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How the blockchain is impacting the financial sector

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Last editedApr 20213 min read

If you’ve followed the financial news at all over the past few years you’ve probably seen references to the ‘blockchain,’ particularly in relation to cryptocurrency such as Bitcoin. But what is blockchain exactly, and how does it work? Here’s a rundown of what every investor should know about blockchain for business.

What is blockchain?

While the inner workings of blockchain can get a bit technical, at its core, this technology is simply a new form of database. It’s used to store information electronically, the same as any other database. But while traditional systems use a centralised database, blockchain technology distributes its data across multiple points of authority. The information can be updated across multiple computers in a network, allowing any authorised individual to view the full financial ledger without a middleman.

Within this framework there are different categories of blockchains:

  • Public blockchain: Access to the blockchain is open, allowing anyone to participate. Bitcoin operates using this type of open-source blockchain, for example.

  • Private blockchain: This type of database restricts access only to authorised users over a private network. This type of blockchain is used in banking or more sensitive financial industries. Those outside the approved network cannot view the ledger of transactions.

  • Hybrid blockchain: Also referred to as ‘sidechain,’ this type of hybrid setup allows different blockchains, both private and public, to interact with one another. It enables transactions to take place between different blockchains.

How blockchain works

To better understand how blockchain works, it helps to distinguish between this type of architecture and a traditional database. A blockchain is composed of groups of data called blocks. Each block has a storage limit, and when this limit is reached the block is chained onto another full block. Together, these blocks of data form the blockchain.

This is one important aspect of what distinguishes a blockchain – once a block is full, you can’t go back and alter its contents. It can only be written once, and then amended or built upon. By contrast, a database structures information into tables that can be altered as needed. A blockchain is an irreversible timeline that cannot be altered later. Each block is given a timestamp for reference, creating a useful audit trail to any user with permission to access it.

There are many potential benefits to using a blockchain, including:

  • Increased efficiency

  • Faster processing speed

  • Reduced errors

  • Better customer experience

  • Speedier transaction settlement

  • More secure transactions

Using blockchain in finance and banking

You can see these benefits at work by applying blockchain to the banking industry. Under traditional circumstances, it can take several days to see funds appear in your account. Banks handle an extremely high volume of transactions each day, which all equates to a standard amount of processing time.

When banks integrate blockchain technology, transaction processing times are greatly reduced. Through a controlled network, you simply add a new block to the existing chain, including all of the data pertaining to your transaction. This is near instantaneous, with no need to wait for central processing. Funds can be exchanged between institutions as well on the blockchain.

Trading stocks can take up to three days for settlement and clearance. During this time, your money and shares are frozen. This can be inconvenient at best and carry significant risk at worst. Blockchain applications can cut down on all the third-party involvement for streamlined services. There are many financial platforms already experimenting with the technology, including China’s WeBank and the Australia Stock Exchange.

How to invest in blockchain

It’s a common misconception that blockchain and Bitcoin are one and the same. In fact, blockchain is the technology that actually lays the foundation for digital currency trading.

While government-backed currencies are controlled by a central authority system like the U.S. Dollar and Federal Reserve, cryptocurrency is supported by the blockchain. This means it can operate without a central authority, reducing risk and eliminating transaction fees. You can invest in blockchain technology by purchasing cryptocurrency, because greater demand for crypto drives up the value of blockchain. In this way, Bitcoin could be seen as a blockchain investment.

Established companies like IBM and Intel are investing heavily in blockchain business apps. You could consider acting a direct investor yourself for blockchain app start-ups, or purchase shares in established computing companies getting into the field.

The bottom line is that blockchain might still be an emerging technology, but it’s rapidly becoming legitimised as its applications grow. By reducing human error and manual manipulation, it offers a way to increase financial efficiency with online transactions.

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