Blockchain is an incorruptible digital ledger of transactions that can be programmed to store records and transactions of value. In simple terms, blockchain is referring to the digital information (block) stored in a public database (chain). Blocks are dispersed across multiple computers. So it becomes a ledger that is digital, distributed and decentralized.
How blockchain works:
For a block to be added five things must happen:
- A transaction must occur
- That transaction must be verified.
- That transaction must be stored in a block
- That block must be given a unique, identifying code called a hash.
- The block is also given the hash of the most recent block added to the blockchain.
Once hashed, the block can be added to the blockchain and becomes part of the record.
Why is blockchain used in Finance?
Traditional financial systems operate with a centralized database, usually with a single point of authority. Blockchain technology, on the other hand, allows for a distributed database that holds a growing number of records. The ledger is continually updated and synchronized across multiple computers in a network. Therefore, any participant in the network with the proper authorization can view the entire ledger – without relying on an intermediary or any one authority.
In a distributed ledger network, there is no central administration. Rather, there is shared ownership, making data secure.
This innovative approach towards recording transactions and ledgers is allowing financial institutes to overhaul the archaic banking and financial processes.
Where is blockchain used in finance?
1. Digital insurance
By allowing policyholders and insurers to track and manage physical assets digitally, blockchain technology can use business rules and automate claims processing through smart contracts.
Insurance companies and startups alike have started adopting blockchain technology to prevent insurance fraud, digitally track medical records and speed up claims process.
2. Cross border transaction
Transferring money across borders has traditionally been slow and expensive, since systems typically pass through multiple banks on the way to the payment’s final destination. When used for cross-border transactions, blockchain can make the process faster, more accurate, and less expensive.
3. Fraud detection and prevention
Blockchain at it’s root is designed to solve double spending challenge and provides permanent time and date stamps for all digital records. The data is registered by a unique fingerprint that stores the date-time stamp in a hashed format. Such an advantage offers near real-time transparency to audit the transaction history as it happened.
Though the system cuts down on fraudulent transactions, it’s not entirely foolproof. Improper infrastructure setup can leave back doors open to vulnerabilities that allow tampering and unauthorized access.
Benefits of blockchain:
It can speed up cross border transactions
In current banking system money transfer or wire takes a few days for completion of transaction and the banking process. Blockchain with it’s distributed ledger system can help in speeding up this process. And thanks to it’s convenience of digital record keeping, it can also help bring down the fees associated with such bank transfers and remittances.
It is a trusted model
If a financial institution that runs a centralized ledger has malicious intentions, they can easily manipulate and misappropriate funds.
In a decentralized ledger system, no centralized party has the power to change entries in the ledger. In fact in a decentralized ledger like the blockchain, once a block on the ledger has been created, no one can go back to change its details.
This, therefore, brings trust and arguably, no need for a centralized trustworthy entity as the participants turn to trust the machine and the codes.
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