Chain v Off-Chain: The Uncanny Relationship Between Traders and Blockchain
Have you ever wondered why the world of finance — traders in particular — quickly embraced blockchain technology?
In order to better understand the uncanny relationship we see between traders and blockchain today it’s imperative that we take a look at the evolution of financial systems.
The Evolution of Financial Transactions
A quick study of the history of finance and money and we discover that from antiquity people were already searching for effective ways to exchange goods and services. The earliest forms of IOUs were locally sourced valuable mediums such as cowrie shells.
In America, the IOUs soon took the form of paper bills which were backed by the gold standard up until 1973.
Centralization of currency and elimination of the gold standard brought with it a sense of irresponsibility as more and more money could be printed at will.
Why is all of this important?
Because it sets us up to see how and why over the years people began to lose faith in centralized financial systems and how blockchain technology with its censorship-resistant, borderless, and neutral aspects came in like a promising alternative.
In a sense, traders have always been the catalysts behind the mass adoption of new value systems. So, it is hardly surprising that even in this 21st-century financial revolution they are also key players in the disruption across monetary systems.
But, why exactly are traders so bent on using blockchain technology? To answer we must turn to what sets blockchain apart or blockchain’s major core elements.
Bitcoin’s Defining Elements
There are four main traits that distinguish blockchain and these are:
- Peer-to-peer network
- Consensus algorithms
- Punishment and reward systems
(i) Peer-to-peer network
This refers to the network of computers or nodes that make up the entire blockchain network. What’s neat about this P2P network is that it is open to all.
With a network that’s accessible to all, the question of security becomes valid. Fortunately, cryptography is used to secure communications in cyberspace which can be a pretty hostile environment. (You only have to look at how the rate of cybercrime incidents has escalated to appreciate the security concerns of traders).
(iii) Consensus algorithms
With a network that’s literally global, you’ve got to have rules that govern the technology and provide immutability of records. Prior to changes being made, users on the blockchain must satisfy one of four requirements. They must demonstrate either:
- Proof of importance
- Proof of work
- Proof of activity
- Proof of stake
(iv) Punishment and rewards
Now that you’ve got an open network, barred to none, and secure, what can be done to encourage everyone to abide by the rules? Well, developers of blockchain technology have put in place a rewards and punishment system.
Rewards exist as coins known as tokens and are awarded to entities that obey the rules of the technology. Bad actors that try to disrupt, cheat or manipulate the system are penalized through the loss of tokens.
Trading is a business fraught with risk and one that requires trust. Blockchain prides itself on cutting edge security — Bitcoin’s blockchain for example has never been hacked since its first trade in July 2010.
Among the core reasons blockchain has been highly favored by traders is because it is open to all, borderless, decentralized, and hence neutral with no censorship.
If you would like to learn more about how traders are depending on blockchain technology and using it in a practical manner be sure to read our other blogs in this Chain v Off-Chain series.