8 Ways Blockchains Can Transform Financial Services
In this article, we briefly introduce the concept of blockchain technology and show how it can be applied in the real world.
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Whenever there is a transaction, there is uncertainty. And when it comes to digital transactions - there’s more uncertainty.
Throughout history, people have tried to find ways to ensure trust while exchanging value. They’ve created rules and built specialized institutions - legal systems, banks, etc., - to facilitate safe trade.
They’ve been paying fees for security, for some degree of it at least, and produced a complex, worldwide system of intermediaries to take care of settlement procedures, build logic for our transactions, and establish the reputation of all parties involved.
But now, there is a new, technological institution emerging - the Blockchain. It holds vast promise for both businesses and people individually and, according to many, it might reshape our entire economy.
Today, we’ll take a closer look into what Blockchain is and discuss its impact on the world of finance.
So, What Is Blockchain?
Filtering out all the hype and technical jargon, we can say that the Blockchain, essentially, is a digital ledger: a distributed recordkeeping system.
The devices that store the Blockchain database are not connected to one processor and the network does not belong to a centralized entity. Instead, it is maintained by a group of personal computers, known as miners, that possess immense computing powers and are located in different parts of the world.
When someone posts a transaction on the Blockchain it gets encrypted into a block. Blocks have time stamps and are linked to one another forming an immutable sequence or a chain of transactions.
Users cannot modify blocks retroactively due to the network’s clever design. All they can do is submit new digital events and wait till miners solve the encoded problems to validate them. Then, after a transaction is confirmed, it gets locked and becomes instantly visible on all ledgers within the Blockchain network.
If anyone attempts to modify a record of a particular digital event, they’d have to alter all the preceding transactions as well. They’d have to hack thousands of computers at once, get through advanced cryptography and make sure that the most powerful computer recourse in the world, which is always watching, doesn’t catch them. To say the least - it’s hard to do.
This degree of security makes blockchains perfect platforms for handling sensitive data such as financial instruments, assets, or anything else of value. So, in order to give a real world example of the possible impact of blockchain technology, here are 8 finance sub-industries that we feel blockchain technology is most likely to change.
1. Storing Assets
People are used to putting money into savings accounts, checking accounts, or deposit boxes. Traditionally, they see banks as the only trustworthy value repositories. Using blockchain, however, they can get a much cheaper, more accessible option for storing assets. The network is far more protected than banks from hacking and data breaches, and all the financial instruments people use to get interest on their money can be replicated on via peer-to-peer interactions.
2. Transferring Money
There is a whole industry out there of making money out of transferring money. Not only do banks and other financial firms take considerable amounts out of sums people send to each other, they make the procedure unnecessarily long and complicated. Blockchain technology can eliminate the need for intermediaries and allow the sending of assets, stocks, bonds, etc., in a much more speedy way and at a lower cost.
3. Ensuring Trust
Establishing the precise identity of a party you interact with is extremely important in the digital world. And so is researching their reputation. Realizing that, banks and rating agencies have been charging considerable fees for ensuring trust. With blockchain, where each transaction is validated by the nodes of the network, their services are no longer needed. Some clever code and well-organized, mass collaboration - that’s what makes for ultimate data protection on the blockchain network.
4. Providing Loans
Issuing debts (bonds, mortgages, etc.) without financial institutions can become a reality too. People might be able to issue, trade, or settle debt instruments directly. They might check credit-worthiness of a peer easily, as one’s reputation is verifiable and secured via cryptography on the network, and get loans from peers promptly, without involving a third party.
5. Exchanging Financial Instruments
Trading (the exchange of financial instruments) is usually followed by a cycle of clearing and settlement procedures which take up to a few days or weeks. Using blockchain technology, this settlement time can be reduced to minutes or even seconds.
Risk management is a subset of insurance. Currently, there are a plethora of derivatives on the market that are meant to protect companies from loss, uncontrollable situations, and from uncertainty overall. Blockchain supports decentralized insurance models: it can make the use of these derivatives much more transparent. The technology might give insurers a chance to view people’s transaction history, their personal and public capital, and, thus, it can help them make much more accurate assessments.
Matching investors with business owners is another big industry that the Blockchain can transform. The technology can facilitate the automation of a large part of the matchmaking procedures and enable new, efficient systems of peer-to-peer financing.
Accounting includes measurement, processing, recording, and reporting of information about financial entities. It is, too, a huge finance sub-industry which is in need of, but hasn’t yet undergone, a substantial digitalization. Blockchain can help power new accounting methods and help accountants cope effectively with the velocity of today’s finance.
The hype around blockchain grows rapidly. Banks, large enterprises, and even governments are eagerly getting on board with the technology, seeing that people expect it to cause a revolution. What it will bring us in reality, however, we are yet to see.
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