Since its implementation in 2009, blockchain technology has progressed immensely. The first blockchain was implemented as a public ledger for the cryptocurrency Bitcoin. Because Bitcoin relies on a public ledger, computers known as “nodes” verify each transaction before it is registered on the blockchain.
In contrast to a traditional financial institution like a bank, there is no central authority that approves transactions, so cryptocurrencies are described as decentralized. Decentralization means that such transactions do not require a bank, an investor, or any third party to intermediate.
Because each exchange is between two users, it is called peer-to-peer (P2P).
Transactions are structured as blocks of data which are then ‘chained’ together chronologically, and the structure forms the blockchain. Because each block is intricately connected to the previous one, no user can modify any part of the system without having to change a significant amount of information.
For example, Bitcoin currently has more than 13,000 nodes with a copy of all its transactions. Someone would have to operate more than half of Bitcoin’s system to modify a transaction. Thousands of blocks would need to be changed to successfully change information.
Today, over 18,000 cryptocurrencies are in existence, with some – including Bitcoin – being more popular than others.
Blockchain in Business and Finance
As the blockchain ecosystems expand, investors and leaders are taking notice. The industry has taken leaps in the past decades, and blockchain technology has shown its significance not only in cryptocurrency but also in various other applications. Globally, 24% of businesses describe themselves as very or extremely familiar with blockchain technology.
Because of its proximity to cryptocurrency, financial services can find many opportunities and advantages in blockchain.
1. Transparent Financial Transactions
The blockchain stores information about each transaction conducted, serving as a digital public ledger in which transactions are linked together chronologically.
Unlike traditional financial institutions like banks, blockchain technology enables nearly unchangeable records of transactions. This is thanks to its system of recordkeeping, making it extremely difficult to change any of the data once entered into the system.
In cases of auditing and regulatory compliance, the blockchain is less vulnerable to bad actors because it does not rely on individuals but on a group consensus. On the blockchain, data is distributed to everyone in its ecosystem. There is no one recordkeeper because everyone is taking part in the recordkeeping process. All transactions are stored publicly, then digitally signed.
Transparency with such data can also foster trust, a value that today’s customers seek out when doing business.
2. Data Security
Internet users today may be unknowingly sharing their data with companies, creditors, and even their employers.
Blockchain-based platforms encrypt data using cryptographic algorithms, reducing the risk of data collection. This system gives a user ownership of their sensitive data.
At a time when big companies store large amounts of their users’ data, a single hack could expose up to millions or billions of users at a time, similar to what happened to Yahoo! in 2013. On the blockchain, such personal data is protected via encryption, keeping data safer from security breaches and hacks.
Financial institutions often store large amounts of sensitive information, as well. Through the use of blockchain, institutions can employ secure credit reporting, digital identity verification, and encryption.
These processes help establish more secure information systems which are less susceptible to fraud or theft.
3. Efficient Payments
Incorporating blockchain technology in financial transactions can increase efficiency significantly. Because there is no need for a third party, blockchain provides a new kind of system for payments. For example, there would be no need for a bank to manually process, record, and verify payments. With blockchain, these steps are all digital and automated.
This is especially helpful for cross-border payments which may take anywhere feom days to weeks and months to process between banks. Through blockchain, these transactions can take seconds.
Financial institution Standard Chartered found that a transaction that typically takes 2 days using traditional banking systems was processed in 10 seconds on the blockchain. While not every blockchain processes transactions at the same speed, many offer faster speeds than manual processing.
All these processes, if done manually, present another concern, which is vulnerability to human error. Because a blockchain can be automated, there is less space for errors. Utilizing blockchain can reduce the processing time through automation, saving you time and decreasing inaccuracy.
4. Smart Contracts
Financial institutions deal with a great deal of paperwork and contracts. If done on paper, processes can stack up and take longer than necessary. Even when done digitally, these documents can take time and effort.
A few years back, cryptocurrency broke boundaries by enabling smart contracts. Smart contracts execute automatically when preconfigured conditions are met. A smart contract is automated, minimizing the need for timely manual processes. This contract is digitally signed and encrypted through cryptographic algorithms before being recorded on the blockchain.
Not only is this process faster but it takes up fewer resources. Smart contracts address a time-consuming concept in financial services: enforcement. Enforcement refers to maintaining, monitoring, and verifying economic agreements.
This can be in the form of a loan agreement, a property deed, an insurance contract, or other similar contracts. With smart contracts, a significant portion of the process is taken care of.
For example, a customer can file for an insurance claim with a smart contract, which automatically verifies the claim, confirms the customer’s identity, and provides the relevant payout.
This technology is applicable in other cases, as well. Investors can use smart contracts for automated loans, and banks can employ smart contracts for more efficient settlement systems.
Simply put, smart contracts can dramatically reduce processing time and increase accuracy in executing financial agreements.
5. Asset Management
Success in asset management can be hindered by delays, slow processing times, and inflexible systems. When this happens, investors and firms may struggle to keep up with stakeholder demands, especially in current times. Many of them are beginning to explore what the blockchain can do to improve asset management.
An analysis by Deloitte sees the most potential in the following aspects:
- Document Management
- Transfer of Ownership
- Trade Settlement
- Investor Communication
- Management Information System
- Regulatory Reporting
Cryptocurrency also adds digital tokens to the picture. Considered as “digital assets,” tokens include Non-Fungible Tokens (NFTs) or intellectual property like artwork. These assets provide broader opportunities for investors to diversify their portfolios.
Investors and traders can benefit from blockchain-based investments with improved portfolio management tools and robot advisers powered by artificial intelligence and machine learning.
Asset managers can also tokenize tangible assets on the blockchain, which can increase trade efficiency and lower transaction costs. Many of these transactions offer partial ownership of an asset, allowing for greater diversification and lower risks.
For example, fine art such as Andy Warhol’s 14 Small Electric Chairs has been partially sold, with each buyer owning a “stake” in the work. 31.5% of the work was sold through a blockchain-powered investment platform.
Using the blockchain for these transactions makes provenance discovery easier, making it clear where the ownership of an asset resides. Whether assets are tangible or intangible, blockchain introduces new ways to broaden investments.
Driven by Innovation
Just like how the concept of blockchain was developed through innovation, its applications to systems like finance are rooted in innovative projects. Through new ideas, continuous development, and technological advancements, blockchain technology can advance to once unimaginable heights.
Video games using blockchain technology offer a different experience for players, incorporating gameplay with currency.
The first known case of a blockchain game was a 2017 game called CryptoKitties. Players would purchase a virtual pet to collect, breed, and sell.
Video games that incorporate blockchain have helped enthusiasts understand the current limits of its technology. For instance, CryptoKitties dramatically slowed down the Ethereum ecosystem in 2017, bringing attention to pertinent system issues.
Since then, more blockchain games have surfaced, allowing developers and players alike to see how viable blockchain is as a platform. Through their execution, successful blockchain games serve as a “proof of concept” that blockchain can integrate with other industries.
Whether the concept of hackathons is familiar to you or not, they have undoubtedly jumpstarted many of the technological advancements today.
A hackathon is an event in which programmers, developers, and enterprising enthusiasts present an inventive project to industry experts, investors, and colleagues. It is typically a contest between teams or individuals to create a project that fits the hackathon’s theme within a limited time.
Many existing businesses have thus found their footing in a hackathon. These include the online marketplace Carousell and the messaging app GroupMe, which was acquired by Skype for $80 million.
Indeed, the concept of hackathons has built on this rich history to continue progress in the realm of blockchain.
Blockchain is Here to Stay
Gone are the days when blockchain technology was exclusively used by cryptocurrency traders and developers. Many industries can benefit from the blockchain, especially the financial services industry.
Tapping blockchain can support more transparent transactions, better data security, more efficient payments, automated smart contracts, and diverse asset portfolios. Innovations through platforms like video games and hackathons also continue to drive the industry forward.