Will blockchain change finance? Clarifying some basic concepts
Shortly after its popularization, blockchain has proved that it can indeed revolutionize a wide range of industries. Features such as decentralization and immutability are concepts that relate to many business sectors all over the world. However, blockchain’s uses and current implementations for finance show how the two industries are closely knit.
What is Blockchain?
Let’s get this out of the way first. Blockchain is essentially a set of records that are distributed across many nodes in a network. These records are generally sets of transaction data. They are stored in blocks. Each block has a particular set of data called a transaction. Because of its decentralized design, there is no single point of failure that can disrupt the transactions. (Now, you have to understand how this is a concept that is quite dissimilar to traditional record keeping in finance and banking.) A block is basically an immutable record. It contains a complete record of every single transaction that has taken place during that block. This cannot be changed or deleted. Once a block is created, it is linked to the previous block and hence they are inseparable. The transactions take place within the block, but they cannot be changed. The term ‘block’ is short for block chain.
What does Blockchain mean for the finance industry?
Gartner predicts that blockchain will be a $6 trillion market in the next three years. While speaking at the Harvard Business Review’s HBR event in 2017, Carlos Gomes, chairman of the Americas for Deloitte, discussed blockchain and said that he believes the technology will completely disrupt the finance industry. He also thinks that in five years time, all of the financial firms are going to be totally transforming the way they work by adding blockchain technologies into their own services. There is not much progress on the application of blockchain in traditional banking yet, but the use of blockchain technology in fintechs is already on the rise. But what are the opportunities of using blockchain technology in finance?
How Blockchain will change the finance industry?
The prime use case for blockchain technology is in the financial sector as it offers the following key benefits to companies within the banking, insurance, payment processing, capital markets, government and law enforcement, and digital asset space. But, the traditional financial sector is one that thrives on what has already been achieved, not speculations.
The importance of transactions
This is why many common use cases for blockchain in finance are related to how the industry handles transactions. If we’ve got a transaction that needs to be verified, or cleared, the traditional banking system’s method of transaction clearing/verifying is to verify the input of users and then complete the transaction by checking for the validity of that input. The transaction processing can also be completed when the transaction is at its end point by duplicating the final output. With the blockchain network, you can sign and verify a transaction as you go without the need of adding a middle-man or verifying the input.
In order to capitalize on the opportunities and avoid threats that blockchain introduced to the finance industry, investors need to clearly understand concepts such as decentralization, immutability, and smart contracts. It is more apparent than ever that blockchain is here to stay, especially in its applications in finance. As investors who benefit from disrupted markets, it is our job to catch up with not only the trends but also the technologies of our times and of the future.