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Bitcoin and Blockchain

 Bitcoin and Blockchain

by Sven Korschinowski, Partner, and Johannes Nöbel CFA, Financial Services Consultant, KPMG Germany

In 2009 the first bitcoins went into circulation around the world. Bitcoins were a revolutionary breakthrough because they allowed the transfer of a digital currency from one person to another in a safe way without using an intermediary such as a bank. Today bitcoins are transferred in large amounts and are the well-known example of a digital cryptocurrency [1]. But bitcoin was only one example and just the start for the underlying evolving technology of distributed ledgers. Distributed ledger technology based on blockchain is a very hot topic and it is getting very much attention lately as it will be used in many scenarios throughout the whole financial services sector and will certainly change the way business is done in many areas.

Blockchain – a distributed ledger technology 

What is a blockchain? For transferring money through the internet the bitcoin network uses a distributed ledger technology – a blockchain. The blockchain stores information about all past transactions and gets distributed and replicated across many computers. In the case of bitcoin everyone can join and participate in the blockchain network with a computer and a special software. 

The transfer of payments from one person to another requires a transaction between the participants of the blockchain network. These transactions need to be validated and they also need to be stored so that it is clear whom the transferred amount currently belongs to. For amounts to be transferred the respective transaction is validated by the network and then stored in a so-called ‘block’. All of these blocks are stored with a timestamp and connected in a cryptographic way to each other so that the transaction can’t be altered (called immutability). Together all these single blocks form a chain that represents the current state of the whole ledger – the blockchain.