(Newswire.net — May 26, 2021) — Blockchain technology is known as the next big thing in the world of finance. Previously recognized as the technology underlying cryptocurrencies, blockchain can transform the financial sector by eliminating the need for intermediaries. Without, businesses will have the ability to improve operations and regain control from financial powerhouses. These may sound like lofty aspirations, but the technology does operate differently from what most businesses know in traditional finance.
To understand why these transformations are possible, here is a short explanation of blockchain.
What is blockchain?
Blockchain is a system of recording information through a digital ledger of transactions. When users input data, the information is duplicated and distributed across the entire network of computer systems on the blockchain. Distribution makes it difficult (and nearly impossible) to change or hack sensitive data in the system. To illustrate, consider what would happen if someone tried to change one block in the blockchain. In this case, the information on the previous and following block wouldn’t line up, so it would become immediately obvious that the information was tampered with. That is unless the hacker could change every block in the chain.
An important distinction to make is that blockchain is not Bitcoin. Blockchain is a technology used by cryptocurrencies. Therefore, several cryptocurrencies have their own blockchain and distributed ledger architectures, which they may use for differing purposes. Ethereum uses blockchain to build dApps, while bitcoin uses blockchain for instant payments and documenting the transaction information on the blockchain.
With each new transaction, the blockchain becomes even more secure. But how is a transaction added?
Steps to add a block to the blockchain
- A user requests a transaction. Cryptographic keys (line of data) authenticate the request that identifies a user and allows them to access the value in their wallet or account. Users will all have a public and private key to secure their assets.
- The blockchain will create a block. The block is a representation of the transaction, which miners add through consensus. In other words, the majority of devices agree that the transaction is valid.
- The block of data is posted to the blockchain for every device in the network to see.
- Devices will validate the transaction. This process is also known as mining. In Proof of Work, people who own computers will solve complex mathematical problems. The process will involve solving a complex puzzle through trial and error. Powerful computers randomly generate a number that may solve the problem.
- Miners receive a “reward” for verifying the transaction. The reward is typically in the form of cryptocurrency.
- The blockchain receives a new block.
- All parties in the network take note of the updated block on the network.
The blockchain hype
The hype around blockchain comes down to trust. Currently, financial intermediaries have become targets of fraud and crime. Private information is stored in a database controlled by a single entity, suggesting it isn’t entirely secure. Furthermore, international payments are costly and can take days or weeks to process. Transaction fees for moving funds can also add up quickly to the disadvantage of the Seller.
A few use cases of blockchain technology in the financial sector include:
Quicker stock settlements
Issuing and sharing private securities requires stringent compliance and complicated policies. Following along manually can be a complicated process, which is why blockchain automates this through smart contracts. The London Stock Exchange has begun to explore additional blockchain opportunities to help change investors’ trade securities in Europe.
Efficient cross border payments
Blockchain technology can simplify payments from one bank to another. Traditionally transferring money between accounts may take up to a week and may include costly fees. With blockchain, transactions can be conducted between any two devices in the network regardless of location. The transaction is then verified almost instantly and stored on the digital ledger. Central banks have already begun to take advantage of these payment opportunities since it helps remove the need for back-office staff.
Automated insurance claim sorting
The insurance industry has been taking advantage of another blockchain innovation, smart contracts. Claim settlement was typically a manual process that requires back and forth communication between several parties, including the insurance company, broker and the client. Blockchain could reduce the back and forth by opening visibility between all the parties.
Conclusion
The financial sector continues to look at ways to optimize its practices with blockchain technology. Although the article only covers three use cases, the concept of a truly global network continues to present opportunities that reduce costs and provide untapped value.