Fintech, like many other technology-based businesses, is always changing. New banking apps appear to be regularly launching, promising radical new payment management and processing methods. While this business has been steadily expanding, the emergence of blockchain technology promises to revolutionize finance technology to a never-before-seen extent.
Today, despite its association with cryptocurrencies like Bitcoin, Blockchain’s use cases are constantly growing into new areas of finance.
This research will explore how Blockchain is slowly changing the game in the Fintechindustry by making it stronger, more secure and robust, while also increasing the options of use throughout the community.
Table of Contents
What is a Blockchain?
Blockchain is essentially a database, albeit a digital, decentralized one.
A blockchain gets created by a chain of blocks containing transaction data, a hash identity, and node information. They have immutable features that link them to the previous block. Each block has a subsequent ration of stored data, making capturing, organizing, and tracking assets much easier. Once the right amount of information is stored, another block will be added to the chain.
On a blockchain network, assets can be tangible and intangible, and you can trade nearly anything of value. Thus, for all parties involved, it lowers risk and expenses.
How Blockchain Works
The data is validated and stored in the blockchain’s database. As a result, it has the authority to validate a transaction. However, the blockchain doesn’t just store data; it also stores every transaction detail.
In a nutshell, this is how a Blockchain works:
User requests for any type of transaction, including those with or without contracts, bitcoin, information, or other data.
The critical data now gets forwarded to the P2P network’s various nodes (the people involved in the transaction) for validation.
The algorithms record and update the node validity and the user status.
When the transaction is complete, a new block gets added to the preceding block with the recorded data.
Blockchain Use Cases in Fintech
The blockchain is essentially an immutable block. It is possible to create a full ecosystem of financial apps using the technology. Using blockchain technology, you can transform regular financial processes into transparent procedures based on secure and efficient transactions.
When used appropriately, blockchain can establish a fintech ecosystem that will transform the financial industry.
Here are some of its most notable use cases.
Smart Contracts
The smart contract is an innovative branch of Blockchain. Smart contracts can potentially alter the automation process in the future completely. Smart contracts will become more intelligent with artificial intelligence (AI) or edge intelligence, triggering AI choices.
In this regard, R3 and its member banks launched trade finance prototypes in 2016, which employed smart contracts to conduct factoring transactions and letters of credit. Smart contracts have a lot of clout in areas with a lot of escrow. It is a win-win situation when a synchronized chain of activities occurs upon if/else statements drawn by both sides.
KYC
Companies must comply with Know Your Customer regulations to experience frictionless payment developments. However, it is difficult to determine the customer’s identity without intruding on their privacy. Blockchain’s transparency allows for identity verification without revealing the user’s genuine identity. It may sound like a lot of jargon, but the protocol enables the establishment, verification, and transaction of digital identities for all counterfeits.
Trading
Even in today’s digital environment, trading companies across the world still heavily rely on paperwork. Not only that but payments and transfers get delayed if you trade over the weekend. Because vendors use trading systems worldwide, there is a need to create a system that allows all participants to inspect and validate the trade readily. The trading system should ensure that all participants have accurate entries and that users can securely make adjustments at any time.
This trading is exactly what blockchain is supposed to do with a generic ledger to improve the overall process. And, because data gets updated in real-time, the flow of information is quick, making it simple to make business decisions and policies based on it. By lowering shorting risks and boosting accountability, such a strategyenhances the entire lifespan of the trade.
Recurring Payments
Payments in B2B typically take 3-4 days to process, which is rather inconvenient nowadays. The paperwork is dependent on the middlemen in the process, which prolongs the sales cycle even more. Intelligent contracts can be a good fit because of their clear agreement conditions, making recurring payments every month or year effortless. The contract only moves to the next level of the process if both parties are convinced, giving the buyer and seller ultimate control.
Borderless Payments
Blockchain allows for decentralized currency, which means you may make payments and transfers without going via a bank. It can also aid faster and easier payments because money transfers from one account to another are less expensive. Payment processing fees also get reduced because blockchain transfers do not require third-party consent, and banks do not require resources to transmit payments.
Blockchain technology will help to improve the global currency flow. Normally, banks impose a remittance fee of 10-15% of the amount transferred. This fee is reduced to 3% when using blockchain.
Because all participants in a blockchain transaction must provide their approval, and anybody can review the updated ledger after the transaction, blockchain payments are extremely safe.
You can also utilize P2P transfer to transfer funds because you do not need a third party. Banks can compete with fintech firms and offer their fintech-related services.
Conclusion
In the field of finance, blockchain has a lot of potential uses. There is also a slew of blockchain startups developing cryptocurrencies and blockchain apps in the hopes of providing rapid and transparent fintech services. Blockchain can transform the way banks do business by enabling faster payments, easier audits, and more comprehensive identification despite its drawbacks.
The rise of blockchain technology is expected to boost fintech development, paving the path for true democratization of finance and allowing individuals to manage their wealth as they would want to.
Web3 describes a version of the internet where data will be interconnected in a decentralized way. Web3 is an umbrella that comprises various fields like semantic web, AR/VR, AI at scale, blockchain technologies, and decentralization. The core idea of Web3 moves along the lines of enabling decentralized ownership on the web.
A blockchain protocol is a set of underlying rules that define how a blockchain will work. Based on the underlying rules of the protocol it’s possible to build a business ecosystem. Usually, protocol’s rules comprise everything from how tokens can be issued, how value is created, and how interactions happen on top of the protocol.
In software engineering, a fork consists of a “split” of a project, as developers take the source code to start independently developing on it. Software protocols (the set of rules underlying the software) usually fork as a group decision-making process. All developers have to agree on the new course and direction of the software protocol. A fork can be “soft” when an alteration to the software protocol keeps it backward compatible or “hard” where a divergence of the new chain is permanent. Forks are critical to the development and evolution of Blockchain protocols.
A Merkle tree is a data structure encoding blockchain data more efficiently and securely. The Merkle tree is one of the foundational components of a Blockchain protocol.
The nothing-at-stake problem argues that validators on a blockchain with a financial incentive to mine on each fork are disruptive to consensus. Potentially, this makes the system more vulnerable to attack. This is a key problem that makes possible underlying blockchain protocols, based on core mechanisms like a proof-of-stake consensus, a key consensus system, that together the proof-of-work make up key protocols like Bitcoin and Ethereum.
A 51% Attack is an attack on the blockchain network by an entity or organization. The primary goal of such an attack is the exclusion or modification of blockchain transactions. A 51% attack is carried out by a miner or group of miners endeavoring to control more than half of a network’s mining power, hash rate, or computing power. For this reason, it is sometimes called a majority attack. This can corrupt a blockchain protocol that malicious attackers would take over.
A Proof of Work is a form of consensus algorithm used to achieve agreement across a distributed network. In a Proof of Work, miners compete to complete transactions on the network, by commuting hard mathematical problems (i.e. hashes functions) and as a result they get rewarded in coins.
An Application Binary Interface (ABI) is the interface between two binary program modules that work together. An ABI is a contract between pieces of binary code defining the mechanisms by which functions are invoked and how parameters are passed between the caller and callee. ABIs have become critical in the development of applications leveraging smart contracts, on Blockchain protocols like Ethereum.
A Proof of Stake (PoS) is a form of consensus algorithm used to achieve agreement across a distributed network. As such it is, together with Proof of Work, among the key consensus algorithms for Blockchain protocols (like the Ethereum’s Casper protocol). Proof of Stake has the advantage of security, reduced risk of centralization, and energy efficiency.
Proof-of-Activity (PoA) is a blockchain consensus algorithm that facilitates genuine transactions and consensus amongst miners. That is a consensus algorithm combining proof-of-work and proof-of-stake. This consensus algorithm is designed to prevent attacks on the underlying Blockchain.
According to Joel Monegro, a former analyst at USV (a venture capital firm) the blockchain implies value creation in its protocols. Where the web has allowed the value to be captured at the applications layer (take Facebook, Twitter, Google, and many others). In a Blockchain Economy, this value might be captured by the protocols at the base of the blockchain (for instance Bitcoin and Ethereum).
A Blockchain Business Model is made of four main components: Value Model (Core Philosophy, Core Value and Value Propositions for the key stakeholders), Blockchain Model (Protocol Rules, Network Shape and Applications Layer/Ecosystem), Distribution Model (the key channels amplifying the protocol and its communities), and the Economic Model (the dynamics through which protocol players make money). Those elements coming together can serve as the basis to build and analyze a solid Blockchain Business Model.
Blockchain companies use sharding to partition databases and increase scalability, allowing them to process more transactions per second. Sharding is a key mechanism underneath the Ethereum Blockchain and one of its critical components. Indeed, sharding enables Blockchain protocols to overcome the Scalability Trilemma (as a Blockchain grows, it stays scalable, secure, and decentralized).
A decentralized autonomous organization (DAO) operates autonomously on blockchain protocol under rules governed by smart contracts. DAO is among the most important innovations that Blockchain has brought to the business world, which can create “super entities” or large entities that do not have a central authority but are instead managed in a decentralized manner.
Smart contracts are protocols designed to facilitate, verify, or enforce digital contracts without the need for a credible third party. These contracts work on an “if/when-then” principle and have some similarities to modern escrow services but without a third party involved in guaranteeing the transaction. Instead, it uses blockchain technology to verify the information and increase trust between the transaction participants.
Non-fungible tokens (NFTs) are cryptographic tokens that represent something unique. Non-fungible assets are those that are not mutually interchangeable. Non-fungible tokens contain identifying information that makes them unique. Unlike Bitcoin – which has a supply of 21 million identical coins – they cannot be exchanged like for like.
Decentralized finance (DeFi) refers to an ecosystem of financial products that do not rely on traditional financial intermediaries such as banks and exchanges. Central to the success of decentralized finance is smart contracts, which are deployed on Ethereum (contracts that two parties can deploy without an intermediary). DeFi also gave rise to dApps (decentralized apps), giving developers the ability to build applications on top of the Ethereum blockchain.
The history of Bitcoin starts before the 2008 White Paper by Satoshi Nakamoto. In 1989 first and 1991, David Chaum created DigiCash, and various cryptographers tried to solve the “double spending” problem. By 1998 Nick Szabo began working on a decentralized digital currency called “bit gold.” By 2008 the Bitcoin White Paper got published. And from there, by 2014, the Blockchain 2.0 (beyond the money use case) sprouted out.
An altcoin is a general term describing any cryptocurrency other than Bitcoin. Indeed, as Bitcoin started to evolve since its inception, back in 2009, many other cryptocurrencies sprouted due to philosophical differences with the Bitcoin protocol but also to cover wider use cases that the Bitcoin protocol could enable.
Ethereum was launched in 2015 with its cryptocurrency, Ether, as an open-source, blockchain-based, decentralized platform software. Smart contracts are enabled, and Distributed Applications (dApps) get built without downtime or third-party disturbance. It also helps developers build and publish applications as it is also a programming language running on a blockchain.
An imaginary flywheel of the development of a crypto ecosystem, and more, in particular, the Ethereum ecosystem. As developers join in and the community strengthens, more use cases are built, which attract more and more users. As users grow exponentially, businesses become interested in the underlying ecosystem, thus investing more in it. These resources are invested back in the protocol to make it more scalable, thus reducing gas fees for developers and users, facilitating the adoption of the whole business platform.
Solana is a blockchain network with a focus on high performance and rapid transactions. To boost speed, it employs a one-of-a-kind approach to transaction sequencing. Users can use SOL, the network’s native cryptocurrency, to cover transaction costs and engage with smart contracts.
In essence, Polkadot is a cryptocurrency project created as an effort to transform and power a decentralized internet, Web 3.0, in the future. Polkadot is a decentralized platform, which makes it interoperable with other blockchains.
Launched in October 2020, Filecoin protocol is based on a “useful work” consensus, where the miners are rewarded as they perform useful work for the network (provide storage and retrieve data). Filecoin (⨎) is an open-source, public cryptocurrency and digital payment system. Built on the InterPlanetary File System.
BAT or Basic Attention Token is a utility token aiming to provide privacy-based web tools for advertisers and users to monetize attention on the web in a decentralized way via Blockchain-based technologies. Therefore, the BAT ecosystem moves around a browser (Brave), a privacy-based search engine (Brave Search), and a utility token (BAT). Users can opt-in to advertising, thus making money based on their attention to ads as they browse the web.
Uniswap is a renowned decentralized crypto exchange created in 2018 and based on the Ethereum blockchain, to provide liquidity to the system. As a cryptocurrency exchange technology that operates on a decentralized basis. The Uniswap protocol inherited its namesake from the business that created it — Uniswap. Through smart contracts, the Uniswap protocol automates transactions between cryptocurrency tokens on the Ethereum blockchain.
Gennaro is the creator of FourWeekMBA, which reached about four million business people, comprising C-level executives, investors, analysts, product managers, and aspiring digital entrepreneurs in 2022 alone | He is also Director of Sales for a high-tech scaleup in the AI Industry | In 2012, Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy.
