Blockchains are built on a series of innovations in organizing and sharing data. The objective is to make one version of the reality, used by all participants, containing a far richer dataset than exists in any one system these days. This will inturn enable new industry processes to be developed, based on the use of transparent real-time data, and the expansion of auto-executing ‘smart’ contracts, with business logic encoded into the ledger. If we talk about the Stock market, Blockchain offers huge potential for tracing securities lending, repo and margin financing and monitoring systemic risks.
Beyond using the technology as an operating procedure for an exchange system, the blockchain has also found, through cryptocurrencies, a use as a way of raising capital, in place of traditional stock and equity markets.
1. Primary Market activities
Beyond using the technology as an operating procedure for an exchange system, the blockchain has also found, through cryptocurrencies, a use as a way of raising capital, in place of traditional stock and equity markets.
For several months already, a new form of public offering has been flourishing, not only because they deal with start-ups, but mainly because they are in the form of cryptocurrencies, like Bitcoin or Ether, from where comes the initialism ICO – Initial Coin Offering, with reference to IPO – Initial Public Offering. These operations are a quick way of securing financing – capital can be raised in as little as a few hours to a few days – for entrepreneurs in the world of blockchain, allowing them to test their ideas or project on a community of experts.
Taking into account the potential of this technology, these capital raise also attract more and more investors looking for added value, even if they do not always understand the technological specificities of the project.
2. Secondary Market activities and Trading
The blockchain has not only prompted innovation on the primary market, with the appearance of ICOs: it may also have a revolutionary effect on secondary market and trading activities.
The distinctive aspect of this process largely relies on the manner in which an efficient process of order matching and price formation is conceived. Essentially, the ability to use the blockchain, with an added value, for negotiating activities, depends on two factors: First, the nature of the financial instruments traded and second is the nature of the intended negotiating activity.
Using the blockchain for trading activities is conceivable even before the creation of the transaction for other instruments. This is typically the case for instruments whose trading price is purely bilateral.
The possibility of using a blockchain for trading purposes thus depends on multiple factors. Nevertheless, it can be expected that the application of the advantages provided by this technology to other segments of the value chain will have a major effect on trading activities. In particular, by streamlining the post-trading phase, blockchain is bound to have as much of an impact on the demand as on the supply of capital, by prompting a growing number of capital issuances on the markets and by increasing investment in and exchanges of instruments in circulation and therefore the volumes traded.
3. Post-trading activities
Blockchain can also simplify the landscape of traditional organisation and operation of post- trading activities.
In the traditional scheme of things, a transaction’s life cycle on the stock market requires the presence of a market intermediary, a trading platform and various post-trading infrastructures and intermediaries, including a clearing-house, a settlement agent, a depository and a central depository.
In the new model, the instruction to buy or sell a financial security on a stock market follows a complex cycle, both in technical and legal terms, due to the presence of these various entities. It is even sometimes difficult to track an order all the way from the investor to the delivery or payment: the clearing house makes it impossible to track an individual instruction due to multilateral settlement methods.
In financial markets, the steady disappearance of paper securities and their replacement with virtual assets has led to the replacement of physical settlement using cash, with digital trades. The need remains however, for a ‘golden record’, a way for market infrastructures and intermediaries to keep their individual databases updated by communicating with the other institutions involved at other levels of post-trading, in order to be able to reflect each transaction in the records for each intermediary/infrastructure. Therefore, golden record in the financial market would be a well innovated blockchain app that caters to the people of Stock market.
In case, you are looking to understand blockchain implications in your business sector in more detail, drop us an email on [email protected] or schedule a free consultation with our team of blockchain experts who can guide you through the blockchain implementation in a specific use case.
Blockchain technology has found its big utility in trade and finance and there have been a substantial increase in the number of trials. However many pilots and trials have failed also. There is an increased awareness among parties and certain well-known names have come up in this blockchain in trade & finance.
As on date, the trade finance has bottlenecks and factors such as–
Manual contract documentation The bank manually reviews the financial agreement provided by the importer and sends financials to the correspondent bank
Invoice factoring Exporters use invoices to achieve short-term financing from multiple banks, adding additional risk in the event the delivery of goods fails
Delayed deliveries The shipment of goods is delayed due to multiple checks by intermediaries and numerous communication points
Manual review The export bank must manually conduct AML checks using the financials provided by the import bank
Platforms Since each party across countries operates on different platforms, miscommunication is common and the propensity for fraud is high
Duplicative bills Bills of lading are financed multiple times due to the inability of banks to verify their authenticity
Multiple versions As financials are sent from one entity to another, significant version control challenges exist as changes are made
Delayed payment Multiple intermediaries must verify that funds have been delivered to the importer as agreed prior to the disbursement of payments to the exporting bank.
Advantages of Blockchain technology
In view of the factors listed above, it has been found the blockchain in trade finance brings about following added advantages-
Review and appraisal in real lime
Financial documents linked and accessible through Blockchain are reviewed and approved in real time, reducing the time it takes to initiate shipment.All bills and invoices are easily accessible on the blockchain giving real time transparent viewing
Removal of intermediaries
Banks facilitating trade finance through Blockchain do not require a trusted intermediary to assume risk, eliminating the need for correspondent banks financial institutions and banks which are in trade and finances through blockchain do not require intermediaries resulting in faster transactions
Elimination of double spending
Bills of lading are tracked through Blockchain and are thus eliminating the problem for double spending All invoices and bills which are being tracked through blockchain remove the requirement of double spending.
Simpler contract execution
In view of contract terms being established and met the final status is there on the blockchain in real-time. This results in a reduction of time. As contract terms are met, status is updated on Blockchain in real time, reducing the time and headcount required to monitor the delivery of goods
Authentication of ownership
The blockchain provides the clarity of the location and ownership of the items as it is well established.The title available within Blockchain provides this transparency .
Settlement and fee reduction
As there is the removal of intermediaries there is substantial reduction in fee. All contract terms executed through Smart Contract remove the need for correspondent banks and added transaction feesRegulators are provided with a real-time view of essential documents to assist in enforcement and AML activities
It is hereby seen that with the introduction of blockchain the business clarity and hurdles have been removed, there is authentication of ownership, simpler contract execution, review and appraisal in real time etc
Payment ecosystems are evolving at an accelerating pace to embrace new transaction processing methods and technologies. Let us understand how we can use blockchain use in simplifying payments.
The payment verticals of retail banking, merchant retail, transaction banking, billers, and digital banking that have traditionally operated in isolation are evolving toward a consolidated, real-time, any-to-any ecosystem.
Payment ecosystems square measure evolving toward a period of time, any-to-any payments experience for consumers; blockchain is a fundamentally disruptive technology that will play a role in the evolution toward real time.
Blockchain has the flexibility to modernize a payment’s elementary imperative of transferring price between multiple parties, securely and with minimal operational or technical friction. Modernizing the fundamental imperative delivers substantial benefits in the future use of computing for banks, businesses and governments.
Recent rapid growth of peer-to-peer market exchanges for lending (Zopa, Lending Club and Funding Circle, etc.), accommodation (AirBnB) and taxi services (Uber) has demonstrated the potential of peer-to-peer architectures. Blockchain has the potential to accelerate and change such models in each new and existing markets.
The areas of application for blockchain stretch so much on the far side pure payments. Across the banking system, uses include post-trade settlement, asset management, securities, and trade finance. Beyond banking, blockchain interest includes insurance, government, identity management, and accounting services. Not only is this likely to generate new opportunities for payment providers, but also new entrants with disruptive business models, as new market areas become more practically addressable.
Blockchain technologies are immature and their ability to support the challenging non-functional requirements of payment services has yet to be proven.
Current blockchain proof-of-work algorithms require seven seconds on average to gain consensus; further technical maturity is required in this area to support consensus in under 25 milliseconds. Recent advancements leveraging a proof-of-stake approach hold promise to improve consensus performance. Technical advancements are being made toward maturity; technical maturity has accelerated over the past year, fuelled by increasing blockchain investments worldwide that exceed $1.5 billion.
Different types of uses in payment system:
Value Transfer: The use case for transferring funds between parties is the major focus. Blockchain 2.0 technologies could be applied to a variety of different payment sceneries.
In single currency domestic payment the impact could be to reduce or remove the need for central counterparty and the delays in setting transaction net or gross in real-time. Transfers in multiple currencies between countries cross border payments.
Trade Finance: The use case for trade finance covers a single common record of the liabilities and obligations of parties in trade finance. Possible users of blockchain 2.0 include: invoice fraud prevention, process efficiency, service improvement.
Reference Data: Enable the rapid, auditable and secure updating of records by any authorized participant and sharing the change across the network of users. Potential areas where these technologies could be used to streamline the update process and simplify integration into existing payments processing include hot card files, sanctions lists, routing records etc.
As real-time, open-source and trusted platforms that securely transmit data and value, they can help banks not only reduce the cost of processing payments, but also create new products and services that can generate important new revenue streams.
The biggest key to turning the potential of blockchain’s use in simplifying payments into reality is a collaborative effort among banks to create the network necessary to support global payments. Blockchain technology itself works—there’s no debate about that. Now it’s time for banks to seem at the larger image and work along and with non-banks—to facilitate outline the backbone which will underpin a universally accepted, ubiquitous global payment system which will remodel however banks execute transactions.
Blockchain is everywhere, literally. But not many people have a clear understanding of this simple, transformational technology. I say “simple” because if you understand its architecture and functionality, you will be marveled by how brilliant it is and in how many ways it can be exploited. Of course, there are complexities involved but they are at a micro-level. So, if you are looking for a jargon-free, not-so-technical explanation of the blockchain concept, this post is for you.
Another thing before you dive deep, blockchain finds many other applications apart from Bitcoin. In fact, Bitcoin is just one of the 700 applications that work on the blockchain principle. But since cryptocurrencies seem to be the flavor of the season, I will mainly talk about blockchain technology in the context of digital payments.
Why Blockchain Technology?
Historically, monetary transactions have relied heavily on intermediaries or middlemen for authenticating the transactions and maintaining records. They acted as a regulatory body to prevent frauds.
Digital assets are more vulnerable since they are easy to compromise and duplicate. They are generally files that can be duplicated if their source code is accessed. Therefore, permission had to be sought from banks in case of money) or intermediaries (for stocks, etc.) for completing a digital transaction. This process could take time but was important to prevent the problem of double-spending (spending the same asset more than once).
So, in 2008, someone called Satoshi Nakamoto released a whitepaper in which he detailed a revolutionary technology by which digital transactions could be verified, authenticated, recorded and completed, without any intermediary! In fact, all the checking and record-keeping was to be done by people themselves. But not everybody is equipped with special verification powers. This can be achieved by specialized people who can solve complex puzzles (miners) by a process called mining. The good news is that miners are normal people like you and me (peer to peer), not banks or middlemen. They use the processing power of super-powerful computers and software to solve big puzzles (like Sudoku, only tougher). Each puzzle has a definite answer and follows a complex algorithm. The puzzle gets harder as the network gets bigger. All miners in a network have to follow the network’s protocol strictly and they are rewarded for their services by Bitcoins. Once a transaction is verified and attached to the network, it is irreversible. Reversing, modifying or deleting a transaction would require manipulation of all previous transactions (remember, it’s a chain). This is practically impossible and thus blockchains are thought secure.
Blockchains have eliminated the need for a bank by fulfilling three of its roles- storing value, verifying identities and keeping transactions records. Hence, blockchains intrigue people more than other digital payment methods like PayTM that require tie up and verification from banks.
A network of value
Blockchain can be interpreted linguistically as a chain of blocks. A block being a bundle of transactions and the chain made up of many interconnected blocks. Miners compete with each other to verify all new transactions by solving complex puzzles. The miner who gets to the result first, attaches his solution (proof of work) and is awarded with a fraction of Bitcoins that are generated now. The other miners double-check his solution and if a majority is in agreement, the transaction completes (Consensus).
Verified transactions are bundled up with their proof of work and made into a block. The new block is time stamped and attached to the existing blockchain, in a chronological order. Now, everybody in the network knows that payment has taken place and it becomes impossible to spend the same currency twice.
Since every block contains an encrypted link to a previous block, all transactions can be back-verified till we reach the origin of the first transaction. So, data that once enters a blockchain becomes immortal, a property it shares with internet!
Some people describe blockchain as the internet of value, and it seems fitting. In the internet, anyone can upload information and others can view it. A blockchain allows anyone to send Bitcoins (encrypted currency) anywhere but only the person who knows its unique address (private key) can access them. So, to transfer your Bitcoins you have to share your coins’ unique address with the recipient.
A distributed ledger
Blockchains not only have an auto-verification system, record-keeping is also automated. A copy of the entire blockchain is available to everybody on the system. Since blocks contain encrypted records representing receipt or payments of money (Bitcoins, in this case), blockchain is a type of virtual ledger. There is no central server that holds the record database or that gives permission to access the database. It is distributed and decentralized. As explained before, there is no need for an intermediary.
Blockchains can be private
Another revelation- blockchains can be private. I know, this essentially kills our favorite feature of blockchains- decentralization. But hold on; there’s more to this. Bitcoin blockchains are public, meaning anybody who has a computer and an internet connection and follows the rules of the blockchain, can join. Then he is given a copy of the entire database. A new transaction cannot be added to the ledger till all its associated previous transactions are verified. Once everything is found in order, the new entry is written and the entire database is synced and replicated to reflect new addition. As you can note, their process has built-in redundancy. This also makes the blockchain concept a bit sluggish.
Enter… private blockchains. They have rules governing who can access the network. They are mostly initiated by enterprises for their private use; something like an intranet. Private blockchains can be accessed by anyone who has been granted permission (invitation) by the starter of the network or who matches the protocol set by the starter. Since the number of participants in private blockchains is less, processing speeds are much faster and processing costs are lower than of public blockchains.
Aside from the access rights, public and private blockchains share similar features:
Both are decentralized. A copy of the entire blockchain is available with each and every participant.
Both have an access protocol (consensus).
Both are immutable and irreversible.
Public or private, the blockchain concept is intriguing. They have made digitization of assets possible and transfer of assets faster. Their encrypted, peer to peer mechanism has phased out the need for regulatory bodies and administrators. And while the blockchain concept purists might protest that private blockchains aren’t exactly permission-free, we say- better a devil known than a devil unknown!
Blockchains are made to go beyond Bitcoins
Although blockchain’s application in digital currencies and asset transfers is most widely documented and exploited, blockchains go way beyond finance. Blocks can store any kind of encrypted information. Bitcoins are also lines of code that hold a unique address.
Apart from handling currency, the blockchain concept can be made to execute some actions (in the real and physical world) if they work in tandem with other technologies. Actions can be to fetch external data such as medical records, census information, intellectual property, weather reports, inventory details, etc. But here comes a problem. Not all participants in a blockchain trust each other. So, how can they filter who can access their data? This can be done using smart contracts. A smart contract contains sets of conditions that must be met by a user, for him or her to gain trust and enter a blockchain. Once a user meets all criteria, blockchain programs trigger and perform some action.
Consider an example. You must have heard of smart devices. They are regular appliances fitted with sensors and connected to the Cloud. These devices are programmed to operate in a predefined manner if certain conditions are met. For example, a smart glucometer keeps monitoring the user’s glucose level and triggers an alarm when levels rise beyond a certain defined limit. They might also send a message to the user’s physician if a low or high sugar situation arises. Now, add blockchain to this equation.
Suppose the physician stores all patient records in a blockchain and shares its private key with his patients. He will be controlling access to confidential records. Apart from securing his patients’ data in encrypted form, the blockchain will be governed by smart contracts that will control who can access the data. Suppose an invalid transaction is tried, the entire blockchain is alerted and doctor, as well as patient, gets a notification. A smart contract can set a protocol that if an input is valid, access should be granted. Programmed devices will be triggered to perform any action- increase insulin dose, contact emergency room, etc. incredible, isn’t it? No need for manual intervention, no hassle, no delay! The Blockchain concept is more than a bubble. It’s an ocean of possibilities and opportunities. Take a dip and find out for yourself!
The purpose of introducing new technology is to upgrade our very own systems and elevating them to a better stance. We could use a stick to stir the pot, but why do that when we can have one large stirrer that could mix, collect and pour the soup out of the pot. Same goes with the way we trade. We need trust. We need records. We need accountability for every paper we sign and every currency we give or take. And that has a cost. Our financial transactions and every legal, formal record we keep need to have the intervention of an intermediary, absence of which, the assets become vulnerable to theft or fraud. That’s precisely why Blockchain technology is taken seriously in the tech world as the new foundation on how we develop and do business. It’s tough to break down the entire process of blockchain into layman terms. Let’s get technical on how does blockchain technology works.
Hash – The nuts and bolts of blockchain
First things first, Bitcoin is not Blockchain. However, it uses blockchain technology to function as a cryptocurrency. Blockchain Technology, on the other hand, is an open and public ledger. This ledger can also be distributed and kept as a copy. In this chain, each block has three major component. The data, hash of the current block, and the hash of the previous block. The first part of the block that is the data entirely depends on the type of the blockchain. In the case of Bitcoin, the blocks record and keep the details of the sender, receiver and amount of coins which is the entire transaction itself. A block has a hash that could be equated to a fingerprint of the block. It effectively recognizes the contents of the block and is always unique. The hash of a block is initiated into calculation as soon the block is created. If you alter or modify something inside the block, the hash changes. This behavior of blockchain technology makes it useful for detecting changes in a specific block. If the hash of the block alters, it is transformed into a new block. You also have the hash of the previous block in each block. All the infusing of these three crucial elements makes this a blockchain and precisely why it is so secure. The first block that results in a subsequent blockchain is termed as the genesis block. If someone tries to tamper with the second block in the chain, the hash changes again. It will be a stupid and a reckless move because the third block and all rest of the block will be invalid because they can no longer read the hash of the previous block.
Proof-of-work – The shield and saviour
But if you look at it, hashes aren’t the only shield against tampering. You have hackers and data frauds equipped with supercomputers that can count thousands of hashes per second. They can easily tamper a block by recalculating the hashes of every other block so that it can transform into a valid blockchain. In order to save the entire blockchain from this apocalyptic recalculation, we have Proof-of-work for every block. It is a super mechanism that steps in and slows down the whole process of recalculation and revalidation that leads to tampering. In Bitcoin, the stipulated time to calculate the proof-of-work is approximately 10 minutes. Only after the calculation, a new one is added. It is super arduous for anyone to calculate the proof-of-work for an entire set of blocks which in turn makes it difficult to tamper with the blockchain. The epicenter of blockchain’s security is the creative use of hashing and proof-of-work mechanism.
Distribution – Open tight security
Blockchain technology has one more level of security that amps up the entire process of making the blockchain super secure from theft. The hero feature over here is distribution. Blockchain technology is famous because of the fact that it is a peer-to-peer network. This network of blocks allows anyone to join the network system which makes it open and transparent for users. When an individual joins this network, he/she gets the entire copy of the blockchain. The individual copy of the chain has nodes. The different segments which make up the whole data structure are called as Nodes. The node has the power to verify the order of the chain. When a new block is created, it is sent to everyone on an open network of the blockchain. The blocks are then verified by each node to check on the authenticity. If it’s verified, only then it is added to the blockchain. The foundation and objective of this whole process is Consensus.
They are the validators of each block. The automatic consequence of this will be the rejection of tampered blocks by the nodes. So in all, even if someone wants to tamper the blockchain successfully, they will need to control almost entire peer-to-peer network, recalculate the proof-of-work of each block and then tamper with every subsequent block in the chain. Only then can you succeed in entering the web of blockchain with your tampered block. And this my friend, is nearly impossible to execute.
Blockchain technology is revolutionary. It has a profound impact to the way we trade and transact, in the sense that we will have to rebuild our financial structures from the ‘Oldskool to the Newskool.’ The transition from the intermediary empire to the peer-to-peer free exchange would mark a glorifying change to fundamental ways we trade. Blockchain technology will be further used to store medical records, create E-notaries, or even to collect taxes. It is still taking baby steps to make its presence in the world. For those who might think that blockchain technology does not hold a future, a sheer look into Bitcoin will be enough to grasp the facts and benefits of blockchain and how blockchain technology works.