Background:
Blockchain is a distributed digital ledger that facilitates transactions to be completed on a peer-to-peer basis, without any centralized trust agency. In other words, blockchain is a decentralized, immutable, secure system of record, which participants can audit, inspect, retrieve, and update. It is also referred to as DLT (Distributed Ledger Technology) which can be visualized as a distributed ledger or a shared database accessed, updated, and participated by multiple users and participants. The key characteristics which make the distributed ledger unique is the ability of the participants to self-regulate and to maintain the central database without any need for trusted middlemen. Every participant can access an identical copy of the ledger; thus, any discrepancy in the ledger can be immediately verified or rectified. Based on a consensus protocol and the underlying cryptography, any additions or updates in the database can be validated by a network of participants called “nodes”. Nodes are the key participants in the blockchain ecosystem who confirm and validate the transactions in the system, thereby maintaining the integrity of the system.
The distributed digital ledger records transactions in a continuous series or "chain" of blocks which are cryptographically linked. This blockchain spreads over multiple copies across the network (i.e., computers). There is a cryptographic linkage between the consecutive blocks. All participating nodes on blockchain network receive up-to-date versions of the state of ledger when new transactions occur. Users may access and update the data, but they cannot amend or delete the existing data. This makes every transaction entry on the blockchain an immutable record, and a permanent and public trail of activities on blockchain, this makes blockchain a tamper-proof database. Any attempt to falsify the ledger requires a coordinated attempt to falsify the total number of ledger copies across all the nodes which effectively is an impossible probability to achieve. This gives blockchain the unique features of security, immutability, and transparency. These characteristics have given blockchain technology a plethora of use cases in the form of cryptocurrencies which can be programmed in multiple ways to record, tokenize, transact, exchange, and store the value on blockchain.
Key properties of Blockchain:
Characteristics such as immutable, auditability, shared database, multiple entities being authorized to make changes to the database, absence of trust and disintermediation makes the application scope of DLT wider and deeper for the financial markets.
Challenges with Blockchain Technology:
Despite having immense benefits and transformative potential several challenges exist in the blockchain ecosystem that need to be addressed to harvest the full benefits of blockchain applications. Some of these challenges are lack of scalability and interoperability, high transaction costs, disproportionate dominance of crypto currencies, etc.
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