Also known as Distributed Ledger Technology (DLT), blockchain is a record of transactions that cannot be altered, deleted, or destroyed. In other words, the digital information on a blockchain can be recorded and distributed but never edited.
We all know that blockchain was launched as a distributed ledger for Bitcoin transactions, but it turned out to be more than just that. Since 2014, blockchain has given birth to many new inventions beyond Bitcoin.
Since then, Blockchain use cases have exploded with the launch of new cryptos, non-fungible tokens (NFTs), smart contracts, and DeFi applications. The innovation factor with blockchain is its guarantee of fidelity and security of data records; it builds faith without the backing of a third party. These features make it perfect for finance. Let’s explore more about how blockchain is re-inventing finance.
Blockchain vs banking
Core banking includes transactions, loans, mortgages, and payment services, most of which are lengthy processes when it comes to execution. For instance, things like verification, credit scoring, loan processing, and funds distribution take anywhere between a few weeks to a few months. Meanwhile, Blockchain has the potential to streamline banking and lending services while mitigating counterparty risk and reducing issuance and settlement times.
Banking is one of the industries that can benefit exponentially from integrating blockchain into its business operations. Financial institutions and banks operate for a few hours, 5 days a week. Transactions are sometimes delayed due to the massive volume of transactions that banks have to settle. On the other hand, blockchains are active 24×7.
Integration of blockchain into banks allows consumers to process their transactions in as little as 10 minutes, irrespective of the time or day of the week. Also, banking using blockchain can also allow an exchange of funds between institutions quickly and safely.
Cryptos
All currencies in the world are controlled by a central authority. A customer’s data and currency are under the complete control of a central bank. If a bank is hacked, a customer’s private information is at risk. If the client’s bank collapses or the client lives in a nation with an unstable government, the value of their currency may be at risk. These drawbacks helped conceive and develop Bitcoin.
By disseminating its operations across a network of computers, Blockchain allows cryptos to operate without the need for a central authority. This cuts risk and eliminates several processing and transaction fees. It can also help countries with unstable currencies or inadequate financial infrastructure to participate in the global economy.
Crypto wallets work for those who lack state identification. There are some war-torn nations or some governments that do not have any infrastructure to offer identification. People belonging to these countries can secure their wealth in the form of cryptos as savings or brokerage accounts are not practical.
Another profound feature of cryptos is that they can be used by anyone irrespective of ethnicity, background, gender, etc. Globally, an estimated 1.4 billion adults do not have bank accounts or any means of storing their wealth/money. Most of these people live in developing countries where the economy mainly depends on cash. While keeping cash invites loss of money or robbery, crypto wallet keys can be stored on a piece of paper, a mobile phone, or even be memorized.
Decentralized Finance
The financial technology of DeFi is based on secure distributed ledgers just like crypto. DeFi defies the centralized financial system by allowing individuals with peer-to-peer digital exchanges. Moreover, it cuts the fees that banks and other financial firms charge for their services. With DeFi, people can hold money in a secure digital wallet and transfer funds in minutes. Besides, whoever has an internet connection can use DeFi. The two main objectives of DeFi include mitigating transactional time and increasing access to financial services.
A DeFi procedure uses computer code known as smart contracts that run on the blockchain network. Users of a DeFi protocol can communicate with these smart contracts through their wallets to transfer funds, borrow, lend, or avail of any service that a DeFi solution offers. DeFi projects on the blockchain network offer easy and cheaper access to capital, efficient lending and borrowing and decentralized crypto and synthetic stock exchanges. Moreover, DeFi eliminates middlemen and allows more efficient financial services at reduced costs.
Because DeFi is generally open source, anyone with the internet can view, audit the source code and see all the transactions. Blockchain data is immutable, which means once the information is on the network, it cannot be altered, creating a trustless financial system that relies on code.
Unlike centralized financial services, DeFi firms do not require intermediaries or custodians to offer services such as buying, selling, lending, and borrowing cryptos. DEX users can interact directly with the blockchain protocol to complete trades or avail services. This non-custodial framework of a DEX means that users can enjoy their crypto ownership and have full control over the assets in their wallets.
DeFi in Insurance
One of the most impactful uses of DeFi has been in the insurance industry. At present, the insurance system suffers from complex paperwork, audit systems, and rigid claiming procedures. But smart contracts could make it much more efficient. DeFi projects these days also offer insurance coverage for cryptos on the blockchain network.
The rising inflation and dropping interest rates in fiat currencies have made savings and investments difficult. Many DeFi projects focus on P2P borrowing and lending market. Distributed ledger technology (DLT) has made transactions quicker, especially in the case of cross-border payments where the cost and delays caused hiccups for senders and receivers. DLT allows everyone to take loans and lend fiat against crypto collateral. Additionally, the DeFi ecosystem facilitates tokenization wherein digital assets can be created, issued and managed on a blockchain network. For instance, digital assets are being tokenized in the form of NFTs to create, store, or trade value. The increasing DeFi adoption has led to the growth of DeFi-based prediction platforms where users can trade value by projecting the outcome of future events.
Conclusion
DEXs and DeFi projects are gradually becoming a profitable option for SMEs and startups in the fintech space around the globe. With low barriers to entry as compared to traditional finance, DeFi and DEXs around the globe give easier access to cheaper credit, easy lending, and borrowing. It has changed the landscape of financial systems.
In the future, blockchains are eyeing solutions other than just wealth storage such as storing medical records, property rights, and a host of other legal contracts.
(The author is CEO of ZebPay)
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
