The role of blockchain in finance continues to evolve and grow. Here's a look at its many use cases and benefits.
After reading this, you'll understand:
The Hedera network can perform over 10 million transactions with the same amount of energy the Bitcoin network uses for a single transaction.
Blockchain allows for the near-instantaneous transfer of cryptocurrencies and other financial instruments.
The Hedera network is built with a DAG-based alternative to blockchain that achieves finality in just a few seconds.
Blockchain's potential use cases range from supply chain management to gaming. Still, the most widely-recognized way blockchain is revolutionizing the modern world is by disrupting norms in the financial industry. Blockchain technology gives financial institutions an efficient way to automate processes and secure transactions. Additionally, it can reduce costs for these institutions and their customers by reducing the number of intermediaries required for trading and transacting.
The number of functions blockchain technology can perform has increased over the years. As it continues to evolve, we'll see more financial use cases emerge. In this article, we'll review the role of blockchain in finance, its benefits, and what the future may hold.
Blockchain is known for its ability to process, validate, and track transactions. But there are other ways this technology impacts financial services. In this section, we'll look at some of the ways blockchain is used in finance.
Cryptocurrencies are digital assets that are traded and tracked using blockchain or another distributed ledger technology. Since the blockchain is distributed across a large network of computers, users can engage in digital asset trading without intermediaries. One of the major benefits these tokens offer the financial industry is fast, affordable global transactions.
These assets have gained a bad reputation for consuming vast amounts of energy. This is because early cryptocurrencies, such as Bitcoin, relied on a mining system that used powerful computers to validate transactions. Most modern cryptocurrency networks use an energy-efficient staking mechanism. For example, the Hedera network can perform over 10 million transactions with the same amount of energy the Bitcoin network uses for a single transaction.
Smart contracts are on-chain self-executing programs that automate various processes. For example, these programs can be used to automatically deposit tokens in a user's wallet if they stake their cryptocurrency. Fintech companies can use these smart contracts for a wide array of tasks, such as recording financial data or automating recurring payments.
Financial service providers are typically required to have robust know-your-customer and anti-money-laundering processes to maintain regulatory compliance. These processes can be slow and often require manual research. Tokenized digital identifiers (DIDs) and smart contracts give businesses in the fintech industry an easy way to verify their customers' identities without manual intervention. These personal details can be verified by an authorized third party that provides DID services and then tokenized with a virtual seal of authenticity. Then, a financial company can verify your identity by scanning the contents of your DID wallet.
DIDs are generally more efficient and secure for customers as well. They provide an efficient way to manage your data and who you share it with while simultaneously expediting identity verification. For example, you can have one DID that contains only the information you want to share with your mobile banking app and another for your day trading application. These identifiers let you have complete control over your personal data integrity.
Blockchain technology enables atomic peer-to-peer transfers that settle almost instantly. Payment settlements happen automatically and aren't limited by your location. Traditional payment services rely on intermediaries and are often limited by operation hours. For example, you have to wait longer for your payment to settle if it's submitted on a weekend or holiday. Blockchain and smart contracts can be used for fast, automatic payments 24/7.
Fintech blockchain enthusiasts are eager to see blockchain used in the finance industry. Decentralized finance technology is often praised for its efficient, secure handling of transaction data. In this section, we'll dive into the many benefits of blockchain in finance.
Blockchain allows for the near-instantaneous transfer of cryptocurrencies and other financial instruments. Still, some blockchains are faster than others. For example, a Bitcoin transaction takes around 40 minutes to settle, while a Polkadot transaction takes around two minutes. The Hedera network is built with a DAG-based alternative to blockchain that achieves finality in just a few seconds.
Blockchain transactions are protected by advanced cryptography to enhance security. The ledger is immutable, meaning transaction data can't be altered after it's recorded. Additionally, each wallet interacting with the blockchain has a unique wallet ID, meaning you can easily ensure you're transacting with the right person.
Companies can also build or buy private blockchains that can only be used by them and their customers. Much like public chains, these are secured by cryptography, meaning they reduce the likelihood of identity theft and fraud.
Blockchain transactions are recorded on a publicly-viewable ledger. You can view any transaction and its associated details, including the sender, receiver, value, and time the transaction was made.
Blockchain transactions are automatic, eliminating the need for intermediaries and costly fees. Traditional financial transactions often involve several intermediaries, such as banks, payment processors, or other financial institutions, each of which may charge fees.
Traditional financial institutions are often forced to spend large sums of money reconciling transactions. Blockchain transaction reconciliation is easy since each record is stored on a decentralized ledger. Financial institutions can simply use smart contracts to read associated blockchain transactions for reconciliation.
Intermediaries can be costly and may slow down transactions and identity verification processes. These entities can also make mistakes, some of which go unnoticed for long periods. Blockchain transactions can be completed without the need for intermediaries, enhancing their speed and reducing the number of errors.
Blockchain is sure to have a transformative impact on the financial industry. Still, that doesn't mean there aren't challenges to overcome. Modern technology can be difficult to integrate with legacy systems, and often hefty costs are associated with these integrations. Additionally, many blockchains are segregated from one another, meaning you can't send a token from one chain to another.
Hedera can help a fintech company overcome these barriers by offering a robust set of tools to help with scalability while supporting third-party projects that aim to enhance interoperability. For example, Hashport is a public utility built on the Hedera network that makes it easy for users to transfer tokens from EVM-compatible networks to Hedera.
Hedera has always been aware that regulatory burdens make it hard for enterprise users to adopt distributed ledger technology. This is why Hedera enables real-time logging of network requests and a cryptographically secure log that can be instantly verified. These features make it easier than ever for enterprise users to satisfy data compliance regulations.
Hedera also has many powerful tools for financial applications, such as its token service that allows you to tokenize assets quickly and inexpensively. The HBAR foundation is committed to supporting the Web3 fintech ecosystem and awarded 23 grants to fintech & payment projects in 2022.