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The Relationship between Blockchain and FinTech

 4 min read / 

Whenever money is transferred around the world, big and complex financial institutions have to account and reconcile those transactions. This system is both time-consuming and costly. Blockchain is the next big financial thing, promising to overcome all these problems creating a new, agile and direct system. Basically, blockchain is a network of nodes that can submit data to be added to a chain of blocks.

What about bitcoin? Well, blockchain is the technology that stands behind all these new cryptocurrencies, in order to ensure efficiency, transparency, and impregnability. Contrary to popular belief, in fact, this whole new system of data blocks is virtually almost impossible to be both manipulated or attacked, since those data are not linked to one specific server, but are replicated and ‘printed’ on many global data-nodes.

Two Different Approaches

There are two different ways to implement the blockchain infrastructure. On one hand, there are the Distributed Ledger Approach actors, requiring a predefined set of identified system maintainers. They can both check the validity of the transactions (Txs) and update the system state, ensuring that no leaks happen.

This system is arguably considered innovative since no peer-to-peer technology service is directly available to the final clients. Essentially, it exploits this new innovation in an incremental way, reducing some layers of transaction complexity while not taking full advantage of all the potential of this new technology.

On the other hand, the blockchain approach is sustained by the most innovative actors. Nodes can be a maintainer an audit, a client and each node run the software implantation of the blockchain protocol. The whole blockchain is based on consensus, ensuring that peer to peer transactions data are both universally recognised and safely provable.

Future Implementations

There are many startups that have already tried to include the blockchain technology within their services and products. Euklid, an investment fund startup, for example, has exploited the blockchain as an extra layer of data, in order to ensure the transparency of the financial returns. No performances can be, in fact, manipulated whenever they are registered on the blockchain because the transactions are registered creating a decentralised, immutable and permanent account.

Patents can be implemented on the nodes in order to ensure in an irrefutable way that inventors rights would be protected. Clipperz, a Munich-based startup, is already helping creators and professionals to protect and manage ownership of their digital assets through a blockchain implementation. Smart contracts, complex pieces of software that automatically execute instructions, are the second tier of software technology and they will drastically reduce the human element necessary for business.

The trajectory culminates with autonomous agents, bundles of smart contracts that operate as highly distributed enterprises. Trakti is already doing that. Started in 2006, this startup adopts the blockchain technology. They started to shift from the implementation of contracts on a digital platform, making it easily editable and accessible. They are implementing contracts that can be enforced through Internet of things checks.

They are trying to implement a system through which the enforcement of the contract itself is based on the blockchain technology, but not the contractual definition and arrangements. If, for example, employees have to be at work at 9, as stated in the contract which is going to be made through human interactions among the parties, Trakti, exploiting the blockchain technology and the Internet of Things, can check the compliance of the contract on the data provided by the Internet of things (for example swiping the badge) and decide automatically, based on the parameters and variables set by the parties involved, whether to release the payment or not.

Problems for the Future

This new sophisticated way to store data requires laws and regulations, but the government does not look to be interested in dealing with such a difficult transition since public administration would have to recognise blockchains as the actual account of data.

Secondly, there are still technological problems to be addressed. Cyber attacks are costly but not impossible yet. The future implementations of this technology are based on the trust that people give it.

Lastly, the next few years will see the birth of many new blockchains, ready to compete and to get as much data as possible. Is this kind of competition really positive? Not entirely, since the real advantage of this technology is the absence of intermediaries and frictions on transactions.

The interactions among multiples blockchains would require in fact sidechains, a system of consensus in order to ensure the communication among different chains. Is this system of sidechains and blockchains going to be efficient? It’s really hard to answer this question now since the future scenarios and reactions to this technology are highly unpredictable.

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  1. Nataliia Bubniuk

    March 22, 2017 at 3:22 PM

    Great article!
    We have been also researching this topic in Applications of Blockchain Technology in Fintech.
    Blockchain drastically reduces the transaction & operational costs for banks. According to the latest research from Accenture, deploying blockchain for automating certain financial processes can help banks save $12 billion this year.
    From the consumers perspective using blockchain for sending international payments can significantly reduce the standard bank processing fees imposed by the correspondent banks.

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