Blockchain technology is one of the emerging technologies in the economic sector that has revolutionized the economy and the finance industry. Whether it is about more safe and secure transactions, managing risks or even holding promises to reduce fraud, the finance industry has changed significantly.
Blockchain mechanism reduces the risk related to hacking and the safety of transactions by adding a trust factor to the transaction system. In the digital transformation era, as the world’s financial system becomes more interconnected, investors would be wise to educate and upgrade themselves on how blockchain is altering the system and how to gain and control exposure to this ongoing development.
What is Blockchain?
Blockchain is a decentralized network that tracks and records digital transactions. As a distributed ledger, there is no single entity or person in control who has the power to taint the network because there is no central authority over the network.
The blockchain is made up of discrete data blocks that are chronologically linked together, and each contains records of information. The network has confidence since these links cannot be altered. By safeguarding information exchanges as they happen, this ground-breaking system handles them.
Blockchain aims to make transactions cheaper, faster, and more efficient. Investors have a wide range of chances thanks to the technology’s numerous uses that may be incorporated into various businesses. It’s one of the technological foundations for cryptocurrencies like Bitcoin to start.
“Blockchain is as significant now as the internet was 25 years ago.”
Thomas Reuters
Advantages of blockchain
Blockchain has the potential to improve consumer affordability, reduce fraud risk, and increase transparency in the financial services sector. Blockchain is well-known for playing a major part in cryptocurrency systems like Bitcoin. It keeps a secure, decentralized log of cryptocurrency transactions. Blockchain can therefore eliminate the need for a third party and ensure the accuracy and security of the database.
Forbes has highlighted the major advantages of Blockchain technology which have been summarised below:
Steadiness
The data uploaded on the blockchain are immune to tampering or hacking. It is impossible to remove or change the data already uploaded. Thus, it keeps it safe and secure, unlike traditional databases. Conventional databases were based on the principle of CRUD (create, read, update and delete).
Transparency
Since blockchain is decentralized, it is quite easy for any network to verify the data uploaded, thus, ensuring the authenticity of the data. It has more trust from the public than the traditional database system, where users cannot identify the verified information, and much data is not made public.
Suppression
Blockchain is free from censorship and suppression since no single party controls the whole database and the technological system. No government can even interrupt a blockchain system unavailable in a conventional database. For instance, banks can forbid the accounts of any of their users in traditional systems.
Traceability
Blockchain has created an irreversible and secured audit chain that makes it traceable at any point in time through any network. The traditional database was not facilitating any traceable trail or chain.
Economical
Blockchain allows consumers to profit from lower costs connected with traditional financial services as investors turn away from financial advisors to avoid paying greater fees.
Utility of Blockchain Technology
Being one of the most secure transaction systems, blockchain mechanisms can be used in various financial services and activities. Most banks, like French Investment Bank BNP Paribas, have announced that they will surely look into blockchain for their currency funds and order processing.
Organizations like NASDAQ have taken significant steps towards blockchain technology and taken measures to promote it. Various utilities of blockchain have been listed below:
Payment Mechanism
The use of blockchain technology as a payment mechanism is its most obvious and fundamental use. Bitcoin and other cryptocurrencies serve as a form of digital money and a means of transferring payments internationally. These transactions happen instantly and only need an active internet connection for the transaction to be successful.
Even though it may sometimes take several minutes for a transaction to be completely confirmed, the actual transaction only takes a few seconds. These exchanges are secure, borderless, and largely anonymous. It is also significantly less expensive than using credit card processors to send money worldwide due to the low transaction costs of just a few cents per transaction.
Depository Mechanism
Consumers typically use banking institutions to hold deposits and savings accounts. But as soon as you deposit into a bank account, the bank uses fractional reserve banking to loan most of it out and generate revenue.
As a result, the bank does not hold the major portion of the money that appears when you see your bank account balance. In reality, a bank run happens when too many clients want to take their money at once, but there isn’t enough money to go around. Therefore, a bank account balance is essentially an accounting item only.
The blockchain ultimately functions as a ledger that records accounting transactions. Since bank accounts could eventually be represented on blockchains, they would become more accessible, safe, and affordable to maintain. Additionally, it might reduce the danger of bank runs.
Secondary Market Exchanges
Purchasing stocks and exchanging currencies involve huge legal restrictions in today’s era. Clearing fees also need to be paid with each trade transaction and become sizable over time and with the increase in the order size.
All asset classes, including stocks, bonds, derivatives, commodities, and real estate, would experience a significant reduction in transaction costs. Also, clearing costs if the ownership of shares could be recorded on a blockchain and any change in ownership could be instantly validated and confirmed.
Issuances and IPOs
If the secondary market exchanges can be held on blockchain, is it possible for primary market transactions too? Imagine a situation where the IPOs are released through an online database mechanism, and the extra expenditure of companies over investment bankers is eradicated.
It will save more than 7% of the amount earlier spent on investment bankers. These shares can then also be sold in the secondary market via blockchain. If the public accepts this scenario, it can disrupt the asset exchanges and investment banking and finance industry.
Revolutionizing the Financial system
Cryptocurrencies have existed for more than a year, but their extremely volatile nature has blurred the real revolution. Bitcoin being the first cryptocurrency, has shown significant improvement and changes in the blockchain mechanism.
Blockchain is a distributed ledger technology (DLT) currently being developed for numerous uses, most notably in the financial sector. DLT is poised to fundamentally alter the financial system once more, with significant ramifications for investors, much as the changeover to computerized trading did 35 years ago. We examine the choices that are opening up for investors below.
Digital Transformation
With the onset of blockchain technology, trading assets and their recording has become way easier and more secure. This technology has significantly reduced transaction fees and operating costs by eliminating the need for intermediaries to trade assets.
DLT is disrupting and transforming the way banks and other financial institutions used to function. The conventional infrastructure has been replaced by new clearing and settlement processes to accommodate the new digital assets and technology created on DLT.
Investors are gaining more control and reduced potential risks due to a diversified range of sources of return. Many digital assets may not be new but only an alternative way of doing what trading and investing were done earlier.
Digital assets can be in various forms, such as cryptocurrency, utility, and security tokens. Each asset has some properties that offer new opportunities but also bring some risks.
Mutualized infrastructure
Blockchains and digital assets provide platforms to universal investors for investment in different assets. It offers a much greater degree of personalization of fund type, investment size, geographical dimension and portfolio building than traditional mutual funds.
This could create a global investment platform with a common ledger and a shared infrastructure. The mutualized infrastructure in blockchain facilitates easy reporting to stakeholders and regulators while reducing technological and administrative friction.
Privatisation and Going Green
The faster pace of conversion into digital assets and currencies can also be used to increase reach to private markets and other investment opportunities currently available only to institutions or high-net-worth individuals.
Green infrastructure is also manipulated by tokenization and encourages retail investors to participate in world moves towards net zero emission. It can be a way to access infrastructure investments usually reserved for institutional clients.
These types of assets usually result in liquidity risks. While tokenization itself does not produce liquidity, it can let illiquid assets be traded in secondary markets.
New Income Streams
Intermediaries are required under the current market architecture to help with asset origination, trading, and administration. Although every intermediary offers a layer of knowledge and service, they also add a layer of costs that ultimately reduce investors’ earnings. These middlemen won’t vanish overnight, but their function will change as society becomes more decentralized and digitized.
This disintermediation tendency can be seen in blockchains that use the Proof-of-Stake (PoS) consensus mechanism, an alternative to the Proof-of-Work (PoW) mechanism used by the Bitcoin blockchain. This opens up new revenue streams for investors.
“Never depend on a single income. Invest in creating a second source.”
Warren Buffet
Various techniques to reduce have emerged, like “staking”, where investors put their assets at the disposal of someone else, and “hedging”, where investors buy various other assets and diversify their portfolio to reduce their risk of loss from any one or two assets. Investors can also offer trading activities services across cryptocurrencies and open a new source of revenue.
Stablecoins – Future of banks
Even though bitcoin and other blockchain-based assets offer higher returns, safe transactions and the scope of wealth maximization, risk-averse investors are always suspicious about investing in cryptos and blockchain digital assets.
Stablecoins have emerged as a new technology pegged to steadier assets like gold. Stablecoins are much steadier, transparent and risk-free investment sources. They are a form of private money that is majorly used as a payment method.
Conclusion
Many believe that the TradFi sector will be completely replaced by blockchain. Others think blockchain technology will only add to the infrastructure already present in TradFi systems. Blockchain technology has the potential to transform the traditional finance system and make it more transparent and secure. Blockchain technology is more suitable for banking operations with benefits like steadiness, decentralized economy and traceability.
However, transformation does not happen in a blink of an eye. Banking and finance sector institutions need to develop adequate infrastructure to utilize and adopt blockchain technology for managing their operations. Some experts believe blockchain will replace banks altogether, while others believe it will only replace the current financial and banking system. The extent to which blockchain will embrace the banking system remains a mystery.
It is unclear how and to what extent the finance sector will use blockchain technology. One thing is certain: blockchain will usher in a new era of financial openness, fairness, and safety.
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Frequently Asked Questions(FAQs)
- What is a blockchain?
Ans: Blockchain is a decentralized network and record of digital transactions made up of various data blocks that are not controlled or influenced by any single authority.
- What is a blockchain company?
Ans: A blockchain company is a company that has invested in and/or developed blockchain technology for its operations.
- What is Mining in Blockchain?
Ans: Mining is used as proof that a blockchain transaction occurred. It is a complex mathematical algorithm that requires high-performance CPU capacities. For more information about Mining, you can check our article “How to Mine Cryptocurrency? What Is Crypto Mining?”
