Since its inception, blockchain continues to bring innovative concepts to the domain of finance. Thanks to its decentralized nature, blockchain remodels traditional financial operations and thereby creates more advanced and effective solutions.
According to the survey conducted by Blockdata, 81 of the top 100 companies, including tech giants such as Microsoft, Amazon, Tencent, and Nvidia, are using blockchain. This acknowledgment serves as a solid proof of the technology’s transformative value.
It is fascinating how blockchain has evolved from an odd technology, whose pool of applications was limited to cryptocurrency transactions, into a flagship solution revolutionizing many and varied domains. It is now predicted that blockchain’s market size will reach $67.4 billion by 2026.
Blockchain is no longer labeled as an exclusively financial technology. It’s now extending its reach to a great number of industries, from real estate to advertising, healthcare, sports, and more.
However, finance is still the sphere where blockchain flourishes to the max.
“There are very few fundamental shifts in global infrastructure that can happen in our lifetime. The financial infrastructure is one of them, and the Blockchain is changing the way we think about the transfer of value.” ― Adam Draper, founder and managing director at Boost VC.
But what precisely are those benefits that blockchain offers to the financial sector? Now is the time to find out.
Outline of blockchain in finance
With a centralized system of finance management, you have to go through a considerable amount of side procedures like verifications and approvals in order to carry out a financial operation. What’s more, you will need to submit a stack of papers when it comes to a more complicated financial service such as a bank loan.
Is there a way to make all these interactions less puzzling?
It’s clear that finance professionals are finding blockchain a very useful technology for simplifying these processes. The statistics backs this up — the market size of blockchain in finance is predicted to reach $22.5 billion in 2026.
The technology promises to make financial operations fast and transparent, while enhancing security and accessibility.
Innovative blockchain instruments
Blockchain has originated a number of solutions for much more smart and effective operations: cryptocurrencies, DeFi, NFTs, DAOs, STOs, and smart contracts.
Let’s take a closer look at each of the them:
Decentralized finance (DeFi) is a collective term for a variety of blockchain-based financial instruments: cryptocurrencies, stablecoins, liquidity mining, yield farming, etc.
DeFi showed itself to be of great use, with $193 billion in TVL (total value locked) being the best proof.
The main advantage of DeFi is that there is no centralized authority supervising operations. Instead, all interactions and transactions are conducted on a P2P basis. This speeds up the process and lowers the risk of mistakes or intentional fraud.
Decentralized finance breaks the limits of what operations are attainable by this or that person as there is no proxy in power to prohibit any. Also, anyone with a stable connection has access to all DeFi services: physical constraints are no longer an obstacle.
All transactions and operations made with the help of DeFi are secure, since data is stored immutably on the ledger. This also means that all parties can check the necessary information at any time. However, no one has the power to change anything. This opens an opportunity for trustless yet safe financial interaction.
Looking for an innovative DeFi solution? The Echo network is just what you need
Hardly there is a person who has never heard of Bitcoin — the first cryptocurrency ever created. Since the birth of Bitcoin (BTC), the crypto pool has expanded significantly, gaining new platforms and their native coins: Ethereum (ETH), Tether (USDT), Binance Coin (BNB), Cardano (ADA), and many more.
You can use crypto for a range of financial operations such as payments and loans, just as you would use fiat money. However, the transactions conducted with crypto coins are much faster as you don’t need middlemen to execute them.
Speaking about enhanced security, crypto transactions make use of cryptographic algorithms and smart contracts to process transactions. This approach makes them much more secure than regular digital payments, where there is a high risk that information could be stolen while funds are being handled by payment processors and banks.
What’s more, using cryptocurrencies you reduce expenses related to international transactions. Recent research shows that blockchain implementation will save banks more than $27 billion on cross-border transactions by the end of 2030.
Visa was the first major payments network to settle crypto transactions. Its solution, Visa B2B Connect, enables B2B (business-to-business) cross-border operations for financial institutions and their corporate clients. Users are connected to a global network, and are not charged intermediary fees.
Pay attention to Arbitrage Bot that allows users to generate profit from cryptocurrency price discrepancies and perform risk-free transactions
When two blockchain derivatives — DeFi and NFT — merge together, they open up whole new ways for finance to benefit from decentralization.
Tokenization and loan collaterals are the chief NFT applications in finance.
Tokenization is a perfect means to firmly establish your ownership over the asset, be it a JPEG picture, important documents (e.g. insurance or vouchers), or immovables. All metadata related to an NFT is permanently written on the ledger, so the name of the creator is stored on it forever.
There are now a bunch of NFT marketplaces where you can turn your assets into non-fungible tokens in a few clicks — OpenSea, Nifty Gateway, KnownOrigin, Rarible, etc.
Some of the marketplaces aggregate any type of NFTs, while others are dedicated to a specific type.
OpenSea is the largest NFT marketplace in the world with 38 thousand unique users. You can convert any asset (images, music tracks, documents, etc) into NFTs directly on the platform and then put them up for auction or set a fixed price. Buyers can check the history of interesting non-fungible tokens, including owners and prices.
OpenSea transactions are executed on a P2P basis, meaning no middlemen are involved. However, the platform takes a 2.5% fee from every transaction. The marketplace supports more than a dozen crypto wallets, with MetaMask and Coinbase Wallet being the top choices.
Meanwhile, xtingles is an example of a selective marketplace — it specializes in ASMR NFTs. The platform lets ASMR creators issue non-fungible tokens, and then generate revenue from royalties while also having their copyright protected. As with OpenSea, xtingles performs NFT sales in two ways: via an auction or for a fixed price.
Don’t miss this article where we investigate top NFT in DeFi solutions
Decentralized autonomous organizations (DAOs) are blockchain-based entities that function with no centralized authority and are governed by the participants. DAOs are used for activities like fundraising, pool investment, collecting, or establishing freelance networks.
Special governance tokens make it possible to participate in voting on the platforms. The voting power is measured by the number of these tokens.
As DAOs execute smart contracts, any attempt to perform activities not written in the contracts will fail. It is also impossible to make any money transactions without complete agreement from all the members.
The top DAOs include Uniswap, DAOstack, Augur, Aragon, and Curve DAO.
We will take Aragon for a more thorough acquaintance.
The Aragon platform offers a set of solutions for building decentralized global communities. The pool of the project’s tools includes Aragon Voice (a voting solution), Aragon Govern (a governance framework allowing on-chain execution and plug-in dispute resolution), Aragon Client (a tool for DAO establishment), Aragon Court (an arbitration platform for disputes resolution), and Vocdoni (an anonymous digital voting protocol).
At the time of writing, Aragon holds $190 million in its treasury and has over $500 million in TVL (total value locked).
The Aragon team claims their goal is a fight for freedom, and they strive for it by creating tools that make decentralized interactions and transactions productive and secure.
Interested in getting more insights on DAO technology? Don’t overlook this article
Security token offerings (STOs) have gained a reputation as an efficient fundraising tool. It is estimated that the STO market will soar to $8 trillion by 2025.
Security tokens represent various types of assets (bonds, investment funds, works of art, etc). Unlike their predecessors — ICOs (Initial Coin Offerings) and IPOs (Initial Public Offerings) – STOs comply with securities laws and regulations.
STOs provide better liquidity, efficient and simplified management of digital assets, high level of accessibility, and the possibility of fractional ownership.
Security token offerings leverage smart contracts that are capable of automating legal and auditing procedures, and help to securely store and share data.
The list of STO platforms features such names as Polymath, Securitize, Swarm, and Securrency.
To better understand the processes behind STO technology, let’s look at Polymath.
The Polymath platform allows users to issue and manage security tokens. Polymath collaborates with custodians, broker-dealers, legal firms, cap table management providers, token sale platforms, and KYC/AML providers to enable users to customize their security tokens.
Among the assets that can be tokenized on Polymath are private equity, limited partner shares, stocks, and bonds. In addition, issuers determine the rules on who can hold their tokens, how they can be transferred, and other jurisdictional requirements.
More information about STOs, such as history and examples of regulations in different countries, awaits you in this article
Smart contracts are blockchain-based programs whose function is to execute predetermined sequences of actions. Smart contracts automate multiple repetitive operations thus considerably saving time and excluding the involvement of middlemen.
Safety measures are also enhanced by smart contracts as no action can be performed without it being coded into the contracts. Once the contract enters the blockchain, it remains there forever, and the code can never be changed. This makes the technology very useful both in terms of efficiency and security.
Which spheres of finance are most affected by blockchain?
Blockchain has already penetrated all spheres of the finance industry: data management, payments and remittances, banking and lending, trade finance, and insurance. Let’s examine each of the cases.
Data and document management
All financial operations require identity verification to prevent fraudulent activity. To perform this, numerous documents have to be collected and certified. Moreover, papers usually go through several mediators, such as bank officers or notaries.
Once stored on blockchain, documents are easily viewed, whenever access is demanded. This ensures that all financial operations, from regular payments to loans and mortgages, are executed much faster.
Blockchain also takes care of fraud prevention, as no one can change the data on the ledger. Besides this, on permissioned blockchains access is given to verified and approved users only.
Another advantage is that databases built on blockchain can be effortlessly submitted to regulatory agencies.
Luckily, we already have blockchain-based data management instruments — DocFlow, for example.
DocFlow turns the entire paperwork cycle into digital format and keeps all documents safe by utilizing smart contracts. The solution lets users see the whole history of papers and time-stamp them. As blockchain doesn’t allow changing data there is no chance someone tampers with important documents.
DocFlow has a built-in proof of origin tool protecting fraud data from entering the system. You can also adjust role-based and coded access to maximize security measures.
Traditional approach to asset management is slow, complicated, and accompanied by numerous intermediaries. Venture capital firms, private equity firms, real estate funds, and specialty markets are striving to reduce liability risk management, carry out more dynamic decision-making strategies, and adapt to constantly changing regulations.
Blockchain tackles these pain points by enabling stakeholders to engage with digitized assets and services seamlessly as all the necessary data is stored securely on the ledger. Besides, blockchain can serve as a platform for digital portfolio, helping to establish wider market coverage.
Thanks to smart contracts, multiple operations such as compliance and regulatory reporting can be automated and performed within fixed time limits and strictly following the rules, thus excluding human error. It is especially useful for international companies that have to comply with different jurisdictions.
One of the blockchain solutions making asset management a way more simple and pleasant experience is MyBit.
MyBit created an opportunity to effectively manage one’s assets for everyone. The platform’s ecosystem includes an ICO website where users can participate in ICO campaigns with various currencies (BTC, ETH, DASH, Monero, Ether classic). You can also monitor the constantly updating transaction history and check campaign status.
MyBit has its own token,MYB, that is used for voting, can be exchanged for other tokens, gets locked for investment in long-term projects via MyBit Ventures fund, and has a wide variety of other use cases within the platform.
The repetitive operations are conducted via smart contracts. This creates a fair investment ecosystem for everyone, eliminating additional expenses for intermediaries.
Payments and remittances
Currently payments and remittances are executed by middlemen, which causes extra expenses. It is also quite long — on average an international payment takes 2 to 7 days.
But why wait so long and pay more if you can avoid it, right?
Payments made on blockchain are P2P operations, meaning no charge is taken by intermediaries. Also, you don’t need to wait even a day before the settlement – transactions on blockchain take seconds.
Finance platforms running on blockchain collect digitized KYC and AML data as well as transaction history, reducing risks of fraud and enabling real-time authentication.
In addition, blockchain allows you choose from multiple forms of payment: tokenized fiat, stablecoin, or cryptocurrency.
A vivid example of blockchain used to make payments and remittances faster and safer isCodefi.
Codefi is a suite of finance services that helps to eliminate transaction delays, decrease operating costs, and make payments frictionless and transparent.
Users can monitor currency operations, settlement status, wallet balance, transaction history, and more on the platform’s dashboard. The wallet used is MetaMask.
Codefi is compatible with all Ethereum based blockchain networks which makes it possible to build customized applications.
As a rule, banking operations such as getting a loan or a mortgage, or even processing payments are slow and require involvement of middlemen to collect all papers, stamps, signatures, and whatsoever. It can take months from the moment you start the process till the actual settlement.
On blockchain verification of data authenticity and KYC/AML procedures are executed in real time without the need to turn to middlemen, thus significantly reducing time waste and minimizing operational risks.
As all necessary documents are digitized and stored on the ledger, they can be instantly presented to any institutions or controlling authorities.
By leveraging smart contracts, banks can boost the speed of transactions and automate repetitive operations, making the overall workflow go smoother and a way faster.
Blockchain also contributes to facilitated loan collateralization as tokenized assets can be evaluated and approved as collateral straight off.
Using NFT as loan collateral means that the borrower and the lender can decide between them on the value of the token, without having to rely on third parties.
This way, the borrower can get the necessary money without selling the asset. Meanwhile, the lender is well protected — if the money can’t be returned, the NFT simply transfers to the lender.
In 2022 more and more banks turn to blockchain in an attempt to improve their core processes. Among them are such names as J.P. Morgan, Swedish Central Bank, and Asian Bank.
J.P. Morgan, an American multinational investment bank, uses blockchain technology to improve funds transfers between banking institutions. The bank expects to reduce the number of rejected or returned transactions caused by mismatched payment details through improved information exchange related to payments.
Wondering what other technology can reform banking operations? Take a look at how AI deals with that
Trade finance deals with transactions linked to both domestic and international supply chains. The processes behind these operations have become outdated long ago with important data still being stored in paper format. This causes major security vulnerabilities and results in human mistakes. Not to mention the extremely low speed of transaction settlements – 90-120 go until all documents are verified and stakeholders see eye to eye on the related aspects.
Blockchain makes trade finance operations securite and efficient by digitizing every bit of the supply chain lifecycle (both assets and papers). This results in decreased processing times, lower capital requirements and operating costs, and reduced risks of fraud.
Besides, on blockchain money transactions take seconds while financial documents go through instant verification.
Scargos is one of the supply chain companies that embraced blockchain as an instrument to make operations more efficient.
The solution offers a live-updated database of shipment orders with complete history of transactions and proof-of-origin stamps. Also, shippers and carriers can communicate directly in the app, speeding up decision-making processes.
All this streamlines shipping mechanisms, cutting down operational costs.
According to statistics, insurance fraud causes $80 billion worth of damage annually in the US alone with people claiming insurance payouts for fake incidents or tampering with the policy terms.
Blockchain tackles this issue thanks to its immutability, which makes it impossible to falsify data as nothing can be changed on the ledger.
Apart from the fraud aspect, the overall work of the insurance industry also leaves room for improvement as the traditional approach to handling insurance settlement is obsolete.
With the introduction of smart contracts, multiple cumbersome actions that are now performed manually can be automated. Thus, operations can be performed faster and be less vulnerable to occasional mistakes or intended interference.
Also, storing all the related documents and assets on blockchain makes it easier to apply for reinsurance as you won’t need to collect and verify everything once again.
Etherisc is one of the companies pioneering in the domain of blockchain-based insurance.
Etherisc builds decentralized applications for different sectors of the insurance industry: crop failure, flight delay, hurricane, crypto wallet hacking, and health problems.
The company is focused on reducing processing fees and time as well as providing greater transparency of the processes.
Want to know more about blockchain use cases in the insurance sphere? Read this article
Challenges of blockchain implementation in finance
Despite the clear benefits and a wide range of applications, adoption of blockchain for finance raises several issues that should be well-considered.
Equipment and staff
First, it will take a long time and a lot of resources to establish a fully fledged blockchain ecosystem on a global scale. Institutions and businesses must acquire modern equipment and well-trained staff to be able to maintain constantly scaling platforms while also meeting the security standards.
What’s even more important is that most well-established blockchains, Euthereum and Bitcoin, have low transaction speed – 10 to 15 transactions per second (tps) for Euthereum and 3 to 5 tps for Bitcoin. It is not even close enough to satisfy the need of financial institutions that require thousands of transactions conducted at the same time.
It means that the finance industry has to consider more recent blockchains like Solana (65,000 tps) or Flow (1,000 tps) to manage the never-ending stream of transactions.
How does Solana manage to compete with Euthereum, a top player in the blockchain world? Check this article to find answers
Also, blockchain is notorious for affecting the environment. It’s been calculated that a single Ethereum transaction releases more than 90 pounds of CO2 into the atmosphere, and a single Bitcoin transaction results in more than 1,000 pounds of the same greenhouse gas. And although there are projects in development aimed at creating more sustainable blockchain mechanisms, the current state of affairs is far from being eco-friendly.
Prospects of unemployment
Alongside the best feature of blockchain – decentralization – comes the threat of unemployment. At present, many people are employed as intermediaries in financial operations. But as blockchain becomes more widely adopted, the need for these people vanishes.
Lack of interoperability
Another pain point is a lack of interoperability between different blockchains. This may cause considerable troubles when there is a need to transfer data from one blockchain-based system to another. Luckily, there are already blockchain networks that aim to improve the interoperability issue such as Polkadot, Cosmos, Harmony, and Echo.
No data changes
Lastly, due to blockchain’s immutability, the data cannot be altered once it enters the ledger. However, financial procedures often require data modifications. As a result, institutions and businesses have to come up with a strategy on how to use this peculiarity of blockchain to their advantage.
Nevertheless, more and more companies embrace blockchain as a way of modernizing their operations, thus changing the rules for the whole industry.
The future of blockchain in finance
Blockchain solves many inconveniences of the traditional centralized finance system: the need for intermediaries, expensive cross-border operations, and outdated document management to name a few.
From the already familiar cryptocurrencies to the completely new concepts of NFTs and DAOs, blockchain offers a host of breakthrough technologies that are taking the way we deal with finances to a brand new level, making transactions fast, safe, and reliable.
The technology and its many derivatives are just as valuable for well-established businesses, enabling them to improve the workflow and customer satisfaction, as they are for start-ups, empowering them with innovative fintech solutions.
Now the technology looks like the best tool to get rid of obsolete aspects and make financial operations much more efficient and reliable.
To implement blockchain the right way, you should carefully consider all the tools it has to offer so that you can achieve the best results. Our blockchain consultants will gladly help you look into the details so that you start your business transformation with full knowledge. Feel free to get in touch with us, and we’ll make your business truly stand out.