UNIT II

Digital financial services (DFS) comprise a broad range of financial services accessed and
delivered through digital channels, including payments, credit, savings, remittances and
insurance. It also includes mobile financial services.
A platform for policymakers to discuss regulatory issues relating to digital financial
services, including mobile financial services, branchless banking, electronic money and
digital payment solutions.
DFSWG aims to promote digital financial services as a major driver of greater financial
inclusion in emerging and developing countries.
It encourages policymakers to exchange experiences to develop a shared understanding of the
risks in emerging digital financial services business models. At the same time, it works with
global standard-setting bodies in order to represent the voice of developing and emerging
countries.
“Digital financial services contributed to increasing financial inclusion of women, but in
some countries, it has been disproportional. Even though access to finance for women is
rising, the gender gap is still persistent” (Dr. Alfred Hannig, Executive Director, AFI).
The key to success in financially empowering women is through gathering data, analysing
insight and continuously crafting effective strategies to engage and include women.
DIGITAL PAYMENT REGULATIONS IN INDIA: -
Various regulatory authorities in India control the digital payment industry, including the
RBI, the NPCI, and the Ministry of Electronics and Information Technology (“MeitY”).
Reserve Bank of India and National Payments Corporation of India
The RBI regulates and supervises digital payment systems in India, such as electronic cash
transfers, prepaid payment instruments, and card payments. It offers rules and regulations
concerning digital payment system security, risk management, client protection, and other
factors. The NPCI operates and manages payment systems such as UPI, Immediate Payment
Service (“IMPS”), and Bharat Bill Payment System (“BBPS”). It is in charge of the creation
and operation of these systems, as well as assuring their efficiency and security and resolving
any payment-related issues.
Payment and Settlement Systems Act, 2007
All digital payments in India, including those made using mobile wallets, prepaid cards, and
online platforms, are governed under the Payment and Settlement Systems Act, 2007. The act
creates a framework for oversight and monitoring of digital payment service providers, as
well as standards for client protection and dispute resolution. It also authorizes and supervises
payment system operators, as well as issues regulations to ensure the safety and efficiency of
the digital payments industry.
Ministry of Electronics and Information Technology
MeitY is in charge of developing the country’s digital infrastructure, which includes e-
governance, digital literacy, and digital payments. It collaborates with other regulatory bodies
and industry stakeholders to promote digital payment system adoption in India.
Pradhan Mantri Jan Dhan Yojana
With the introduction of new payment systems and the execution of various initiatives to
promote digital payments, India’s legislative framework for digital payments has undergone
considerable changes in recent years. To improve financial inclusion and promote the usage
of digital payments, the government has established many projects, including Digital India
and the Pradhan Mantri Jan Dhan Yojana (“PMJDY”).
The Indian government’s implementation of e-RUPI, a cashless and contactless digital
payment option, is intended to improve the effectiveness of Direct Benefit Transfer (“DBT”)
in the country. These initiatives have built a solid ecosystem for digital finance, paving the
way for a cashless economy.
Overall, India’s regulatory environment for digital payments is strong and expanding, with a
focus on maintaining security, protecting customers, and encouraging innovation and the use
of digital payment systems.
Security and Privacy pertaining to digital payments in India
In India, security and privacy are critical features of digital payments. The RBI has issued
guidelines for digital payment security, including the adoption of two-factor authentication
and encryption for sensitive data.
Furthermore, the Draft Digital Personal Data Protection Bill, 2022 seeks to govern the
collection, storage, and use of personal data by companies involved in digital payments. In
addition, the government released the National Cyber Security Policy 2013, which aims to
defend key information infrastructure from cyber threats. Despite these precautions, data
breaches, phishing attempts, and identity theft continue to be a problem for digital payments
in India. Consumers must be aware of these risks and take the required safeguards, such as
using secure payment methods and monitoring their transaction history regularly.
Requirements and Compliance Guidelines for Merchants
To maintain the security of cardholder data during digital transactions, merchants in India
must adhere to the Payment Card Industry Data Security Standards (“PCI DSS”). The PCI
DSS framework requires merchants to establish a secure network, keep cardholder data
secure, monitor and test security systems regularly, and maintain an information security
policy.
Merchants must also follow the RBI’s KYC standards, which require them to verify the name
and address of their clients before onboarding them. Compliance with these principles
protects merchants from fraud and data breaches while also increasing customer confidence
in the digital payment system.
Trends and Future Outlook
The digital payments landscape in India is expected to continue its growth trajectory in the
coming years. With initiatives such as the UPI, BharatQR, and the adoption of digital wallets
in India, the usage of digital payments is likely to increase further. The COVID-19 pandemic
has also accelerated the shift towards digital payments, as people increasingly avoid physical
contact with cash.
In terms of future outlook, there is a growing interest in using emerging technologies such as
blockchain and artificial intelligence to enhance the security and efficiency of digital
payments. The government is also expected to continue its focus on promoting digital
payments through various initiatives and policies. Overall, the future of digital payments in
India looks promising, with the potential to transform the payments landscape and drive
financial inclusion.
TYPES OF DIGITAL PAYMENT: -
Various digital payments are available to promote cashless transactions and convert India into
a cashless society. Some of the digital payment methods are:
 Banking cards
 Point of sale (PoS)
 Internet banking
 USSD (Unstructured Supplementary Service Data)
 UPI (Unified Payment Interface )
 Mobile banking
 AEPS (Aadhaar Enabled Payment System)
 Mobile wallets
 Banks prepaid cards
 Micro-ATMs
 BHIM (Bharat Interface for Money) app
1. Banking cards: Cards are one of the most extensively used digital payment methods,
offering a variety of features and benefits such as payment security, convenience, and so on.
Debit/credit or prepaid banking cards have the advantage of being used for various sorts of
digital payments. Customers can keep card information in digital payment apps or mobile
wallets to make a cashless payment. Among others, Visa, Rupay, and MasterCard are some
of the most reputable and well-known card payment systems. Banking cards can be used for
online shopping, digital payment apps, point-of-sale machines, and internet transactions,
among other things. These banking cards contain the card number, cardholder’s name, smart
chips, expiration date, card holder’s signature and the security code, i.e., the CVV.
How to get a bank card?
You need to apply for the card in your respective bank by filling up a form requesting this
service. The card will be activated within a week, and you will be given a 4-digit pin that may
be used for all transactions if you apply with your particular bank and provide Know Your
Customer (KYC) details.

2. Point of sale (POS): An important component of a point of purchase is the location where
a client makes a payment for goods or services and where sales taxes may be due. It could be
a physical store with PoS terminals and systems processing card payments or a virtual sales
point like a computer or mobile electronic device. The merchant may utilize various
technologies such as weighing scales, barcode scanners, and cash registers to calculate the
amount due by a consumer (or the more advanced "POS cash registers", which are sometimes
also called "POS systems. Payment terminals, touch displays, and other hardware and
software solutions are available to make a payment.
Also Read: Digital Khata and How Khatabook Helps Businesses - Khatabook
3. Internet banking: Also known as net banking or online banking, it is a digital
payment system that allows a bank or financial institution's customers to conduct financial
and non-financial transactions through the internet. Customers can use this service to access
practically every banking service that was previously only available at a local branch, such as
fund transfers, deposits, and online bill payments. Anyone who has an active bank account
and has registered for internet banking services can use it. A consumer who registers for
online banking services does not need to visit the bank every time they need a banking
service, making it a convenient process of banking. User/Customer IDs and passwords are
used to protect net banking portals. There are different services included in internet banking
such as account balance check, view bank account statements, NEFT & RTGS Funds
Transfer, IMPS Fund Transfer, issuance of cheque book and many other services as well.
Funds can be transferred through internet banking by three methods namely NEFT, RTGS
and IMPS.
NEFT-
RTGS-
IMPS-
4. USSD: Another digital payment technique is by dialling *99#, which can be used to make
mobile payments without downloading an app. These forms of payments can be done even if
you don't have access to mobile data or the internet. The USSD and the National Payments
Corporation of India (NPCI) support this service. The primary goal of this form of digital
payment service is to foster the participation of underprivileged groups of society in the
digital payment systems and to integrate them into mainstream banking. This service can be
used to make fund transfers, see bank statements, and inquire about balances. This type of
payment method also has the advantage of being available in Hindi.
What Is *99# and How to Use It?
• Customers can access this service by dialling *99#, after which they can utilize their
mobile to interact with an interactive audio menu.
• The customer's mobile number must match the one linked to the bank account to use the
service.
• The next step is to register for USSD, MMID (Mobile Number Identifier), and MPIN
(Mobile Payment Identification Number) so that this service can be availed.
5. AEPS: AEPS can be utilised for various banking operations, including balance inquiries,
cash withdrawals, cash deposits, payment transactions, and Aadhaar to Aadhaar fund
transfers, among others. Based on Aadhaar verification, all transactions are processed through
a banking correspondent. There is no need to go to a branch, produce debit or credit cards, or
even sign a paper in person. Only if your Aadhaar number is registered with the bank where
you have an account can you use this service. The NPCI has taken another step to promote
digital payments in the country through AEPS.
6. UPI: UPI is an interoperable digital payment system that allows any consumer with a bank
account to send and receive money via a UPI-enabled app. The service allows users to link
multiple bank accounts to a UPI app on their smartphone, allowing them to seamlessly
conduct financial transfers and collect requests 24 hours a day, 365 days a year. UPI's key
benefit allows users to send money without a bank account or an IFSC number.
All you'll need is a Virtual Payment Address to get started (VPA). There are numerous UPI
apps available on the market, and they are compatible with both Android and iOS devices. A
valid bank account and a registered cellphone number linked to the same bank account are
required to access the service. There are no fees associated with using UPI. Some of the
examples of UPI enabled apps include PhonePe, Paytm, Bhim App, Google Pay, Google Tez,
MobiKwik etc.
7. Mobile banking: Making financial transactions on a mobile device is mobile banking (cell
phone, tablet, etc.). This activity can range from a bank sending fraud or usage activities to a
client's cell phone to paying bills or moving money internationally. The ability to bank from
anywhere and at any time is one of the benefits of mobile banking. Compared to banking in
person or on a computer, security concerns and a limited range of capabilities are its
disadvantages.
A virtual wallet that holds payment card information on a mobile device is a mobile wallet.
Mobile wallets are a handy way for a user to make in-store payments, and they can be used at
any retailer that the mobile wallet service provider has listed.
8. Bank prepaid card: A prepaid card can make purchases. You purchase a card with funds
pre-loaded on it. The card can then be used to make purchases up to that amount. A prepaid
card is sometimes known as a stored-value card or a prepaid debit card. Prepaid cards are
available at a variety of stores and online. The Visa or MasterCard logo can be found on
many prepaid cards. These prepaid cards have the appearance of a credit card.
9. Micro ATMs: They are card swipe terminals that allow banks to access their core banking
system from a distance. A fingerprint scanner is included with this machine. In other words,
micro-ATMs are portable point-of-sale machines used to distribute cash in areas where bank
branches are not accessible. Micro ATMs, which are comparable to point-of-sale (PoS)
terminals, are a type of mobile banking device that may be used at home.
10. Bharat Interface for Money (BHIM): The National Payment Corporation of India
created BHIM (NPCI). It is a mobile-based program that enables rapid, safe, and dependable
cashless payments. BHIM is based on the Unified Payment Interface (UPI), allowing direct
bank-to-bank e-payments. It works with other Unified Payment Interface (UPI) applications
and bank accounts. The Unified Payment Interface (UPI) is an instant payment system built
on top of the IMPS infrastructure that allows you to send money between any two bank
accounts in real-time.
CRYPTOCURRENCY – Meaning and Definition
Cryptocurrency, sometimes called crypto-currency or crypto, is any form of currency that
exists digitally or virtually and uses cryptography to secure transactions. Cryptocurrencies
don't have a central issuing or regulating authority, instead using a decentralized system to
record transactions and issue new units.
What is cryptocurrency?
Cryptocurrency is a digital payment system that doesn't rely on banks to verify
transactions. It’s a peer-to-peer system that can enable anyone anywhere to send and receive
payments. Instead of being physical money carried around and exchanged in the real world,
cryptocurrency payments exist purely as digital entries to an online database describing
specific transactions. When you transfer cryptocurrency funds, the transactions are recorded
in a public ledger. Cryptocurrency is stored in digital wallets.
Cryptocurrency received its name because it uses encryption to verify transactions. This
means advanced coding is involved in storing and transmitting cryptocurrency data between
wallets and to public ledgers. The aim of encryption is to provide security and safety.
The first cryptocurrency was Bitcoin, which was founded in 2009 and remains the best
known today. Much of the interest in cryptocurrencies is to trade for profit, with speculators
at times driving prices skyward.

How does cryptocurrency work?

Cryptocurrencies run on a distributed public ledger called blockchain, a record of all
transactions updated and held by currency holders.
Units of cryptocurrency are created through a process called mining, which involves using
computer power to solve complicated mathematical problems that generate coins. Users can
also buy the currencies from brokers, then store and spend them using cryptographic wallets.
If you own cryptocurrency, you don’t own anything tangible. What you own is a key that
allows you to move a record or a unit of measure from one person to another without a
trusted third party.
Although Bitcoin has been around since 2009, cryptocurrencies and applications of
blockchain technology are still emerging in financial terms, and more uses are expected in the
future. Transactions including bonds, stocks, and other financial assets could eventually be
traded using the technology.
Cryptocurrency examples
There are thousands of cryptocurrencies. Some of the best known include:
Bitcoin:
Founded in 2009, Bitcoin was the first cryptocurrency and is still the most commonly traded.
The currency was developed by Satoshi Nakamoto – widely believed to be a pseudonym for
an individual or group of people whose precise identity remains unknown.
Ethereum:
Developed in 2015, Ethereum is a blockchain platform with its own cryptocurrency, called
Ether (ETH) or Ethereum. It is the most popular cryptocurrency after Bitcoin.
Litecoin:
This currency is most similar to bitcoin but has moved more quickly to develop new
innovations, including faster payments and processes to allow more transactions.
Ripple:
Ripple is a distributed ledger system that was founded in 2012. Ripple can be used to track
different kinds of transactions, not just cryptocurrency. The company behind it has worked
with various banks and financial institutions.
Non-Bitcoin cryptocurrencies are collectively known as “altcoins” to distinguish them from
the original.
How to buy cryptocurrency?
You may be wondering how to buy cryptocurrency safely. There are typically three steps
involved. These are:
Step 1: Choosing a platform
The first step is deciding which platform to use. Generally, you can choose between a
traditional broker or dedicated cryptocurrency exchange:
 Traditional brokers. These are online brokers who offer ways to buy and sell
cryptocurrency, as well as other financial assets like stocks, bonds, and ETFs. These
platforms tend to offer lower trading costs but fewer crypto features.
 Cryptocurrency exchanges. There are many cryptocurrency exchanges to choose
from, each offering different cryptocurrencies, wallet storage, interest-bearing account
options, and more. Many exchanges charge asset-based fees.
When comparing different platforms, consider which cryptocurrencies are on offer, what fees
they charge, their security features, storage and withdrawal options, and any educational
resources.
Step 2: Funding your account
Once you have chosen your platform, the next step is to fund your account so you can begin
trading. Most crypto exchanges allow users to purchase crypto using fiat (i.e., government-
issued) currencies such as the US Dollar, the British Pound, or the Euro using their debit or
credit cards – although this varies by platform.
Crypto purchases with credit cards are considered risky, and some exchanges don't support
them. Some credit card companies don't allow crypto transactions either. This is because
cryptocurrencies are highly volatile, and it is not advisable to risk going into debt — or
potentially paying high credit card transaction fees — for certain assets.
Some platforms will also accept ACH transfers and wire transfers. The accepted payment
methods and time taken for deposits or withdrawals differ per platform. Equally, the time
taken for deposits to clear varies by payment method.
An important factor to consider is fees. These include potential deposit and withdrawal
transaction fees plus trading fees. Fees will vary by payment method and platform, which is
something to research at the outset.
Step 3: Placing an order
You can place an order via your broker's or exchange's web or mobile platform. If you are
planning to buy cryptocurrencies, you can do so by selecting "buy," choosing the order type,
entering the amount of cryptocurrencies you want to purchase, and confirming the order. The
same process applies to "sell" orders.
There are also other ways to invest in crypto. These include payment services like PayPal,
Cash App, and Venmo, which allow users to buy, sell, or hold cryptocurrencies. In addition,
there are the following investment vehicles:
 Bitcoin trusts: You can buy shares of Bitcoin trusts with a regular brokerage account.
These vehicles give retail investors exposure to crypto through the stock market.
 Bitcoin mutual funds: There are Bitcoin ETFs and Bitcoin mutual funds to choose
from.
 Blockchain stocks or ETFs: You can also indirectly invest in crypto through
blockchain companies that specialize in the technology behind crypto and crypto
transactions. Alternatively, you can buy stocks or ETFs of companies that use
blockchain technology.
How to store cryptocurrency?
Once you have purchased cryptocurrency, you need to store it safely to protect it from hacks
or theft. Usually, cryptocurrency is stored in crypto wallets, which are physical devices or
online software used to store the private keys to your cryptocurrencies securely. Some
exchanges provide wallet services, making it easy for you to store directly through the
platform. However, not all exchanges or brokers automatically provide wallet services for
you.
There are different wallet providers to choose from. The terms “hot wallet” and “cold wallet”
are used:
 Hot wallet storage: "hot wallets" refer to crypto storage that uses online software to
protect the private keys to your assets.
 Cold wallet storage: Unlike hot wallets, cold wallets (also known as hardware
wallets) rely on offline electronic devices to securely store your private keys.
What can you buy with cryptocurrency?
When it was first launched, Bitcoin was intended to be a medium for daily transactions,
making it possible to buy everything from a cup of coffee to a computer or even big-ticket
items like real estate. That hasn’t quite materialized and, while the number of institutions
accepting cryptocurrencies is growing, large transactions involving it are rare. Even so, it is
possible to buy a wide variety of products from e-commerce websites using crypto. Here are
some examples:
Technology and e-commerce sites: Several companies that sell tech products accept crypto
on their websites, such as newegg.com, AT&T, and Microsoft. Overstock, an e-commerce
platform, was among the first sites to accept Bitcoin. Shopify, Rakuten, and Home Depot also
accept it.
Luxury goods: Some luxury retailers accept crypto as a form of payment. For example,
online luxury retailer Bit dials offers Rolex, Patek Philippe, and other high-end watches in
return for Bitcoin.
Cars: Some car dealers – from mass-market brands to high-end luxury dealers – already
accept cryptocurrency as payment.
Insurance: In April 2021, Swiss insurer AXA announced that it had begun accepting Bitcoin
as a mode of payment for all its lines of insurance except life insurance (due to regulatory
issues). Premier Shield Insurance, which sells home and auto insurance policies in the US,
also accepts Bitcoin for premium payments.
If you want to spend cryptocurrency at a retailer that doesn’t accept it directly, you can use a
cryptocurrency debit card, such as BitPay in the US.
BLOCKCHAIN
What is blockchain technology?
Blockchain technology is an advanced database mechanism that allows transparent
information sharing within a business network. A blockchain database stores data in blocks
that are linked together in a chain. The data is chronologically consistent because you cannot
delete or modify the chain without consensus from the network. As a result, you can use
blockchain technology to create an unalterable or immutable ledger for tracking orders,
payments, accounts, and other transactions. The system has built-in mechanisms that prevent
unauthorized transaction entries and create consistency in the shared view of these
transactions.
Why is blockchain important?
Traditional database technologies present several challenges for recording financial
transactions. For instance, consider the sale of a property. Once the money is exchanged,
ownership of the property is transferred to the buyer. Individually, both the buyer and the
seller can record the monetary transactions, but neither source can be trusted. The seller can
easily claim they have not received the money even though they have, and the buyer can
equally argue that they have paid the money even if they haven’t.
To avoid potential legal issues, a trusted third party has to supervise and validate transactions.
The presence of this central authority not only complicates the transaction but also creates a
single point of vulnerability. If the central database was compromised, both parties could
suffer.
Blockchain mitigates such issues by creating a decentralized, tamper-proof system to record
transactions. In the property transaction scenario, blockchain creates one ledger each for the
buyer and the seller. All transactions must be approved by both parties and are automatically
updated in both of their ledgers in real time. Any corruption in historical transactions will
corrupt the entire ledger. These properties of blockchain technology have led to its use in
various sectors, including the creation of digital currency like Bitcoin.
How do different industries use blockchain?
Blockchain is an emerging technology that is being adopted in innovative manner by various
industries. We describe some use cases in different industries in the following subsections:
Energy
Energy companies use blockchain technology to create peer-to-peer energy trading platforms
and streamline access to renewable energy. For example, consider these uses:
 Blockchain-based energy companies have created a trading platform for the sale of
electricity between individuals. Homeowners with solar panels use this platform to sell
their excess solar energy to neighbors. The process is largely automated: smart meters
create transactions, and blockchain records them.
 With blockchain-based crowd funding initiatives, users can sponsor and own solar
panels in communities that lack energy access. Sponsors might also receive rent for
these communities once the solar panels are constructed.
Finance
Traditional financial systems, like banks and stock exchanges, use blockchain services to
manage online payments, accounts, and market trading. For example, Singapore Exchange
Limited, an investment holding company that provides financial trading services throughout
Asia, uses blockchain technology to build a more efficient interbank payment account. By
adopting blockchain, they solved several challenges, including batch processing and manual
reconciliation of several thousand financial transactions.
Media and entertainment
Companies in media and entertainment use blockchain systems to manage copyright data.
Copyright verification is critical for the fair compensation of artists. It takes multiple
transactions to record the sale or transfer of copyright content. Sony Music Entertainment
Japan uses blockchain services to make digital rights management more efficient. They have
successfully used blockchain strategy to improve productivity and reduce costs in copyright
processing.
Retail
Retail companies use blockchain to track the movement of goods between suppliers and
buyers. For example, Amazon retail has filed a patent for a distributed ledger technology
system that will use blockchain technology to verify that all goods sold on the platform are
authentic. Amazon sellers can map their global supply chains by allowing participants such as
manufacturers, couriers, distributors, end users, and secondary users to add events to the
ledger after registering with a certificate authority.
What are the features of blockchain technology?
Blockchain technology has the following main features:
Decentralization
Decentralization in blockchain refers to transferring control and decision making from a
centralized entity (individual, organization, or group) to a distributed network. Decentralized
blockchain networks use transparency to reduce the need for trust among participants. These
networks also deter participants from exerting authority or control over one another in ways
that degrade the functionality of the network.
Immutability
Immutability means something cannot be changed or altered. No participant can tamper with
a transaction once someone has recorded it to the shared ledger. If a transaction record
includes an error, you must add a new transaction to reverse the mistake, and both
transactions are visible to the network.
Consensus
A blockchain system establishes rules about participant consent for recording transactions.
You can record new transactions only when the majority of participants in the network give
their consent.
What are the key components of blockchain technology?
Blockchain architecture has the following main components:
A distributed ledger
A distributed ledger is the shared database in the blockchain network that stores the
transactions, such as a shared file that everyone in the team can edit. In most shared text
editors, anyone with editing rights can delete the entire file. However, distributed ledger
technologies have strict rules about who can edit and how to edit. You cannot delete entries
once they have been recorded.
Smart contracts
Companies use smart contracts to self-manage business contracts without the need for an
assisting third party. They are programs stored on the blockchain system that run
automatically when predetermined conditions are met. They run if-then checks so that
transactions can be completed confidently. For example, a logistics company can have a
smart contract that automatically makes payment once goods have arrived at the port.
Public key cryptography
Public key cryptography is a security feature to uniquely identify participants in the
blockchain network. This mechanism generates two sets of keys for network members. One
key is a public key that is common to everyone in the network. The other is a private key that
is unique to every member. The private and public keys work together to unlock the data in
the ledger.
For example, John and Jill are two members of the network. John records a transaction that is
encrypted with his private key. Jill can decrypt it with her public key. This way, Jill is
confident that John made the transaction. Jill's public key wouldn't have worked if John's
private key had been tampered with.
How does blockchain work?
While underlying blockchain mechanisms are complex, we give a brief overview in the
following steps. Blockchain software can automate most of these steps:
Step 1 – Record the transaction
A blockchain transaction shows the movement of physical or digital assets from one party to
another in the blockchain network. It is recorded as a data block and can include details like
these:
 Who was involved in the transaction?
 What happened during the transaction?
 When did the transaction occur?
 Where did the transaction occur?
 Why did the transaction occur?
 How much of the asset was exchanged?
 How many pre-conditions were met during the transaction?
Step 2 – Gain consensus
Most participants on the distributed blockchain network must agree that the recorded
transaction is valid. Depending on the type of network, rules of agreement can vary but are
typically established at the start of the network.
Step 3 – Link the blocks
Once the participants have reached a consensus, transactions on the blockchain are written
into blocks equivalent to the pages of a ledger book. Along with the transactions, a
cryptographic hash is also appended to the new block. The hash acts as a chain that links the
blocks together. If the contents of the block are intentionally or unintentionally modified, the
hash value changes, providing a way to detect data tampering.
Thus, the blocks and chains link securely, and you cannot edit them. Each additional block
strengthens the verification of the previous block and therefore the entire blockchain. This is
like stacking wooden blocks to make a tower. You can only stack blocks on top, and if you
remove a block from the middle of the tower, the whole tower breaks.
Step 4 – Share the ledger
The system distributes the latest copy of the central ledger to all participants.
What are the types of blockchain networks?
There are four main types of decentralized or distributed networks in the blockchain:
Public blockchain networks: Public blockchains are permissionless and allow everyone to
join them. All members of the blockchain have equal rights to read, edit, and validate the
blockchain. People primarily use public blockchains to exchange and mine cryptocurrencies
like Bitcoin, Ethereum, and Litecoin.
Private blockchain networks: A single organization controls private blockchains, also
called managed blockchains. The authority determines who can be a member and what rights
they have in the network. Private blockchains are only partially decentralized because they
have access restrictions. Ripple, a digital currency exchange network for businesses, is an
example of a private blockchain.
Hybrid blockchain networks: Hybrid blockchains combine elements from both private and
public networks. Companies can set up private, permission-based systems alongside a public
system. In this way, they control access to specific data stored in the blockchain while
keeping the rest of the data public. They use smart contracts to allow public members to
check if private transactions have been completed. For example, hybrid blockchains can grant
public access to digital currency while keeping bank-owned currency private.
Consortium blockchain networks: A group of organizations governs consortium
blockchain networks. Preselected organizations share the responsibility of maintaining the
blockchain and determining data access rights. Industries in which many organizations have
common goals and benefit from shared responsibility often prefer consortium blockchain
networks. For example, the Global Shipping Business Network Consortium is a not-for-profit
blockchain consortium that aims to digitize the shipping industry and increase collaboration
between maritime industry operators.
What are blockchain protocols?
The term blockchain protocol refers to different types of blockchain platforms that are
available for application development. Each blockchain protocol adapts the basic blockchain
principles to suit specific industries or applications. Some examples of blockchain protocols
are provided in the following subsections:
Hyperledger fabric: Hyperledger Fabric is an open-source project with a suite of tools and
libraries. Enterprises can use it to build private blockchain applications quickly and
effectively. It is a modular, general-purpose framework that offers unique identity
management and access control features. These features make it suitable for various
applications, such as track-and-trace of supply chains, trade finance, loyalty and rewards, and
clearing settlement of financial assets.
Ethereum: Ethereum is a decentralized open-source blockchain platform that people can use
to build public blockchain applications. Ethereum Enterprise is designed for business use
cases.
Corda: Corda is an open-source blockchain project designed for business. With Corda, you
can build interoperable blockchain networks that transact in strict privacy. Businesses can use
Corda's smart contract technology to transact directly, with value. Most of its users are
financial institutions.
Quorum: Quorum is an open-source blockchain protocol that is derived from Ethereum. It is
specially designed for use in a private blockchain network, where only a single member owns
all the nodes, or in a consortium blockchain network, where multiple members each own a
portion of the network.
How did blockchain technology evolve?
Blockchain technology has its roots in the late 1970s when a computer scientist named Ralph
Merkle patented Hash trees or Merkle trees. These trees are a computer science structure for
storing data by linking blocks using cryptography. In the late 1990s, Stuart Haber and W.
Scott Stornetta used Merkle trees to implement a system in which document timestamps
could not be tampered with. This was the first instance in the history of blockchain.
The technology has continued to evolve over these three generations:
First generation – Bitcoin and other virtual currencies
In 2008, an anonymous individual or group of individuals known only by the name Satoshi
Nakamoto outlined blockchain technology in its modern form. Satoshi's idea of the Bitcoin
blockchain used 1 MB blocks of information for Bitcoin transactions. Many of the features of
Bitcoin blockchain systems remain central to blockchain technology even today.
Second generation – smart contracts
A few years after first-generation currencies emerged, developers began to consider
blockchain applications beyond cryptocurrency. For instance, the inventors of Ethereum
decided to use blockchain technology in asset transfer transactions. Their significant
contribution was the smart contracts feature.
Third generation – the future
As companies discover and implement new applications, blockchain technology continues to
evolve and grow. Companies are solving limitations of scale and computation, and potential
opportunities are limitless in the ongoing blockchain revolution.
What are the benefits of blockchain technology?
Blockchain technology brings many benefits to asset transaction management. We list a few
of them in the following subsections:
Advanced security: Blockchain systems provide the high level of security and trust that
modern digital transactions require. There is always a fear that someone will manipulate
underlying software to generate fake money for themselves. But blockchain uses the three
principles of cryptography, decentralization, and consensus to create a highly secure
underlying software system that is nearly impossible to tamper with. There is no single point
of failure, and a single user cannot change the transaction records.
Improved efficiency: Business-to-business transactions can take a lot of time and create
operational bottlenecks, especially when compliance and third-party regulatory bodies are
involved. Transparency and smart contracts in blockchain make such business transactions
faster and more efficient.
Faster auditing: Enterprises must be able to securely generate, exchange, archive, and
reconstruct e-transactions in an auditable manner. Blockchain records are chronologically
immutable, which means that all records are always ordered by time. This data transparency
makes audit processing much faster.
What is the difference between Bitcoin and blockchain?
Bitcoin and blockchain might be used interchangeably, but they are two different things.
Since Bitcoin was an early application of blockchain technology, people inadvertently began
using Bitcoin to mean blockchain, creating this misnomer. But blockchain technology has
many applications outside of Bitcoin.
Bitcoin is a digital currency that operates without any centralized control. Bitcoins were
originally created to make financial transactions online but are now considered digital assets
that can be converted to any other global currency, like USD or euros. A public Bitcoin
blockchain network creates and manages the central ledger.
Bitcoin network: A public ledger records all Bitcoin transactions, and servers around the
world hold copies of this ledger. The servers are like banks. Although each bank knows only
about the money its customers exchange, Bitcoin servers are aware of every single Bitcoin
transaction in the world.
Anyone with a spare computer can set up one of these servers, known as a node. This is like
opening your own Bitcoin bank instead of a bank account.
Bitcoin mining: On the public Bitcoin network, members mine for cryptocurrency by
solving cryptographic equations to create new blocks. The system broadcasts each new
transaction publicly to the network and shares it from node to node. Every ten minutes or so,
miners collect these transactions into a new block and add them permanently to the
blockchain, which acts like the definitive account book of Bitcoin.
Mining requires significant computational resources and takes a long time due to the
complexity of the software process. In exchange, miners earn a small amount of
cryptocurrency. The miners act as modern clerks who record transactions and collect
transaction fees.
All participants across the network reach a consensus on who owns which coins, using
blockchain cryptography technology.