The financial sector experienced a great revolution with the inception of blockchain technology.
Although initially intended for supporting digital money like Bitcoin, currently it plays a fundamental role in transforming the financial sector– but what is this technology and why does it matter so much?
In this post, we will deeply analyze the effect of this innovative technology on our traditional banking systems!
However, let us first understand the meaning of Blockchain.
Blockchain Explained
Blockchain is basically a system of keeping records digitally. It’s special because it’s safe and clear— anyone can see the records. They might be about transactions (buying and selling things), contracts (agreements to do things) or documents.
Data is put into blocks and linked together so that they form a chain. Each piece of information stored this way has a unique code; this code links it to the block before it. If you change something in one block, it will be obvious that it has been changed.
Let’s now go further into how this technology is completely changing the financial industry.
1. Decentralization
The power of blockchain lies in its decentralization.
It operates differently from the conventional way of depending on a central body that will facilitate transactions– like banks do– because it uses P2P connections whereby every individual can avail him/herself with similar entry privileges into an open-sourced accounting record known as “the blockchain”.
2. Increased Security
Blockchain’s security is enhanced by its decentralized design. Because information is not stored in any one location, it cannot be accessed by hackers looking to interrupt operations or steal data.
Encryption further protects information as it can only be read by those with permission via private access codes; these features make Blockchain an attractive option for businesses needing secure transactions between multiple parties.
3. Faster Transactions
In finance, time is money— and blockchain technology proves valuable for this reason: It has a peer-to-peer network design that enables rapid transactions.
Unlike conventional banking systems where international transfers can take days to process (causing delays and expenses for firms), blockchain allows two entities to pay each other directly.
This means payments clear faster and companies end up spending less per transaction because there are no intermediaries jockeying for their cut.
4. Smart Contracts
Smart contracts are one of the most thrilling uses of blockchain technology. These automated agreements can self-execute based on coded terms and conditions.
Instead of needing to trust one another to follow through, parties can ensure they will do what they’ve promised by having their agreement directly enforced via this type of code— which may mean there is no need for an outside party like a bank intermediary!
5. Improved Transparency
Increased transparency in financial transactions is also provided by blockchain technology.
Because all information about them is recorded on an immutable ledger which every participant can access, there exists a complete audit trail of each transaction.
This improves accountability— an essential factor for trust-building within the financial world.
6. Reducing Costs
The conventional financial system comes with expensive fees, which can take a large chunk out of your savings! But there’s hope: Blockchain technology provides an alternative way for people to save their money without paying too much in charges.
By removing middlemen from each transaction (and the costs that go along with them), it makes things cheaper overall– meaning users get better value on lots of different kinds of financial services all around the globe.
This has proved especially helpful in giving cheap or affordable banking, lending and insurances to people who have been excluded because they are poor.
7. Enhancing Financial Inclusion
Blockchain technology has made it possible for people who couldn’t use traditional banks to take part in online economies– things like making payments securely or investing using loans.
This tech offers low fees as well as extra safety, meaning anyone with an internet connection has more financial opportunity.
As a result, there are fewer barriers to being involved worldwide, which may help reduce economic differences between groups over time.
8. Disrupting Traditional Banks
The direct transactions between peers that Blockchain enables— doing away with the need for middlemen— has made banks uneasy.
They fear this technology could shake up their business in a big way if more people use it.
So now some banks are looking into incorporating Blockchain techniques as they seek to stay current with new financial trends.
9. Fresh Investment Opportunities
The advancement in blockchain technology creates new doors for investment that cut across individual and institutional investors.
With the rise in acceptance of digital currencies e.g. Bitcoin investors can now make huge profits on what they have invested.
On top of that, there are now platforms powered by blockchain from which users can invest in traditional assets like stocks, commodities and real estate through tokenization.
Final Thoughts
We have only scratched the surface of how blockchain is changing finance– there are countless other applications being investigated.
From voting systems to supply chain management, the technology could revolutionize many different industries. However, just like any nascent technology, blockchain must address several obstacles before it is embraced by the financial sector.
These include regulation and a lack of standardization– but as governments and big banks recognise its benefits, they are likely to find ways round such problems: perhaps by creating new rules specifically for this market upheaval; or maybe via an international body that will set standards for everyone.
To conclude, finance is being totally changed by blockchain. It’s taking control away from central authorities, making transactions more open and secure, cutting costs– fees too– and boosting the numbers of those who can take part in the system as it lowers entry barriers.
As firms adopt this game-changing technology, there will come a point where its very structure alters: traditional banking powered not as we know it but (also) by innovations born of blockchain!
