating a trustless environment amongst all the entities involved.

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