A large majority of financial institutions have become familiar with blockchain technology applications such as Bitcoin and cryptocurrencies. Blockchain technology is a digital ledger that makes exact copies of every transaction and distributes the copies across all of the users computers (nodes) on that network.
The transactions are processed through blocks, recorded one after another, forming a chain of blocks, hence the title ‘blockchain’. The data recorded in blocks is protected and secured through cryptography, preventing the corruption of transactions and other fraudulent activity.
This reshapes the way people trust each other and financial institutions, as the transaction network is self-sufficient and guarantees the protection and security of the trading of assets and finances.
Blockchain technology also removes the need and ability of a third party “middleman” to involve themselves, essentially creating a decentralised trading and asset management platform.
As society is moving towards being cashless and growing more dependent on technology, traditional methods of finance must evolve with society’s needs. Blockchain is a disruptive technology driving change across all sectors, and it is already being adopted by several institutions.
Benefits of Blockchain Technology
Blockchain is the underlying technology behind all of the cryptocurrencies and decentralised applications (DApps) developed on the blockchain. By exploring real-life applications it is possible to determine the relevance of this technology in the financial industry.
Today, banks face aging infrastructure and rising replacement and maintenance costs, as well as the burden of heavy regulatory boundaries and greater economic instability.
Here, blockchain can be applied to evolve bank infrastructures and at the same time save a grand amount of money. Santander conducted a study and found that the implementation of blockchain could save a bank up to $20 billion per year.
The Power of Smart Contracts
Smart contracts are the most anticipated blockchain application. They facilitate the negotiation and execution of agreements, acting as legal contracts. This means that contractual clauses are partially or fully self-executing and enforcing.
The benefits of smart contracts is that they are active on the blockchain, meaning that they are more secure than traditional contract law. The conditions of smart contracts though, dictate that the quality of the input will determine the quality of the output.
As smart contracts are blockchain oriented, their rules are recorded in computer code. Therefore, the rules cannot be freely interpreted to fit the intent of the contract and must be strictly interpreted according to literal meaning.
Blockchain technology is not a new phenomenon, but industries are only recently experimenting with the scope and applicability of this technology. With the growing interest in smart contracts, transactions will become more secure, and the process will be increasingly more trustworthy.
There are a plethora of methods to utilise blockchain technology in the financial industry, from smart contracts to implementing the technology as an infrastructure.
There are many doubts regarding how the technology can be used and if it will promote healthy industrial development. Until then, we must constantly inform ourselves and learn about the possible methods of implementation so as to stay ahead of the game.