Blockchain in the context of financial services

In my last post I put together a brief intro of bitcoin and its characteristics. This is how we reached the topic of blockchain which is behind bitcoin. In the context of financial services blockchain is a ledger or in other words it represents historical records of verifiable monetary stake. There is a wonderful demo what blockchain actually looks like on Anders Brownworth’s blog.

Knowing what blockchain is, why is it so useful in financial services?

Trustless exchange – Two parties are able to make an exchange without the oversight or intermediation of a third party, strongly reducing or even eliminating counterparty risk.

User control -users are in control of all their information and transactions e.g. physically may own it and provide a public token as reference to it.

Data integrity and quality – blockchain data is standardised, consistent, and widely available.

Reliability – due to its decentralized nature, blockchain does not have a central point of failure and is better able to withstand malicious attacks. With the reservation/pre-condition that the consensus process cannot be manipulated.

Transparency and immutability – changes to public blockchains are publicly viewable by everybody in the blockchain thus creating transparency, and all transactions cannot be altered or deleted. This is the equivalent of one single source of truth for all.

Ecosystem simplification – putting all transactions on a single public ledger, removes the complications of multiple ledgers and many parallel truths.

Faster transactions – nowadays interbank transactions can take days for clearing and final settlement, especially outside of working hours. Blockchain transactions can reduce transaction times to seconds (or minutes) and are processed 24/7.

Transaction costs – by eliminating  intermediaries and overhead costs for exchanging assets, blockchains have the potential to greatly reduce transaction fees.

Permissions and rich consensus process – a public blockchain is a blockchain that anybody in the world can read, can send transactions to and expect to see them included if they are valid. Also anybody in the world can participate in the consensus process – the process for determining what blocks get added to the chain and what the current state is. Consortium blockchains: a consortium blockchain is a blockchain where the consensus process is controlled by a pre-selected set of nodes; for example, one might imagine a consortium of 10 financial institutions, each of which operates a node and of which 7 must sign every block in order for the block to be valid. Fully private blockchains: a fully private blockchain is a blockchain where write permissions are kept centralized to one organization. Read permissions may be public or restricted to an arbitrary extent.

Original sources for the points above + my own commentary: Deloitte on blockchain technology/Ethereum blog

Blockchain has already been widely applied in financial services. In most cases we talk about proof of concept applications but there are already several exchanges running on blockchains and many other exciting applications (more on them in my next article). Organizations like R3 and Digital Asset Holdings have worked tirelessly to understand the market fit of blockchain and provide software kits which then to a great extent enabled the blockchain revolution.

Some of the most prominent use cases for blockchain are as follows:

  • Identity – blockchain allows to safely store, confirm and distribute personal data which is applicable for KYC.
  • Registry – blockchain could keep track of records of ownership, enable exchange of ownership of physical assets for digital ones, or just store information for public or permissioned access.
  • Smart contracts – blockchain can create and execute autonomously financial contracts e.g. payouts.

My post got pretty lengthy this time so let me stop here. In my next article I would like to share some really interesting real life applications of blockchain.

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