Blockchain: Disrupting the FinTech
- (McGraw Tower - Photo Courtesy of Cornell University)
- Overview
Fintech disrupts banks, and blockchain disrupts fintech. Blockchain is a very powerful technology capable of performing complex operations. The distributed ledger technology that underpins blockchain systems is designed for near real-time data transfer. It can provide instant solutions for customers' transactions and interactions with banks. Blockchain technology enables the entire financial services industry to significantly optimize business processes by sharing data in an efficient, secure and transparent manner.
- Blockchain: a Comprehensive, Always Up-to-date Accounting Record
Blockchain is a comprehensive, always up-to-date accounting record of who holds what or who transfers what to whom. It is becoming a way for people to instantly conduct and verify transactions on the network without a central authority. A block is the "current" part of the blockchain, which records some or all of the most recent transactions, and once completed, goes into the blockchain as a permanent database. Every time a block is completed, a new block is generated. Blocks are linked to each other in a proper linear time order (like a chain), and each block contains the hash of the previous block. Blockchain has no transaction costs.
Taking traditional banking as an example, blockchain is like a complete history of banking transactions. Just like banking transactions, Bitcoin transactions are entered into the blockchain in chronological order. At the same time, blocks are like personal bank statements. A complete copy of the blockchain records every Bitcoin transaction ever performed. As such, it can provide insights into facts such as how much value a particular address was worth at any point in the past.
- Three Main Types of Blockchains
There are three main types of blockchains: public (a platform where anyone on the platform can read or write to the platform), private (only the owner has rights to any changes that must be made), and consortium (public and private Hybrid, literacy can scale to a certain number of people/nodes). Ethereum is a distributed computing platform based on a public blockchain. It provides a way to create online marketplaces and programmable transactions called smart contracts. Ethereum is the biggest innovation after Bitcoin.
- Smart Contracts and Distributed Ledger
A core component of next-generation blockchain platforms, smart contracts are computer agreements designed to facilitate, verify, or enforce contract negotiation or performance. Proponents of smart contracts claim that various contract terms can be partially or fully self-enforcing, self-enforcing, or both. The purpose of smart contracts is to provide security to traditional contract law and reduce other transaction costs associated with contracts. Smart contracts use self-executing software programs that run on distributed ledgers to automate business processes. A blockchain is a database, and smart contracts are the application layer that makes many of the benefits of blockchain technology a reality. Smart contracts lead to the convergence of smart devices, analytics, artificial intelligence, cloud and blockchain technology.
Smart contracts are mainly used in cryptocurrencies. The most prominent smart contract implementation is the Ethereum blockchain platform, also known as decentralized applications or dapps. Additionally, trade finance, post-trade services, and event-driven insurance are the main use cases that financial services institutions are piloting/piloting. Loyalty and rewards, smart grids and digital rights management are the main use cases piloted in other areas.
- Emerging Applications For Blockchain
Blockchain shows great promise in a wide range of commercial applications. Now, more and more companies from all walks of life are exploring how to use blockchain technology to eliminate friction in business processes and establish a trust system for value exchange. A blockchain database powered by an enterprise-grade, scalable and secure core database is at the heart of unlocking potential.
By using blockchain, individuals can securely exchange money or purchase insurance without a bank account. Financial institutions can settle securities in minutes instead of days. Blockchain technology allows strangers to record simple, enforceable contracts without a lawyer. It can sell real estate, event tickets, stocks, and just about any other type of property or rights without a broker. Blockchain can also track and ensure that all payments are done correctly. Businesses of all types (government, banking, insurance, finance, accounting, healthcare, legal, supply chain and logistics, manufacturing, retail, etc.) can more closely manage the flow of goods and associated compensation. Unlike existing financial ledgers or databases used by banks and other institutions, blockchains are not updated and maintained by a single company or government. Instead, it is run by the user network.
- The Challenges To Blockchain Technology
However, blockchain's reputation also brings some new challenges, including interoperability, flexibility, scalability and governance. There are now many blockchain-based currencies, each optimized for a different purpose. And none of these currencies are compatible with other currencies, making it difficult for users to transfer funds between them. Also, there is a growing trend to use blockchain in other areas. These areas include the Internet of Things, supply chain, stock exchanges and other areas that are important for secure data transactions. However, the original blockchain used in Bitcoin was not designed to scale to all possible use cases, making it difficult to use it in these areas. Since the blockchain is a decentralized system, once a problem occurs, no one will sue and be held accountable, and there are also challenges in management. It will take some time to resolve these issues. The industry will have to work with governments to develop standard rules and laws governing transactions. Additionally, nodes holding copies of the blockchain continuously receive updates. These nodes are distributed all over the world. Therefore, blockchain has high latency.
Blockchain needs to transform if it is to meet the requirements of every possible industry. The Hyperledger Project is an effort overseen by the Linux Foundation to advance blockchain technology by identifying and addressing key features of distributed ledgers' cross-industry open standards that could transform the way global business transactions are conducted.
