Blockchain is a technology used in the recording of transactions across different computers within a network. Basically, it is an electronic ledger that allows the storage of information in blocks. Blockchain is a kind of database, but it differs from other types of databases because it is decentralized. Other types of databases also do not use blocks in storing information.
How Blockchain Functions
Blockchain is composed of four different processes that complete a transaction. First, a person provides a transaction request. This could be a transfer of documents, such as contracts, financial records, and other information. It could also involve transferring funds from one person to another or from an institution to an individual and vice versa. The transaction request is channeled to a P2P network by a group of nodes. The nodes then validate the transaction request along with the status of the user. Once validation is complete, a new block is added to the existing blockchain. This ends and completes the transaction. Once a transaction is completed, it will be permanent and can never be altered.
How Safe Blockchain Is
Blockchain is highly secure. That is why it is used in many industries, particularly in the finance industry. Comprising a series of blocks, blockchain records data using hash functions. The recorded data are timestamped and cannot be overwritten, making it hard to manipulate and tamper. Since the data are stored in blocks, centralized points are eliminated. This makes it hard for criminals to gain access and steal any information.
The Benefits of Using Blockchain
High-level security is the primary benefit that a business can enjoy when using blockchain. Its method of storing information highly reduces the likelihood of fraud and cyberattacks. Due to the decreased number of fraudulent activities, companies can save more on their operations. This is the reason why many mortgage companies use blockchain in their business operations. These companies feel safe when sending money through the network. They also feel safe transacting with their customers online.
Overall, many companies in the financial industry use blockchain because it reduces the fees involved with credit card payments. Blockchain uses a streamlined process that allows merchants to pay less or nothing at all during financial transactions.
Data distribution in a blockchain is systematic. Every time a new transaction is created, a block is added, and every person within the network is provided a copy of the transaction. A single entity does not control the system. Instead, everyone across the network is given the same information. Data in blockchain are accurate and arranged in chronological order. Each transaction is recorded securely and may be retrieved easily at any time when needed.
How Blockchain Benefits the Financial Industry
The use of distributed ledger technologies allows companies in the financial industry to streamline their operations safely. This is practically what blockchain offers. Blockchain has largely enhanced the outdated systems of banks and many other financial institutions. The distributed ledger it offers allows banks to perform their operations better. It also allows them to trade faster and more cheaply in the most efficient manner.
Some of the other benefits that blockchain offers to the financial industry are as follows:
- Instant settlements. Settlements that usually take up a week can already be done in real time within minutes or seconds, saving both the customers and the institutions a significant amount of time and money.
- Improved capital optimization. Since transactions are settled instantly, financial institutions no longer have to hire middle-office and back-office staff. Financial institutions no longer need custodian banks or clearers, allowing them to optimize their capital better.
- Reduced counterparty risks. Blockchain processes diminish issues in which a party fails to accomplish its end of the bargain. This potentially saves additional costs and time for the company as well as the client.
- Increased transparency. Since blockchain distributes the same information across networks, transparency is increased. This leads to enhanced regulatory monitoring and reporting by the central banks.
- Increased financial solutions in terms of crisis. Blockchain allows the exchange of cryptocurrencies, digital currencies, or tokens. So, customers who only have tokens or are trading in cryptocurrencies can exchange them for equity.
- Reduced errors in handling and reconciliation. Data recorded through blockchain are immutable, which means that they cannot be altered. They can also be tracked in real time, making it easier for audits. These attributes eliminate the likelihood of errors in handling and reconciliation.
The financial industry is constantly improving its products and services. Along with these improvements, companies in this industry are also open to innovating and discovering new technologies that can help them improve their operations. Blockchain is highly beneficial to financial institutions. However, the world is still changing, and many other technologies are still going to innovate and change how these companies work in the near future.