blockchain-in-finance

Blockchain in Finance: How Blockchain is Taking Over Fintech

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 Fintech industry by making it stronger, more secure and robust, while also increasing the options of use throughout the community.

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:

  1. User requests for any type of transaction, including those with or without contracts, bitcoin, information, or other data.
  2. The critical data now gets forwarded to the P2P network’s various nodes (the people involved in the transaction) for validation.
  3. The algorithms record and update the node validity and the user status.
  4. 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 strategy enhances 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.

Learn More From The Book Blockchain Business Models

blockchain-business-models

Read Next: EthereumBlockchain Business Models Framework Decentralized FinanceBlockchain EconomicsBitcoin.

Read Also: Proof-of-stakeProof-of-workBlockchainERC-20DAONFT.

Other Commercial Applications On Top Of The Blockchain

DeFi

decentralized-finance-defi
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.

Tokenization

erc-20-token
An ERC-20 Token stands for “Ethereum Request for Comments,” which is a standard built on top of Ethereum to enable other tokens to be issued. Based on a smart contract that determines its rules, the ERC-20 enables anyone to issue tokens on top of Ethereum. As they are using a standard, those are interoperable. ERC-20 Tokens are critical to understanding the development of Ethereum as a business platform.

Decentralized Autonomous Organizations

decentralized-autonomous-organization
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.

NFTs

non-fungible-tokens
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.

Sharding

sharding
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).

Staking

proof-of-stake
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 Ethereum’s Casper protocol). Proof of Stake has the advantage of the security, reduced risk of centralization, and energy efficiency.

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