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Uses of Blockchain Technology in the Financial Sector

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There are many financial institutions that depend on the blockchain because of its outstanding advantages and the influence it has had on other sectors ever since it has been introduced. By comparison, blockchain technology is more applicable in the financial area than any other sector.

By looking at the main uses of blockchain technology in the financial sector, you may agree with me. As you may know, the blockchain has boosted the financial sector through its cost reduction effect, provision of alternative means of payment, enhanced transparency, expansion of investment opportunities, elimination of intermediation, and increased liquidity

Elimination of intermediation

The blockchain technology enables peer-to-peer transactions, without the use of middlemen. The traditional financial system relies on the involvement of intermediaries such as banks or insurance companies or clearing agents. Therefore, the traditional financial system has many problems such as high costs of transactions, system manipulation, and other inefficiencies.

On the other hand, decentralized blockchain technology avoids all third parties to any transactions through the use of a decentralized ledger and smart contracts. All transactions are approved, verified, executed, and recorded by a network of nodes by reaching a consensus on the blockchain while ensuring traceability. 

Long before, a financial transaction between two individuals who might not know each other will need a trusted entity (banks or a broker) to facilitate the process which included a lot of paperworks. With blockchain solutions such as smart contracts which are agreements coded onto the blockchain and only executed when the initial conditions specified are met, some financial business processes can be carried effectively without any human intervention.

The Algorand blockchain can be  described as a finance inclined blockchain solution for building sophisticated financial products and processes. With smart contract functionalities, developers and projects can build decentralized financial applications that will function flawlessly without any intermediary. Smart contracts on the Algorand blockchain (Algorand’s Smart Contracts (ASC1s) are embedded into layer 1 and as such benefits from Algoand’s blockchain protocol’s speed, scalability, finality, and security.

ASC1s are tamper-proof and cost-effective. Notable applications in the financial sphere may include decentralized exchanges, regulated and automated disbursement of payments which is made possible by Atomic Transfers and Agorand Standard Assets, escrow systems, Loan payments & Fee Executions processes, etc. All these services, tools, and processes have no central authority which results in cost reduction and nearly instant operations.

Fast and secure payment option

In addition to avoiding the middlemen, financial transactions are carried out securely and instantly. Funds can be easily transferred from one party to another without the involvement of a third party. With the traditional financial system, banks and brokers are usually the third parties. Their involvement makes the chain a bit complex and as a result, slows down a simple transaction that could take at least less than 5 seconds with a blockchain solution.

For example, Atomic Transfer on Algorand which is a Layer 1 solution enables an individual or entity to send Algo (Algorand’s native currency) and Algorand Standard Assets (digital assets issued on the Algorand blockchain) instantly to another party. As a result, financial assets can be sent anywhere around the globe within a few seconds.

Algorand, which is a permissionless proof of stake blockchain protocol, processes many transactions within a short space of time. In fact, it can process over 1000 transactions per second and takes less than 5 seconds for a transaction to be finalized rendering it irreversible or changeable. This is very critical for merchants accepting crypto as payments. Waiting for several minutes for a transaction on the blockchain to be completed can have a great effect on businesses today. Algorand’s low latency blockchain makes it conducive and ideal in the e-commerce industry and other financial operations.

The Algorand blockchain is fully decentralized consisting of computer nodes residing in various geographical locations across the globe. Since the blockchain is maintained and synchronized among these nodes, this creates a trustless economy where financial transactions can be executed securely while ensuring transparency and accountability. Algorand blockchain is also fault-tolerant making it possible to achieve consensus even if some nodes fail or act dishonestly. 

Alternative payment method

In the traditional financial system, there is a dominant use of FIAT currency. However, with the blockchain, people adopt the use of different cryptocurrencies. There are many cryptocurrencies that are used to settle credits or make payments for goods and services. These include Bitcoins, Ethereum, Algo, and several others.

Algorand Standard Assets (ASAs) which is a Layer 1 solution provides users the possibility to tokenize any real life asset on the Algorand blockchain. These kinds of assets issued on the Algorand blockchain are customizable making it easy for institutions to define how an asset should behave in order to meet their business needs and in some cases comply with regulations. 

Because ASAs are deployed in Layer 1, they are fast and secured, costs very little to execute and easier to issue by developers. Any ASA can be used regardless of your geographical location and can be transferred at any time. In comparison to FIAT, Algo and ASAs are bother less, settles faster, cost-effective, secure and the possibility for micropayment. Algorand’s native cryptocurrency – Algo and ASAs unlocks another set of digital assets to revolutionaries the digital payment industry.

Cost reduction

One significant contribution of blockchain technology in the financial sector is the reduction of transaction costs. With the traditional financial system, whenever payments are made, transaction costs are incurred. The transaction costs are charged by financial intermediaries such as banks. These costs are usually high as compared to its competitors.

However, with the blockchain, transaction costs are very minimal. The Algorand transaction costs, for example, are very low. A typical transaction of Algo or ASA via Atomic transfers costs 0.001 which is valued in USD as $0.003.  As you can see, the transaction costs are very low and negligible if we are to compare it with other primitive blockchains where a single transaction can cost between $3 to $20. 

Furthermore, Atomic Transfers on Algorand Layer 1 supports sending of multiple assets (Algos & ASAs) to multiple recipients simultaneously which incurs fees same as a single transaction. This is possible because several transactions are grouped together and executed in full or none is executed at all. This, as a result, treats a bunch of transactions as one and as such costs just the same as a regular transaction. Because of low transaction costs, business viability can be improved in the financial sector. There is also more room for innovative solutions while cost reduction is paramount. Some use cases may include micro payments, social tipping, decentralized exchanges and many more.

Increased security

One of the main security issues facing the traditional financial sector is an increase in fraud and cyber-attacks. Since the traditional ledger is created within a centralized database, it is very easy for hackers and cyber attackers to crack the system and access all the important information.

The blockchain enables real-time execution of payments and real-time fraud analysis. This makes it difficult for hackers and cyber attackers to by-pass security systems. More importantly, the blockchain data is checked at every step of the transaction by independent miners, making it tamper-proof.

Algorand’s protocol is reliable in this case. Its smart contracts are executed on a tamper-proof (trustless) network, resulting in transparent, error-free, accurate, and immutable applications.

Other uses of the blockchain

There are many other uses of blockchain technology in the financial sector which include enhancement of transparency, increased investment opportunities, reduction in error handling, and opening of more lending opportunities, among others. As the blockchain technology evolves many other uses will emerge and Algorand is constantly developing to meet the changing demands of prospect users of its permissionless blockchain protocol

Final thought

Blockchain technology has brought many changes in the financial sector. Increased liquidity, a secure payment system, and cost reduction are among the remarkable benefits gained in the financial sector.  Are you a developer or an organization wanting to build powerful and reliable financial applications, processes and services? Algorand has a solution for you. Visit https://www.algorand.com/ or https://algorand.foundation/ for more information.

This piece was written by Ayuba Issaka

Follow Ayuba on: Twitter

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