What is a Blockchain?
Blockchain, otherwise called Distributed Ledger Technology (DTL), is a decentralized, distributed and usually public virtual record of information housed in “blocks”. No single owner of information exists in a blockchain meaning that everyone has access to verify and audit transactions from the comfort of their home. Importantly, alterations to the information stored in a blockchain cannot be made discreetly.
How Does a Blockchain Work?
Every block in a blockchain is made up of a cryptographic hash of the preceding block, a timestamp, and the transaction data. A hash is a mathematical function that converts or maps a defined set of data into a “hash value” i.e. a bit string with a defined size. A cryptographic hash is basically a hash function with added security detail that protects the content of the information being passed along the chain.
Each block in the chain has a limited amount of data it can hold. As a result, new blocks are constantly created along the chain to preserve the information. Each newly created block is closed when it reaches its memory capacity and is added to the chain in a repetitive linear process. The timestamp is evidence of the block’s transaction data existence at the time of the publication.
The continued linkage of blocks and dissemination of information along the chain makes the alteration of an independent block without changing the preceding blocks impossible.
Importance of Blockchain Technology
Blockchain technology is highly regarded for its security and transparency. With blockchain, 3rd party interventions are eliminated and cost-reduction of transactions can be ensured. The absence of human element serves to improve the accuracy of the chain.
These advantages explain why blockchain is central to bitcoin operations and other related digital currencies.
Economic Significance of Blockchain
The World Economic Forum projects that an estimated 10% of the world’s Gross Domestic Product (GDP) will originate from blockchain-based systems by 2025.
According to a PwC report, blockchain could add $1.76 trillion to the global economy by 2030 and improve 40 million jobs worldwide within the same time frame.
The report identifies 5 primary use cases across which this economic impact is set to be spread:
Product tracking: This is expected to contribute $926bn to the overall market share
Payments and financial services (including digital currencies) which is projected to yield $433bn
Identity management (personal IDs, certificates) with an expected input of $224bn
Dispute resolution and contracts which will provide $73bn
Customer engagement ($54bn)
The Role of Blockchain in the Finance Industry
As outlined in the preceding section, blockchain use cases are spread across 5 main areas. These areas are all possible fields for transforming security. Some of the ways blockchain can enhance the finance industry are outlined below:
Smart Contracts: Blockchain can usher in a new era of agreements through smart contracts. A smart contract is a self-executing contract written in code that encompasses the terms of the agreement between two parties. On blockchain, this agreement is immutable and trackable. Once the terms of the agreement are fulfilled, the smart contract executes the agreed terms. Using smart contracts in the finance industry can function to eliminate the need for operators to manually approve transactions, insurance claims, trades and other financial activities. This will reduce waiting times and fees associated with the multiple steps currently required to carry out banking activities. Recently, decentralized finance has shown promise as an infrastructure capable of executing smart contracts with adequate provision for transparency, security and other protocols.
Record Keeping: Using blockchain technology, banks and other financial institutions can record digital information more effectively and accurately than traditional bookkeeping methods. In doing this, larger amounts of transactions and financial activities can be recorded and also monitored for changes, thus reducing costs associated with delays and errors. External audits can be made easier and accounting skills which are currently dedicated to these processes can become available for development in other areas.
Payments: Blockchain has the capacity to facilitate payments more quickly than existing methods while still maintaining security of funds. Payments across borders can be made easier, contributing to global trade and economic growth. This will be made possible by creating networks between international banks and financial institutions that will help to reduce the delays and fees and provide more seamless experiences for customers.
Capital Markets: Blockchains can be employed in capital markets to digitally represent assets and facilitate buying and selling of securities. In addition, it presents an opportunity for regulators to observe the markets and proffer early solutions in case of market fluctuations.
It is noteworthy that AI can be used in conjunction with blockchain. The synergistic action of both technologies can drive immense value. AI techniques such as machine learning and reinforcement learning can be used to extract valuable insights from the validated records stored on blockchain. The findings of this analysis can be used to solve innumerable challenges and optimize service delivery in the finance industry.