The financial services industry will be transformed by blockchain technology. Blockchain networks will lower fees, increase transparency in the murky world of big finance, and reduce the time it takes to move money around the world significantly.
How blockchain works
A blockchain is a decentralized network with the following characteristics:
The network can be accessed by anyone without requiring special permission.
The majority of blockchain networks are open.
Immutability refers to the fact that data and transactions on a blockchain network cannot be changed.
Rather than relying on a centralized node, blockchains rely on community involvement.
Comparing and contrasting a blockchain network with a database can be beneficial. Only those users with specific permissions have access to the data contained in a database. A database is a collection of information that is centralized in one location and protected by a single company or agency. Authorized users have access to database information and can easily change it.
There are several applications for blockchains:
With DeFi on the Ethereum network, blockchain banking is becoming increasingly common. On decentralized networks that are not owned by a centralized company, users can lend, borrow, and exchange properties.
As with Bitcoin and other monetary blockchains, blockchains can be used to send value.
Many blockchain currencies have a cap on the number of coins that can be produced when it comes to blockchain financial services. This qualifies them as inflation hedges (there will only ever be 21 million Bitcoin)
A blockchain can be used by anyone to timestamp data. Since they can't be modified, blockchains are ideal for timestamping.
While it will take ten to fifteen years, blockchains will potentially eliminate the majority of accounting and back office workers.
Disadvantage of Blockchains
One disadvantage of blockchains is that they are inefficient at storing data. A database is much more appropriate for a blockchain financial services company that needs to store large volumes of data. However, several blockchain initiatives have been created to fix this.
Another disadvantage is that many public blockchains experience scaling issues. The majority of blockchain banking networks are currently not fast enough to handle the volume of traffic that PayPal can handle. One disadvantage of blockchains is that they are inefficient at storing data. A database is much more appropriate for a blockchain financial services company that needs to store large volumes of data. However, several blockchain initiatives have been created to fix this.
Another disadvantage is that many public blockchains experience scaling issues. The majority of blockchain banking networks are currently not fast enough to handle the volume of traffic that PayPal can handle.
Private blockchain
A private blockchain is a network that is run by a single company or a group of companies. R3 has been around since 2014 and is one of the most well-known private blockchains. JP Morgan has a private blockchain on which their JPM stablecoin is designed for blockchain in banking. The JPM coin is only available to institutional JP Morgan clients.
The main drawback of a private blockchain is that it is a closed mechanism that only a small number of people have access to. The interoperability of a network like Ethereum is lacking in private blockchain financial services solutions.
The ability to scale to thousands of transactions per second is a major benefit of private blockchain banking. Since they compromise protection and inclusivity for speed and reliability, private blockchain networks are typically faster than public blockchain networks.
Is it safe to assume that since private blockchain financial services are quicker, they would be the most widely accepted solution?
This is highly unlikely to be the case. Since public blockchains have such a huge network impact, building on them makes much more sense than building on a private blockchain. Since they expect that companies will use public blockchains in the future, the consulting company EY has invested several million dollars building out infrastructure on top of Ethereum.
Furthermore, much work is being done to scale public blockchains to the point that they can accommodate enough transactions to be commercially viable.
The Effect of Blockchain Financial Services on the World
The legacy financial structure will be altered in a number of ways as a result of blockchain in banking. A few of the best examples are as follows:
Remittances that are both faster and less expensive
One of the biggest winners of blockchain financial services would be multinational companies. Corporations can send millions or billions of dollars to anywhere in the world for a small fee using blockchain-based stablecoins.
Depending on the venue, international money transfers using the current financial system will take days, weeks, or even months. Blockchain banking would be a huge step forward from the current scheme.
The Accounting Department Will Be Taken Over by Smart Contracts
Blockchain financial services is just the latest example of how software is consuming the planet. The accounting business will be transformed by financial smart contracts. A few of the services that smart contracts can provide are mentioned below.
Payments to a seller are made automatically until the product is purchased.
Tax payments are made automatically.
For a company, a more effective accounting ledger
Stablecoins automatically swap currencies.
Although this is not a good thing for work, the harsh reality is that smart contracts would eliminate millions of workers. Blockchain banking contracts will replace several accountants, back office employees, and lawyers.
The bad news is that the job market is deteriorating, but the positive news is that smart contracts will reduce costs for companies all over the world. Consumers would benefit from a portion of the savings.
Providing Customers with Blockchain Financial Services
Decentralized Finance, or DeFi, has grown in popularity as a part of the cryptocurrency ecosystem. Users of DeFi may borrow money, deposit money for interest, or trade assets on decentralized exchanges. All of this is cutting-edge technology, and the amount of money invested in DeFi has been increasing at an exponential rate since 2020.
The issue is that decentralized systems are not as simple to use as centralized applications. To use DeFi, you must first learn how to create a crypto wallet, send money to various addresses, and interact with blockchain apps, which are not always user-friendly.
DeFi could help the legacy financial system by providing a more user-friendly interface for some of these decentralized applications. On the backend, a bank might connect to a DeFi protocol and then allow customers to access the application via their banking website.
Customers would profit because they could use decentralized protocols without having a deep understanding of blockchain technology, and the bank would benefit from charging a small fee for this service.
The financial services industry will be transformed by blockchain technology. Blockchain networks will lower fees, increase transparency in the murky world of big finance, and reduce the time it takes to move money around the world significantly.
Who are the Biggest Winners in Blockchain Banking?
The great thing about blockchain technology in banking is that it can help everybody. Blockchain, like the internet, is a technology that benefits everybody.
Large companies would be able to send money around the world for a fraction of the current cost. People who save money can put it in DeFi apps to receive a real interest rate instead of the 0% interest rate offered by most bank accounts.
Customers would be able to access advanced financial products if banks follow blockchain. These foresighted banks would be able to charge for the service while also expanding their customer base.
Who will be harmed? Businesses and banks that have yet to embrace blockchain technology. They would become uncompetitive in comparison to their competitors who stay current with technology.
The Benefits of Blockchain Technology
We haven't covered any of the benefits of blockchain financial services yet, but here are a few more.
Micropayments
Certain blockchain networks allow sending micropayments as small as ten or twenty cents financially feasible. Granted, not every network allows for this. The average fee on Bitcoin, for example, is a few dollars. On other networks, however, the fees are so low that micropayments are possible.
Access to all financial resources
Financial services built on the blockchain are available to everyone in the world. You only need a way to obtain a small amount of cryptocurrency to participate in these ecosystems.
Blockchain banking is much more inclusive than conventional banking, which excludes billions of people due to a lack of proper documentation.
Bitcoin is a self-contained currency.
Bitcoin is the most stable blockchain of them all. Bitcoin is not governed by any government, organisation, or corporation. It's a currency that exists outside of national borders.
The supply of Bitcoin cannot be inflated, and governments cannot seize Bitcoin from its owners. For people living under authoritarian regimes, Bitcoin is an elegant alternative.
Blockchain banking is the way of the future.
Banking on the blockchain is the way of the future. Building a financial system on top of the blockchain has so many advantages that the legacy system has little chance of surviving.
The move to blockchain may take a decade or two, but the process has already begun. We're seeing widespread Bitcoin acceptance, DeFi is gaining traction, and some countries are considering launching their own Central Bank Digital Currencies. The future of financial services is rapidly approaching.
Banks are so aware of these issues because I am sure that in the future the virtual market will be so large that there will be no competition