The Bank of England's recent report on payment technologies and digital currencies regarded the blockchain technology that permits digital currencies a'genuine technological innovation'which may have far reaching implications for the financial industry.blockchain technology
So what's the block chain and why are y'all getting excited?
The block chain is an on the web decentralised public ledger of digital transactions that have taken place. It's digital currency's equivalent of a high street bank's ledger that records transactions between two parties.
Just like our modern banking system couldn't function with no way to record the exchanges of fiat currency between individuals, so too could an electronic network not function with no trust that comes from the capacity to accurately record the exchange of digital currency between parties.
It's decentralised in the sense that, unlike a traditional bank which is the only real holder of an electric master ledger of its account holder's savings the block chain ledger is shared among all members of the network and is not subject to the terms and conditions of any particular financial institution or country.blockchainsoftware
What exactly? Why is this preferable to your current banking system?
A decentralised monetary network ensures that, by sitting outside the evermore connected current financial infrastructure it's possible to mitigate the risks to be part of it when things go wrong. The 3 main risks of a centralised monetary system that were highlighted as a result of the 2008 financial crisis are credit, liquidity and operational failure. In the US alone since 2008 there were 504 bank failures due to insolvency, there being 157 in 2010 alone. Typically this kind of collapse does not jeopardize account holder's savings due to federal/national backing and insurance for the first few hundred thousand dollars/pounds, the banks assets usually being absorbed by another financial institution nevertheless the impact of the collapse may cause uncertainty and short-term problems with accessing funds. Since a decentralised system like the Bitcoin network is not determined by a bank to facilitate the transfer of funds between 2 parties but rather depends on its tens of thousands of users to authorise transactions it is more resilient to such failures, it having as numerous backups as there are members of the network to ensure transactions continue to be authorised in case of 1 person in the network'collapsing'(see below).
A bank do not need to fail however to impact on savers, operational I.T. failures such as for instance those who recently stopped RBS and Lloyds'customers accessing their accounts for weeks can impact on one's capability to withdraw savings, these being a result of a 30-40 year old legacy I.T. infrastructure that is groaning under the stress of checking up on the growth of customer spending and too little investment in general. A decentralised system is not reliant on this type of infrastructure, it instead being based on the combined processing power of its tens of thousands of users which ensures the capacity to scale up as necessary, a mistake in any area of the system not evoking the network to grind to a halt.
Liquidity is a final real danger of centralised systems, in 2001 Argentine banks froze accounts and introduced capital controls as a result of the debt crisis, Spanish banks in 2012 changed their small print to permit them to block withdrawals over a quantity and Cypriot banks briefly froze customer accounts and used around 10% of individual's savings to greatly help pay off the National Debt.
As Jacob Kirkegaard, an economist at the Peterson Institute for International Economics told the New York Times on the Cyrpiot example, "What the deal reflects is that being an unsecured as well as secured depositor in euro area banks is much less safe because it used to be." In a decentralised system payment takes place with out a bank facilitating and authorising the transaction, payments only being validated by the network where there are sufficient funds, there being no third party to stop a transaction, misappropriate it or devalue the total amount one holds.