The banking sector is the section of the economy devoted to the holding of financial assets for others, investing those financial assets as leverage to create more wealth and the regulation of those activities by government agencies.
Here, we will discuss about the two important economic functions of bank.
First one: Bank operate a payment system, which is the vital activites to support and sustain daily transaction in modern economy. So, we make payment transaction through bank, onlinebank, swiping credit card. There is legal institution bank which regularise the flow of money. This is the traditional banking model when we consider blockchain as a modern tool to cash transaction. Before, moving on to discuss about blockchain, lets discuss about the second key function of banks.
Bank performs the role of financial intermediation, which means it accepts deposit from people and lend the money to other individuals or business enterprise agaist the interest. By this activities, banks generate profit on one hand and also support many business house and entrepreneurs to turn their business ideas into reality through offering investment opportunities.
As a variety of models for cooperation and integration among finance industries have emerged, some of the traditional distinctions between banks, insurance companies, and securities firms have diminished. In spite of these changes, banks continue to maintain and perform their primary role-accepting deposits and lending funds from these deposits. This is also highlighted by the emergence of recent banking technology such as Blockchain, and the prediction about updated ATMs, which is much the same as Apple Pay or Samsung pay for the contactless ATM transaction just using phone.
This prediction about the updated ATMs is not the topic of surprise because a
few ATM technologies are already accessible overseas. For instance, biometric authentication is already employed in India, Facial recognition payment system is growing in China and the Demank is testing it. Therefore, it speaks a lot about the future payment system.
So, What is Blockchain Technology?
Today, we will discuss about Blockchain technology. First of all, we need to know about Bitcoin.
Any idea about Bitcoin?
Bitcoin: Bitcoin is open-source; its design is public, nobody owns or controls Bitcoin and everyone can take part.
The successful cryptocurrency, Digital currency based on the blockchain technology, https://bitcoin.org/en/.
Bitcoin History: described in 1991 by a group of researchers(Digital Timestamp as a Notary) and 2009 adapted by Satoshi Nakamoto to create the digital cryptocurrency Bitcoin
Bitcoin Characteristics: Anonymous, Untraceable, Secure
Alternatives to Bitcoin: Dash, Litecoin, Digibyte, Nano etc. Now lets explain about Blockchain.
Blockchain
Blockchain is a decentralised public ledger of all committed transactions across P2P network
This chain grows as new blocks are appended to it continuously
Decentralised System: It is own by no single body and data is distributed to everyone, no single body of functionality
Blockchain records and validates each and every transaction. Blockchain does not require third-party authorization. https://www.youtube.com/watch?v=SSo_EIwHSd4
How Block chain Works?
•Request: A person requests a transactions
•Transaction: Transaction broadcasted to p2P network
•Validation: The network validates the transaction and the users with the algorithms
•Once confirmed a transactions is combined with other transaction to create a block
•Attaching to the block
•Transaction completed
Explanation: “Request to send money, block is formed, block send to block of miners, then they validates(they verify), miners send block requested and transaction completes”.
Blockchain Examples: Ripple or Transferwise payment
Blockchain Example Explained:
#1. Payments, Especially Cross-Border Payments ( Powered mostly by Swift or Western Union until now). For example: Westpac combine with Ripple in 2016)
#2. Stock Exchange and Share Trading (traditional stock exchanges process is lengthy, bureaucracy and more parties involved) so blockchain use offers simplified services. For example: Nasdaq and CitiGroup together invested in blockchain ledger
#3. Digital Identity Verification: (Online financial transactions are impossible without identity verification(repeatedly), with blockchain, they do not need repeated identity verification. Id2020 is a project aimed at creating digital identities for people who have no paper IDs
Ripple is a real-time gross settlement system, currency exchange and remittance network created by Ripple Labs Inc., a US-based technology company. Ripple Payment Protocol makes Instantly Move Money to All Corners of the World possible. 300+ financial institutions partnered with RippleNet to find new customers in new markets, expand services and deliver the best experience in global payments today. https://ripple.com/
Transferwise is another payment system which works on blockchain technology. It is easy to use and it has excellent customer centric service model. Their help center are offering 24/7 service to clients.
Characteristics of Blockchain
•Decentralization: In conventional centralised transaction systems, each transaction need to validated through the central trusted agency. Third party is not needed in blockchain
•Data Consistency: Consensus Algorithms in blockchain are used to maintain Data consistency in distributed networks.
•Persistency: Transactions validated quickly, nearly impossible to delete or rollback transactions once they are included in the blockchain
•Anonymity: User can interact with generated address so real identity is not revealed but no privacy is guaranteed, security is through proof of work and Hashing
•Auditability: Unspent Transaction Output(UTX-O) model is used by Bitcoin Blockchain to stores data based on it.
Source:
Summary: Usage of Blockchain in Banking
1.Blockchain-led appointment scheduling software speed up Knowing Your Customer compliance checks
2.Integrates Silos Channel
3.Flexible data management foundation(storing, Retrieval of Data)
4.Ensure security which is a major concern in financial domain
5.New Paradigm of Communication
6.Better Data Consistency through one specific arrangement of qualities(No duplication of Data)
Blockchain Advantages
ØTransparency and Trust: Any member of the network access to shared, trustworthy records and the technology’s strong security features.
ØSecurity: In practice, say the distributed ledger is shared across 5,000 computers and a hacker wanted to change some information recorded in one of the blocks, they would have to hack all 5,000 computers simultaneously. This is an arduous task.
ØSpeed: Reconciliation and payment of transaction happens in less than 10 minutes versus an average of a few days for third-party systems, Can be used as a replace of Swift transfer
ØApplications: Can be used in various financial services such as digital assets, remittance, online payment
https://www.consultancy.uk/news/13484/blockchain-technology-how-it-works-main-advantages-and-challenges
Blockchain Disadvantages
1.No central authority to reimburse if the service provider goes bankrupt. Therefore, can be problem related to trust
2.Conversion to local currency can be difficult
Blockchain Technical Challenge
•Scalability is a huge concern: Incapable of high frequency trading because Bitcoin block size is limited to 1MB, Bitcoin network is restricted to a rate of 7 transactions per second. However larger block means larger space and slower propagation in the network.
(Miners hide their mined blocks for more revenue in the future which hinder Blockchain development)
•Privacy leakage: Current Consensus Algorithms used in Blockchain(Proof of work or proof of stake) facing some problems
•Bitcoin Challenge: While the system works well enough for most transactions, it still suffers from the inherent weaknesses of the trust based model
•Stop the tendency to Decentralization: User cannot alter one the transaction is done but still the chances with miner. Up to now, the top 5 mining pools together owns larger than 51% of the total hash power in the Bitcoin network
Conclusion
•Potentiality for transforming the traditional industry
•Traditional Company can embrace blockchain technology
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