In the previous part of our blockchain technology guide we explained the differences between a public blockchain, which is known for its use with cryptocurrencies, and a private one, which is more often used by public trust institutions. Two years ago forty five global financial institutions (including JP Morgan, Goldman Sachs, Deutsche Bank and Bank of America) started a consortium that analyzes the use of this technology in the world of finance.

But why would banks want to use blockchain technology, for instance for money transfers? How is it better than the solutions that are currently used, and is the cost of processing required for verification lower than in a public one? We asked Billon's expert, Jeff Deneau.

One major advantage of blockchain technology is reducing the cost of infrastructure to almost nothing. Let's say one bank server can serve up to 100 customers. In that case everything works well, it's very safe and there are no delays, and the customers are happy. But what if there are many users and they all want to use the system at the same time? In that case we need another server, which presents us with a problem: how do we manage the traffic between the two computers in order to give them an equal load? It all gets very complicated when we have thousands or millions of users - we need a central unit. IT technicians know very well that as any computer system grows, its efficiency and speed decreases and the maintenance costs rise.

Blockchain doesn't need a central infrastructure, which makes it perfect for managing this kind of traffic. Using it eliminates most of the server maintenance costs, allowing a company to effectively manage transfers of any amount, including so called micropayments. Today transactions of less than 100 euro are not profitable for banks because the cost of carrying them out in the current banking system usually matches the transaction amount. Those costs are transferred to the customers. Banks are under additional financial pressure because of the PSD II directive, which obligates them to offer basic accounts free of charge. Basing those services on blockchain would eliminate the banks’ losses.

Switching to blockchain would also give banks the possibility to reach new customers who have found traditional banking services too expensive. I can imagine a bank opening a “light” account addressed at teenagers or customers in the Global South, the servicing of whom in the decentralized banking system has so far been unprofitable.

And when it comes to the cost of processing necessary to verify transactions, blockchain's effectiveness will increase along with the number of network users. Work will be divided into more and more nodes, which will make the network more effective.

Let's go back to the example of a private blockchain used for sending large amounts of money between two banks. Why wouldn't they use classic solutions, the system they are using right now?

A private blockchain can also be used when two sides want to keep their financial operations secret. In a public blockchain anyone can see that a large amount was transferred to an address, and then figure out that the address belongs to Goldman Sachs and JP Morgan. Banks can form a consortium that uses a private blockchain in order to transfer funds between each other without drawing unnecessary attention to it.

What is an access node, where is it located and how can you connect to it?

An access node is nothing more than a blockchain network participant. In the case of a public blockchain the nodes are huge server farms, currently found mostly in China because electricity used to power the machines is cheap there.

Nodes are usually installed on computers or servers that have a large processing power. Sometimes they have an interface in the form of a website where you can observe what is happening in the network. There are also end user solutions in the form of apps, like in the case of the Billon blockchain, where any smartphone can be a blockchain access node. The app doesn't connect to a central server that processes data - the software uses the phone's processing power. The installation of each node increases the safety of the network.

This might be the most difficult aspect to understand for people who firmly believe in central data bases. Do you think it's a better alternative for storing bank assets?

Blockchain is a safer means of storing assets because it eliminates the central system point which can become the target of a hacker attack. Banks have a problem with using public blockchains because a potential network participant with malicious intentions cannot be stopped. There is no way to block a user. You also can't tell people “there are criminals at this address, don't do business with them”. People will still be able to do it and nobody will stop them as long as they can make enough money out of it. It is difficult to regulate a system like that. A private blockchain enables control over users, which is one of the major advantages of this solution. It's simply a more civilized blockchain, ready to meet the expectations of market regulators.