The blockchain is basically an expanding list of records that are connected with the help of cryptography. In every block, there are some encrypted hashkeys of the earlier block along with the transnational data and a timestamp. Cryptography is a method by which we hide the data we are sending a data/message in an encrypted form using a key which when used again will reveal the original data.
Impact of blockchain on the finance sector
With the emergence of the blockchain, finance has undergone a massive transformation. Although they share a complex relationship per se, due to the fact while on one hand, blockchain offers a lot of opportunities to evolve how people exchange currency, on the other hand, it is also seen as a threat to the established method of banking. It distributes digital ledger which records transaction while having the advantage of no one can tamper with the records.
How blockchain technology works
The blockchain works in the following way:-
- Someone requests a transaction which is broadcasted to P2P networks called nodes.
- The request is validated by the network of nodes along with the user’s status using known algorithms. This request can involve cryptocurrency, contacts, records or other information.
- Once the transaction is verified it is combined with other transactions to form a new block of data for the ledger.
- This block is then added to the existing blockchain in such a way that it is permanent and unalterable and the transaction is complete.
Problems in the current finance sector
There are a lot of problems that the finance sector is currently facing. The main problems includes:-
- It is way too old and assemblage of the paper-based process along with industrial technologies wrapped up digitally.
- Since it is centralized, it is susceptible to system failures, cyber threat and is resistant to change.
- The current system is restrict able and denies access to tools to millions of people across the world.
- Transaction fees is very high.
- Due to its susceptibility to cyber crime, businesses which depends heavily on centralised data pools, the system makes them vulnerable to disruption providing further reason to transfer to the blockchain.
Solutions blockchain provides to these issues
The way with which blockchain works, it provides security to the susceptible and vulnerable finance sector. It does so in the following ways:-
- Fraud reduction
Blockchain follows a decentralised approach which reduces the chances of cyber threats. Another way it is less vulnerable is that blocks of data that is added to the chain is in encryption form using SHA-255 method where finding the exact key used in encryption is very difficult.
- Know your customer
Financial companies spend $65 million-$400 million per annum on verification of users whereas blockchain allows independent verification of one individual from one enterprise to another.
- Current financial method needs a lot of payments due to a large number of intermediates being present. This problem is solved by blockchain which would open gates for secured and low cost payment process between various enterprises or between individuals.
- The blockchain technology transforms the way the trading works and provides a more efficient way to trade as compared to normal methods.
- It enables smart contracts. It is generally a kind of protocol whose purpose is to keep a track on the contract performance.
- Blockchain technology plays a pivotal role in securing internal communications, which are susceptible to data leaks and cyber espionages.
- In the current financial method, end-to-end encryption is done to secure the information which has a severe disadvantage in the fact that metadata is not covered in the encryption which can lead to the leak of sensitive information. In Blockchain technology, the metadata is scattered in the distributed ledger that cannot be collected at a centralized point thus securing the authenticity of the metadata.
Challenges that the blockchain is currently faceing
Although block chain has a lot of advantages over other financial methods there are a few things one is concerned about before he/she can transfer to block chain. The main issue is:-
- The regularity issues that one faces in other methods, one needs to know how blockchain follows the KYC (know your customer) and AML (anti-money laundering) laws.
Blockchain is not an existential threat to someone who understands how the new model works but otherwise it is a big threat to the existing financial sector. Emergence of blockchain has caused the financial sector to think of a new model to tackle the blockchain which will take time. If the financial sector has to come out as a winner in this race, they need to evolve, transform, build a vision and align the vision to cause disrupt while keeping themselves customer-centric. In this way, blockchain has impacted the security landscape in the financial sector.
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