Ripple, a blockchain based technology startup, is sitting on a venture capital of US$ 93 million, sourced from an interesting mix of funders ranging from Google Ventures and Seagate Technology to a horde of banks like Standard Chartered. Ripple’s network already has 15 global banks, and 10 more are waiting to board the train. Shanghai Huarui Bank, a privately-owned bank in China, is working with Ripple to implement a commercial cross-border payment service, so customers can transfer money internationally in real time. The bank feels it will help Chinese families to send money to their children studying abroad.

What is Ripple’s offering that promises such confidence in the network? What is this technology, which interests not just banks but Web giants and the tech industry as well? In two words, the answer is blockchain technology.

Bank investment in blockchain technology is expected to reach US$ 400 million by 2019. This is because of the confidence that blockchain technology has the potential to ensure completely secure and tamper-proof transactions, in scenarios ranging from smart contracts and real-time international money transfer to contactless payments. Early blockchain systems had their share of problems like settlement lag and lack of privacy, but the current generation of startups is bent upon delivering enterprise-grade blockchain.

Demystifying the blockchain

You do not have to feel bad if you have already Googled for blockchain and not made head or tail of it. Even finance and tech experts take some time to understand this concept, and even more time to explain it confidently. As with most nascent technologies, it is difficult to differentiate the technology from its applications, and understand it for what it really is, what it is currently used for and what else it can do.

A blockchain is a decentralised, distributed public ledger that records, validates and secures transactions in a system. As is obvious from the name, a blockchain is made of several blocks. Each block contains encrypted data pertaining to a transaction, along with a hash that draws upon the previous block in the chain.

This way of connecting each cryptographically-hashed block with the previous one ensures that all data in the chain remains secure and unchanged. There is no single owner of any transaction—each transaction is authorised and backed by thousands of computers (called miners)—and so there is no single point that can be attacked or hacked.

That is what makes blockchain based transactions secure and tamper-proof. Using blockchain technology, it is possible to carry out peer-to-peer transactions over the Internet, without requiring middlemen like payment gateways to authorise transactions.

“The block records some or all of the current transactions, and once it is completed, the block is time-stamped and hashed into the permanent database or blockchain.

“The blocks are linked to each other in a linear, chronological order where each new block contains the hashed details of the previous block. This creates a chain of transactional information, so that every block that is added protects information in the previous one,” explains Kumar Abhishek, founder and CEO of ToneTag, a sound based proximity communication provider that enables contactless proximity communication, mobile payments, location based services, customer engagement services and more. The company recently adopted blockchain technology to make its transactions more secure.

Do Bitcoin, blockchain and distributed ledger technology (DLT) mean the same?

People tend to use these terms interchangeably, much like they use Xerox to mean photocopier, but these are not the same.

A distributed ledger refers to a consensus of replicated, shared and synchronised data that is distributed across multiple locations, often spanning several institutions and individuals across the globe.

Bitcoin is one of the most well-known and earliest proven applications of DLT. It is a decentralised digital currency that enables you to make instant payments to anyone, anywhere in the world, without requiring any middlemen.

It is decentralised, that is, transaction management and money issuance are carried out collectively by the network. This is where the blockchain comes in. Devised as a method to keep track of all confirmed Bitcoin transactions, the blockchain is one type of distributed ledger in which data is distributed as blocks that form a linear chain with each one connected to the previous.

As explained in Bitcoin wiki, “Bitcoin uses public-key cryptography, peer-to-peer networking and proof-of-work to process and verify payments. Bitcoins are sent (or signed over) from one address to another with each user potentially having many, many addresses. Each payment transaction is broadcast to the network and included in the blockchain so that the included bitcoins cannot be spent twice. After an hour or two, each transaction is locked in time by the massive amount of processing power that continues to extend the blockchain. Using these techniques, Bitcoin provides a fast and extremely reliable payment network that anyone can use.”