Banking on the blockchain is often a misunderstood concept given the volatility of the crypto market today.
During 2008 while the world was melting down, the economy was officially declared a recession.
Blockchain technology emerged from the ashes of the global financial crisis with the sole purpose of disrupting traditional financial markets. There has been a lot of buzz around blockchain technology in recent years, but will this new technology change the way we transact across businesses in the future?
What is blockchain technology?
Blockchain technology is commonly referred to as a “distributed, peer-to-peer, ledger technology where a block is a cryptographically secured record of data sets and the chain is a network of decentralized peer-to-peer nodes.” That’s a mouthful, but what does that mean?
A peer-to-peer (P2P) network is a set of distributed computers, or nodes. A network node helps to fully process and validate transactions of the network before adding the data to the ledger of the chain. All the nodes keep and share every data and they keep the network running.
The “ledger technology” refers to a track record that is uneditable. It traces every transaction which can be tracked publicly by anyone. This is a massive gamechanger when it comes to tracing the provenance of a contract and reduction of fraud.
Most blockchains security and transparency relies on cryptography. Cryptography is a practice of sending encrypted data and messages in a secure way. With no bank or other intermediary required for processing transactions, it is trustless.
Benefits of Blockchain Technology:
The current financial system is based on trust in intermediaries. This system is ment to offload the responsibility and the ownership across many different entities and individuals.
In today’s system, a single international transaction has a minimum of two and even up to five banks involved in the process. If you’ve ever transferred money internationally, you’ll also know there’s a hefty fee and a processing time of three to fives business days for the transaction to get executed.
Blockchain technology brings speed to the global systems and industries while eliminating the use of an intermediary. Think of this as cutting out the middleman. Less fees and faster turnaround, what’s not to like?
How is blockchain technology able to be faster and more secure?
Data is held in a shared decentralized database spread over a peer-to-peer network of computers rather than using a central server. This concept should be familiar to those that were around during the early years of peer-to-peer music sharing on platforms Napster, Limewire, and Kazaa.
So even in this peer-to-peer system, if one network represents a node and it goes offline, the other nodes are still available to support the transaction.
This makes the network stronger, distributes the liability, and therefore is “decentralized” all at the same time. On a sidenote, having these nodes in a decentralized system also offers more reliability and privacy as all users collectively retain control of the data and the network.
Traditional Banks and Blockchain:
Banks are in direct competition with blockchain technology in many ways. The nature of blockchain technology eliminates the largest incentives of banks and other financial institutions.
Commercial banks make money by earning interest on loans to its customers, customer deposits, and fees based on transactions. Blockchain eliminates the need of trusted third parties which is why it is predicted that it could eliminate traditional banking as we know it today.
Banks can leverage the technology themselves as well and use the blockchain to automate and streamline their processes to free up valuable resources. By integrating blockchain into existing banking infrastructure, customers could see their transactions processed in a matter of seconds regardless of holidays or the time.
Companies such as J.P. Morgan, HSBC and Wells Fargo are already developing or actively using their own blockchains. Visa and MasterCard are also exploring the technology as they see it as a key growth opportunity to expand beyond card payments.
Defi = Decentralized Finance:
The term decentralized finance, or DeFi, stands for the ecosystem of financial applications built on top of blockchain technology. Defi is quickly emerging as a disruptive technology that creates unique models for making money that never existed before. Just like the internet did in the 90’s and early 00’s.
The main characteristic of DeFi is that anyone can join and connect to the decentralized applications (dApps), even without KYC (Know Your Customer) and without a bank account in some cases. DeFi also allows users to remain in custody of their financial assets. The general idea behind it is to bring financial control and freedom to individuals in a permissionless and open market.
Once connected to a DeFi platform, users almost immediately can be part of the digital revolution and can take advantage of countless peer-to-peer financial services, like lending and borrowing, buying insurance, trading assets and derivatives. But new financial instruments such as yield farming or liquidity mining are also innovations introduced through DeFi.
The DeFi ecosystem is decentralized, because the protocols are designed to be managed by the community of users instead of being centrally controlled by institution or entities. Users are able to participate in major decisions, even propose changes themselves and they can benefit from their own succes and growth. They become owners of the DeFi applications they are using.
In many cases because of being in an early experiment stage, not all DeFi protocols are fully decentralized yet. But developers are working to gradually hand control over their protocols to the community.
In the digital realm, dApps and DeFi protocols are the new banks. Instead of a centrally regulated bank there is a whole decentralized infrastructure that holds data and verifies transactions eliminating single point control and trust issues. Doesn’t it sound better?
The Future of Defi
According to The Global Findex Database, the number of underbaked adults around the globe was 1.4 billion in 2021. DeFi combined with traditional banking could offer the best of both. It can provide basic financial services to the underbanked and improve available services to it’s users.
Whether it is a decentralized exchange, lending and borrowing, DeFi is constantly evolving to mirror traditional finance services. It is a potential gamechanger seen as a cheaper, quicker and more reliable alternative to traditional finance. It is impossible to predict the effects of DeFi, but it seems it will eventually going to replace chunks of the current financial and monetary system as we know it.
A threat or an opportunity?
Blockchain technology is a potential game changer with the capability to revolutionize global economy and financial markets. The fact that organizations such as J.P. Morgan or Visa are actively using the technology showcases the amount of potential that blockchain has to offer.
Blockhains are secure, highly scaleable, extremely versatile and transparent. It is a revolutionary tech that will make life simpler and safer, changing the way how transactions are made. It is the engine of the next financial revolution.
