Fourteen years have passed since Satoshi Nakamoto published a whitepaper on using cryptographically secured chains. This technology became known as the blockchain, a digitally distributed, decentralized system that records all the transactions made of any asset across the blockchain network. The assets can be tangible, such as cash, cars, and houses, or intangible such as intellectual property, copyrights, and patients.
Blockchain tracks orders, digital money, and accounts across its network. This is why it is popular with digital cryptocurrencies like bitcoin. However, it’s important to remember that bitcoin is not a blockchain; blockchain is the technology that enables bitcoin to function; think of it as the engine that drives the bitcoin network.
Join us as we delve into the complicated world of blockchain and discover that blockchain has many applications, including shaping the future of the financial services industry.
How Does Blockchain work?
Thousands of books, journals, and whitepapers go into the details of blockchain. Blockchain technology is ingenious, and above all else, it is trusted. Every transaction that is processed is recorded in a block. The block can contain any information you want, who, what, when, where, how much, and even the condition. Each block is connected to the ones before and after, forming a chain. It is impossible to amend the chain, and each new block joins the end of the chain.
The created blockchain grows and grows into a single chronologically organized record of transactions. Blockchain data projects precisely what happened in the past, allowing assets to be tracked and verified, creating greater trust, security, and an accountable, transparent, highly efficient platform.
Blockchain and Finance
Blockchain can be used for any credible information. It is already being used for healthcare medical records, logistics tracking, and tracing ingredients in the food distribution network—however, it’s money transfer and financial services that most people associate with blockchain.
Recently we have seen a surge in FinTech businesses disrupting the financial sector, many of whom use blockchain as the backbone of their financial offering. The offered services may include decentralized financial transactions, payments, remittances, share trading, and proving financial identity.
Here are the key reasons financial services are backing blockchain:
#1: No Intermediaries: An intermediary is an engine between two parties in a financial transaction. The intermediary facilitates that transaction when moving money from point A to point B. Companies like SWIFT oversee transactions between countries that are not directly linked to the banking layer. Elsewhere, intermediaries connect lenders to borrowers and process monthly paychecks.
The biggest problem with intermediaries is the cost associated with the transaction, a penalty that ultimately is passed onto the customer. Blockchain completely cuts out the middleman, with only a small transaction fee to pay for the computing power needed to validate the transaction within the chain. In addition, the blockchain doesn’t need to use third parties to authenticate data because it authenticates itself; the level of trust is so great that the blockchain is accepted as the source of truth.
#2: Highly Secure: The financial services sector is drawn to blockchain because of its inherently secure framework based on cryptography, decentralization, and consensus. The blockchain network creates this trust by creating immutable transactions. In addition, it’s nearly impossible to change the blockchain structure, making all data traceable.
To alter a blockchain, a hacker would need control of more than half of all the computers in the same distributed ledger, which is impossible. The more users on the blockchain, the more secure the data becomes. Blockchains are either permissioned (private) or permissionless (public); ironically, it can be argued that private blockchains are less safe because the number of nodes needed to change the blockchain could be less.
All users should always keep their access keys to the chain secure in an encrypted repository.
#3: Borderless: Blockchain is an international technology without borders. It doesn’t matter where you are; you only need access to the blockchain network to use it. This promotes having a currency free from government influence in a technology that’s far-reaching and not just for finance. The technology has raised concerns because it’s a service that’s difficult to regulate.
#4: Fast Transactions: Traditional banking transactions are historically slow to process; how many times have you sent (or been sent) a payment, and it’s taken days to hit your account? Many think this is the bank reserving the cash to earn interest, but while that is partly true, the most delay comes from intermediaries ensuring the transaction is genuine.
Blockchain is much quicker at processing transactions; although not instant, the trades are typically processed within the first 2 hours. Factors impacting this are the load on the blockchain network and the number of ledgers (and miners) available to process and validate the data block. All nodes have to agree that the transaction is valid to reach a state of consensus. Once achieved, the transaction block is validated and added to the blockchain.
We have just scratched the surface of blockchain development. Blockchain has a proven track record with cryptocurrencies. Upstart businesses have already launched innovative blockchain-based banking solutions, such as ripple, transforming how users send and receive financial products. Only now monolithic banking corporations are trying to catch up.
The future of cryptocurrency may be volatile; no one knows, but the technology that powers it has many uses for the financial sector. Security is paramount in today’s online world, and all organizations want to use the most advanced technologies for a proactive stance toward the threat landscape.
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