The finance industry is among the earliest to experience significant disruption due to the progressive advancements of blockchain in finance.
Bitcoin in particular was designed to be an alternative to the centralized finance sector, and offer the advantages of cash in the online environment.
The first use case of blockchain was a digital currency, Bitcoin. Over the years, the technology has grown its capacity to facilitate more financial solutions.
The following are the most notable use cases of blockchain in the financial services industry:
Major financial institutions have pushed against cryptocurrencies as a viable alternative to fiat currencies. Nevertheless, they have embraced blockchain, the technology that powers crypto.
To traditional mainstream financial institutions, blockchain in finance is a tool to help improve service delivery for their clients. In particular, they recognize it as potentially useful in securing data and automating systems.
As a result, almost all the major players in the banking sector, such as JP Morgan, Barclays, and Santander, are dealing with blockchain in finance. Besides running their own blockchain projects, many have joined blockchain consortiums, particularly R3, Hyperledger, and B3i.
The Blockchain network is being embraced as the critical component needed to transition from the double entry to the triple entry accounting model.
The triple entry accounting model was first explained in a white paper by Ian Grigg, a cryptographer, and entrepreneur, published in 2005.
This model seeks to make it possible for financial records of transacting entities to provide credibility and authenticity to one another. The concept's core is to have a neutral, trusted third party to maintain and secure transaction records of entities doing business with one another.
During auditing, the trusted third party becomes the source of data that is used to confirm and validate the information a business has in its financial records.
The initial suggestion was to have a registered service provider as the trusted third party in the triple entry accounting model. However, when blockchain applications in finance came along, it turned out to be more suited to take up that function.
Blockchain is a distributed ledger technology on a peer-to-peer network that makes data secure and immutable through decentralization and hash functions. It is also less costly than having a third-party company store data as it is not a company with overheads.
Blockchain in finance offers new investment opportunities. These include assets such as cryptocurrencies, utility tokens, and non-fungible tokens. Investors can trade these assets for profit as they do stocks, futures, and forex.
The technology also creates investment models that were impossible to achieve in the traditional finance industry. For example, investors can become liquidity providers in blockchain decentralized finance (DeFi) applications.
Smart contracts on the blockchain manage and run DeFi platforms on their own. The funds a smart contract needs to deliver financial services come from investors who are paid interest and fees.
There are also investment opportunities that are hybrids of traditional finance and the blockchain. Examples of such investments include Bitcoin futures and exchange-traded funds (ETFs).
Besides being used to improve service delivery in traditional financial institutions, blockchain is also being used to design new financial models.
In particular, the blockchain is used to replace traditional financial institutions with smart contracts in service delivery. This arrangement is known as Decentralized Finance (DeFi).
A smart contract on the Blockchain can process conversions between different currencies, facilitate peer-to-peer money transders, lending, and directly issue credit.
The DeFi model makes services cheaper as there is no organization with overheads and shareholders to please. A smart contract manages all the processes on a peer-to-peer network. Also, the services are accessible to anyone connected to the internet.
The following are some of the most notable ways and use cases of blockchain in finance:
Before blockchain in finance, sending money from one country to another took up to weeks. It also had to cost a significant amount of fees.
That was, in particular, the case because several service providers had to be involved. Each had to manually process the transaction and charge for the service.
The Blockchain has not only made payments primarily peer-to-peer by removing trusted third parties from the equation but has also made international borders irrelevant.
When sending money using blockchain-based payments, it does not matter whether the sender and the recipient are next to each other or on the opposite ends of the globe. The time it takes for the transaction to complete and the fees charged are the same.
Blockchain in Finance offers the mechanism through which individuals can lend money to each other. The transactions can be secured through smart contracts.
Given the decentralized nature of Blockchain, the physical location of lenders and borrowers becomes irrelevant. This is part of the solution to the unbanked around the globe.
The Blockchain also creates the mechanism that a smart contract can manage a liquidity pool created by investors and lend to users at a fee on their behalf. The liquidity providers share the fees and interest.
Examples of lending platforms on the Blockchain include Aave, Compound Finance, and BlockFi.
The Blockchain can secure and process transactions on a supply chain. It can also facilitate the generation, transmission, and settlement of business documents such as invoices.
The smart contract applications on the blockchain are being used to automate financial processes and systems.
Indeed, they remove trusted third parties from financial transactions. That means one user can borrow directly from another or exchange from a liquidity pool created by other users.
With time digital data is becoming critical in the provision of financial services. Unfortunately, there is a growing threat to the security of digital databases.
The blockchain offers the capacity to secure data and also make it accessible in a way that protects users' privacy. This is achieved through the decentralized nature of blockchain, hash functions, and cryptography.
The following are the most common benefits financial systems can get from Blockchain solutions:
The technology offers a mechanism for securing new transactions and data. It achieves this through immutability on decentralized networks, hash functions, and cryptography.
Financial institutions don't need to build systems from the ground to use blockchain. Existing blockchains have the capacity largely ready for them.
In many cases, all businesses have to do is write a smart contract on a blockchain and have a secure system for collecting and processing data.
The Blockchain, especially on a public peer-to-peer network, allows stakeholders to easily determine the authenticity of transactions, processes, and data. This can be achieved even without exposing specific user information.
Meanwhile, no one, in particular, controls the system; therefore, all changes have to go through consensus mechanisms.
The Blockchain is a shared ledger on a peer-to-peer network. There is no limitation to who can access it. Meanwhile, anyone can participate in maintaining the shared ledger, a process that follows a public protocol.
Cryptocurrency is becoming mainstream, and many want a smooth experience when receiving, storing, and spending their digital assets.
Financial systems integrating Blockchain can improve the experience of their customers with an interest in crypto. This can increase their loyalty.
Indeed, it is now common for users to spend their crypto through debit cards supported by mainstream payment processors.
If you plan to integrate Blockchain into your existing financial systems or are building completely new systems, Casper Network can be your handy partner (see also use cases for blockchain technology or how blockchain can help different industries).
The Casper Network is built with the capacity to support dynamic and highly upgradeable smart contracts, which can be used to build new systems or improve those in existence.
Image courtesy of Pixabay.
