Soon after the financial crisis of 2008, when the trustworthiness and veracity of many well-established institutions in our economy came to question, a White Paper named 'Bitcoin: A Peer-to-Peer Electronic Cash System' was published by an unknown computer scientist with a pseudonym Satoshi Nakamoto.
Blockchain is the building technology concept that is used in Bitcoin and any other crypto currencies. Blockchain technology have use cases in Financial sector, Supply Chain Management, Government agency applications and so on. Cryptocurrencies is only one among them.
Wondered why these currencies (Bitcoin, Ethereum, etc.) are called "crypto" currencies? Because, the main problem we are trying to solve here TRUST and SECURITY are achieved by Digital Cryptography - a computer science branch which deals with Encryption, Privacy and security of data (in our case the financial data).
In the first few sentences of the paper; it points the issue of trust as follows:
"Commerce on the Internet has come to rely almost exclusively on financial institutions serving as trusted third parties to process electronic payments. While the system works well enough for most transactions, it still suffers from the inherent weaknesses of the trust-based model".
And with Proposed solution:
"A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution".
A peer to peer means unverified, not monitored by any institution, except the participants of the network. Then how can this system of blockchain answer trust and security.
Anyone on the network can say “Hey... I've credited your account with $50”, even though they don’t own $50. And anyone can make an entry saying that Vijay Mallya has cleared his loan with SBI, even though he didn't.
Well, here is our concept of distributed ledger and sciences of cryptography kicks in.
Again, Distributed ledger and Blockchain or not same. You can say distributed ledger is one of the concepts realized by blockchain technology.
Think of a VERY SECURED Word or excel sheet that is shared to everyone in this world for editing and reading purpose. This analogy can best explain a distributed ledger.
Who can lie that s/he have $50 Million in bank account and get away with it, if every other person has a fact sheet to check?
Again, another problem, does this means whatever the transaction I do is visible to anyone? Answer will be NO. There are variations in the blockchain technology on based on what applications you intend to use it for. For example, data of city central welfare institution runs its transactions on Blockchain based system, all the citizens and stakeholders are eligible for the transparency it should offer.
Rather a Business to Business transaction need not to be exposed to its competitors. And transactions at individual citizen need not to be drilled up to the granular level of detail.
So basically, we have the flexibility for level of detail and available granularity of information.
Anyone can make entries in the ledger, what if person 'C' makes an entry saying that 'George gave Lincoln $5'. When any entry gets created on a ledger, the parties involving in transaction must sign a digital unforgeable signature. Why unforgeable - this is backed by the technology of 256-bit encryption. (What the heck is this 256-bit ?) Imagine to decode, forge or copy this, you have odds of one in 2^256.
Is that a small number? HAHA!! your probability of a correct guess is 1/115 quattuorvigintillion.
Do you want to see the number -?
Do you know what is the cost of computing power you required to crack this? Yeah, US agencies did the math. Its 1044 times the GWP, GROSS WORLD PRODUCT. This is a ridiculous amount someone should spend to steal even a 10 trillion dollars.
Finally, based on all these information, how can blockchain consortium or distributed and decentralized Information system REPLACE A CENTRAL BANK ?
Well, this is the most arguable topic in world of Financial Technology. Once the people started transacting in intangible currencies (now a days e-wallets) the level of traceability attained on "journey of a coin" is impeccable. Now, imagine an entire system running on nothing else but a mutual consensus of individuals participating in that network. Not only currency, the legality of contracts can be realized with smart contracts and other upcoming innovations.
Once the transformation is considerable in Monetary chains the Monetary policy makers will be embracing the new innovations and ultimately force the fiscal operations of a sovereign nation to attain the level of transparency and accountability they should have offered Centuries ago.