In the year 2008, Blockchain came into existence. Bitcoin was the first digital cryptocurrency. As time passes by innumerable industries are recognizing the advantages of blockchain technology. The finance industry is getting the hang of the importance of blockchain technology.
How is blockchain technology defined?
A blockchain is a technology in which a series of changeless data is stored and handled by a set of devices. None of the blockchains is owned by a single business firm. The blocks of data which are also known as blocks are guarded and chained to one another using chains. The main reason why blockchains have gained so much of importance is that the entire process is decentralized. The database stored is completely secured and none has any access to it. None can touch the data as the data is unchangeable. As it is transparent, therefore, keeping a track of the data becomes next to impossible.
What is the three main support system of blockchain technology?
Before Bitcoin and BitTorrent were introduced the entire process was centralized in nature. Centralization means that if you are a user then you can gain access to anyone's data by seeking permission from the single
entity. Banks can serve as the best example of the centralized process. If you require transferring an amount to a party then you are required to consult the bank. Another example of the centralized process
can be when you ask for queries from Google then you are asked to wait. Google gets back to you by retrieving information from the server. Though the process is serving people for years it has been causing serious
damage to the society at large. This is because all the data series are saved and protected in one server. It's an easy job for hackers to gain access to all these crucial data. There is no system up-gradation
as such. If there was any then the entire process would have stopped. When a centralized entity closes down then there is no way of retrieving crucial data. If any centralized institute is corrupted then it
loses all access to the data. This is a serious threat to users.
On the other hand, when it comes to the decentralized process then the data is not securely accumulated within one single organization. Within a decentralized network if you want to connect with any of your friends then you can do so immediately from your own space. This is the main concept behind the invention of Bitcoins. Do you want to transfer money to a relative? Well, that's an easy task. You can do so from your comfort zone.
The concept of transparency is misconceived by a lot of people. Some say that blockchains are secured while others have the view that they have clarity. For example, if you are a part of the blockchain and you are
about to check out another user's transaction history then it would be represented by an address. This means that you do not get to know the private details of the person but you can view his transactions. The
transparency offered by the decentralized system is immensely growing in the financial industry. It is the icing on the cake.
If you would like to know from the angle of cryptocurrency then you can find out how the institute is transacting because you have all the details. This forces centralized institutions to be authentic with their details. However, it is just a mere example. You are fully aware that none of the companies will transact using cryptocurrencies. If they were to do so then all their transactions won’t take place within this single network.
Changelessness means that once something has been fed into the blockchain network then the data is unchangeable. None can mess with the data entered. How many fraud cases can be curbed in the financial sector if this process is followed? If a hacker gets to know that the data is unchangeable then a lot of customer’s money can be saved. This is the main reason why cryptographic hash function came into existence. Hashing refers to the grasping of an input string of any width and producing an output of a particular width. In the process of hashing, it doesn't matter how long your input is but your output has a permanent length. In such a situation none is required to remember the input as the length can be very long. You must be aware of the output which is particular in width. This makes mentoring easier.
This is a property of the cryptographic hash function. When you make minor changes in the input even then you are bound to receive an output massive in nature. For example, there are three blocks and each block contains a set of data. If a hacker tries to tamper with the data in block three then the output produced will result in unimaginable results. This is turn is bound to affect block 2 and then block 1. The entire chain is now broken and dismantled. This is exactly how the blockchain technology attains stability.
How is blockchain affecting the finance industry?
The blockchain technology can change the entire banking industry. The banking industry is adopting the blockchain technology rapidly.
Rapid Cross Border transactions
People are finding it difficult to transfer money internally within a bank. The average time taken to transfer within the same bank can cost you 2 to 5 working days. Now, this is truly insane. This is a huge concern
in the 21st century. Innumerable people are working in remote areas and their salary is given to them by making a bank transfer. Most of the time, the money doesn't reach on time. If you are a freelancer, by
any chance, then you will know the real pain. The bank to bank SWIFT transfers can cost you a lot of time. PayPal is the worst medium of sending and receiving money. Why does this happen? If the company is releasing
the pay on Thursday then it reaches you on Monday because banks remain closed on weekends. The process takes a long time because the system is centralized.
Blockchain, on the other hand, is a decentralized procedure and it doesn't involve any form of a centralized institute. Moreover, all the processes are conducted by the users themselves and therefore both time and money are saved. The transactions are completed within seconds, unlike banks which take up to 2 to 5 days.
Where do you think a financial institute gives up a lot of money? Well, it's nowhere else than complying with the Know Your Customer (KYC) regulations. £40m is spent by a financial institute every year on an average for KYC Compliance. The cost can also go up to £300m. J.P. Morgan has spent a large sum of £1.6 billion on its compliance department. In addition to this, 13,000 people have been employed to monitor regulatory transformations. Employees working in the corporates stated that bringing clients on board can take up to 2 months. Why don’t banks shift from this offline procedure of transactions? This is because some changes or the others are always coming up when it comes to complying with regulations. Other than that, most of the banks still make use of the traditional paper system. The procedure of compliance is done but by using papers.
How does the blockchain technology help? Self-sovereignty is the main idea behind the blockchain technology. It means that a person has the ownership right of one's body and soul. This concept is in a fault-finding condition now. Every organization that you get to see in today's world has an online presence. Online scams increase due to siloed existence. When you provide your details in the blockchain network then be assured that it is safe. How would KYC become cheaper because of that? For example, you visit a bank for the opening of a bank account. You are asked to provide the bank with all the private details and also give access to it.
As reports state that there are innumerous parties that are involved in trade finance. Due to a large number of parties involved in the process, the entire procedure becomes destructive and sluggish. The general tendency of the parties lies in mistrust which results in the involvement of central institutes. Smart Contracts in blockchain can resolve such a critical issue.
Cryptographic Hash Functions
Transactions serve as input and processes over a hashing algorithm thereby producing an output which is of an immovable breadth. This process takes place over financial platforms like Bitcoin. Being deterministic means it does not matter how many inputs you have passed through a hash function the output remains the same. It would have been really hard to keep track of the different hashes produced every single time. Pre-Image resistance states that it is really difficult to figure out the input with the help of produced output. Though it is not entirely infeasible the process is annoying and can kill a lot of your time. The snowball effect claims that minor changes being made in the input can result in disastrous changes in the output.
Smart Contracts are automated in nature. This feature makes the procedure simpler. Procedures can take place only when it is abiding by certain coded rules and regulations. No human intervention is required. Smart Contracts are based on instructions. Only when the instructions coded in the first set are executed then the second step follows. For example, there is a vending machine and you insert a coin in it. Accordingly, you press the buttons of your choice and press OK. The items are then processed out and you get to have it. No third parties were involved in this act of vending machine. Until and unless you are done with the first step the second step couldn't be executed. Smart Contracts eradicate third parties thereby cutting out a lot on your costs. No trust-building is required as there is no third party involved in the entire act.
What are the hurdles that the blockchain technology must overcome?
Financial institutions have a vast amount of transactions to be processed. The blockchain technology hasn't developed that architecture to date. Once the architecture is built then it is good to go with the financial industry. Dependability of the technology on public-key cryptocurrency must be removed. A user can get a hold of the assets only with one's private key. The keys either public or private can vanish. Such a displacement will lead the owners to transfer their assets documented on the blockchain network. Interoperability problems can create a menace for financial institutions.
The blockchain technology and the financial industry can go hand in hand once the obstacles are removed from its path. If the benefits of blockchain technology are taken into consideration then the financial industry can gain a lot.