All About Blockchain and its impact on Financial sector
Blockchain is said to be the future of internet and financial systems. All the transactions that take place today are through centralized institutions like banks. If a person needs to send money to another person, the transaction must take place through a bank or any financial institution. But through Blockchain it can be sent from peer to peer. There are no middleman required for a transaction to take place
Points covered in this article are
What is Cryptocurrency and Blockchain?
How is Cryptocurrency better than a centralized financial model?
How can Cryptocurrency impact the financial sector?
How does blockchain work?
Decentralized data in blockchain
Immutable records of blockchain
Distributed ledger under blockchain
Is Blockchain secure?
The future of financial sector in Blockchain
1. What is Blockchain and Cryptocurrency?
● Blockchain is a technology that records transactions, links it with previous transactions, creates a ledger and protects the recorded data with cryptography
● Cryptocurrency is digital or virtual currency that runs on a technology called Blockchain. To overcome the problems with centralized financial systems, Blockchain was introduced. There are various Cryptocurrencies, Bitcoin being the most used currency
2. How is Cryptocurrency better than a centralized financial model?
The concept of Cryptocurrency was brought into picture because the centralized system that is in widely use has various problems attached to it such as,
● Bank accounts can get hacked
● Technical issues arise
● If the transfer limit is exceeded, transaction cannot take place
● Financial institutions also charge additional amount for services provided
These issues related to security and additional charge over and above the transaction amount does not arise in blockchain. All the transactions take place in a decentralized form and the data is protected by high level encryption which cannot be hacked. This leads to distribution and equality in the economy. Using Cryptocurrency people can make transactions without any help of third parties
3. How can Cryptocurrency impact the financial sector?
Blockchain technology consists of various Cryptocurrencies such as bitcoin. One of the most impacted sectors by Blockchain is going to be the financial sector. All the financial institutions can be transformed and taken over by Blockchain technology.
● Blockchain has higher security than that provided by a bank or financial institution
● It lowers the cost of making a settlement
● Faster and more well executed transactions shall be performed
● There will be transparency of data and scams and frauds cannot take place
● There is no central authority. All the cryptocurrencies is decentralized and distributed worldwide
In certain blockchain systems like Ethereum, there are self-executed smart contracts to make settlements more trustworthy. These kinds of contracts can make the Blockchain more secure
4. How does Blockchain work?
With all the potential to replace the centralized data system, blockchain distributes the data making the data decentralized.
● When a person has to make a transaction in blockchain, the record is created in the form of a block and transaction details are permanently inscribed in the block
● A chain of records is created when a transaction takes place. These chains of records are called ledger
● The blocks which are created are to be validated. The validation is given by 'Miners'. The minors have to solve a complex mathematical formula to add a block to the blockchain
Every miner competes with many miners around the world. The fastest to solve the problem earns cryptocurrency
5. Decentralized data in Blockchain
Blockchain runs on a decentralized network, which is on a peer-to-peer basis. All its activities are similar to that of a bank but there is no central authority or governance by a middleman. Blockchain tennis all the middleman along the settlement and makes it a direct settlement between one who pays and the one who receives. Transactions are recorded in form of blocks. These are inscribed with the details of transaction and linked with all the previous blocks. These encryptions are made in the most secure way. In the centralized way of managing data there is fear of security and blockchain eliminates it all
6. Immutable records of Blockchain
Blockchain are highly resistant to modification of data. The data in each block are validated by miners and each block contains hash encryption. The hash has to be modified if the block is to be hacked but if the hash in one block is changed, all the blocks are to modified and it is highly difficult. So once the data is recorded it cannot be altered without consensus
7. Distributed ledger of Blockchain
Blockchain records transactions between multiple parties in the form of ledgers. These ledgers contain all the details of the transactions. The distributed ledger exists in multiple places with all the participants of the transaction simultaneously. Each computer in the distributed network maintains a copy of the ledger. It ensures that there is high transparency and also all copies are updated and validated simultaneously. Because of the high-level security and multiple records, manipulating the data in a block is highly difficult
8. Is Blockchain secure?
In order to remove all the uncertainties in the traditional finance system Blockchain was introduced. Banks and other financial institutions store their data in a centralized system which can be hacked by someone. But hacking is almost impossible in blockchain because all the blocks have the encryption in form of 'hash' and anyone who has to hack should change hash of not only one block but all the blocks linked together.
9. Future of financial sector under Blockchain
With all the problems involved with introducing blockchain in our financial system, how can we accept Cryptocurrency and the whole new level of technology? Today cryptocurrencies are not in effective use as people are unaware about its benefits. Use of Blockchain technology is the best way to overcome the problems with present working systems. Even though blockchain is a lot more efficient and faster, there'll be challenges in fully adapting in blockchain. So, in order to bring any change, blockchain should be sufficiently trustworthy. There are many bumps in the way to introduce blockchain but it will make progress and has the potential to be accepted globally
Blockchain can be both an advantage and disadvantage to the financial sector. The centralized data system is less efficient, costly and time consuming compared to the decentralized data system. Even though blockchain is more better than current financial model, it may take few more years for it to become mainstream financial model
You may refer this video for more understanding about Blockchain