0It was the year 2008. Before that, several incidents had occurred where people took money from banks and fled from India. Nirav Modi and Vijay Mallya are among the well-known names that revealed the weaknesses of the current banking system.
Before understanding what exactly blockchain is, we should first understand the current banking scenario. In the present system, people deposit their money in banks, assuming it is safe.
Money remains safe in a bank only when the people working there are trustworthy. A bank manager, for example, holds many rights and responsibilities. However, being human, he also has emotions and family obligations.
A family person working in a bank can be trustworthy only to a certain extent. If someone threatens that person, he might disclose sensitive bank information to protect his loved ones.
But this is not true for machines. Machines have no emotions, relationships, or fear—which makes them highly trustworthy.
So, up to this point, it is clear that in the conventional banking system, the money deposited in banks is ultimately supervised by humans. And since humans are vulnerable to emotional and relational pressures, they cannot be considered completely trustworthy.
This is one of the reasons why money in banks is not always safe. Another issue is that the machines deployed in banks—such as servers—are also prime targets for attackers.
Even if the person maintaining the servers is loyal and trustworthy, attackers may still try to compromise the machines. Hence, in a centralized banking system, both humans and machines represent potential weaknesses, making it hard to guarantee the safety of our money.
There have been several cases where bank employees committed fraud. For instance, an ICICI Bank relationship manager once changed a customer’s phone number, broke the fixed deposit (FD), transferred the money to her own account, and invested it in the share market—losing it all. Eventually, the customers, who were the stakeholders of the bank, suffered the loss.
So, what can be done? Instead of relying on a centralized system, we need a system where no one has to trust anyone.
This means that if I have an account in a bank, I should be able to see not only my account information but also transaction-related information of others (without revealing personal details). Whenever anyone transfers or spends money, that transaction should be visible to all.
For example, if you transfer $500 to your friend, everyone in that network should be aware that a transaction of $500 took place between two valid account holders—without exposing their private identities.
Thus, instead of depending on a single person or machine, the system becomes distributed. The authority over transactions is not vested in one central entity but shared among multiple participants—forming what we call a blockchain.
Now, the question arises: how do participants in this system remain aware of all transactions? The answer lies in the ledger — a kind of digital register (similar to what businessmen once used to record their transactions).
This ledger is shared among all participants and automatically updated whenever a transaction occurs. In this way, a group of individuals who don’t necessarily trust each other can still maintain a trustworthy system through this shared ledger.
When someone wants to transfer $500 to another person, the transaction is verified by all the participants in the blockchain network to ensure the sender has a sufficient balance.
These participants then reach an agreement through a consensus mechanism. Consensus refers to a process in which all participants must agree before a decision is finalized in the blockchain.
Hence, blockchain is a democratically governed system, created and maintained by the people themselves. To ensure data integrity (that is, data cannot be modified), participants use a special digital code called a hash. Each block in the blockchain is connected to the previous one through these hashes, forming a secure chain.
It’s similar to a lock-and-key system: one person’s lock key is passed to the next, who adds his own key — and so on. If a hacker tries to change the first key, all the following keys are affected, and the locks won’t open.
To understand this better, imagine a 20-story building with 400 rooms. If someone changes one lock’s key, all the other 399 locks would automatically need to be changed. A hacker would have to modify all 400 locks within a few seconds without anyone noticing—an almost impossible task.
Likewise, in blockchain, since all blocks are interconnected through hashes, changing the hash of one block would require changing the hashes of all others within seconds—practically impossible.
Through this mechanism, blockchain secures data across different fields such as supply chain, healthcare, finance, and more.
In summary, this article explained:
- Why conventional banking systems are vulnerable
- How blockchain enhances security
- What blockchain is
- What hashing means
