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Using Blockchain for Secure Financial Transactions

In the decade ahead, the widespread use of blockchain for financial transactions will be accomplished. Using newly modified consensus concepts, Layer 2 protocols, and sharding will make the fundamental scalability issues a thing of the past and blockchain payments a thing of the present.
Daniel Zacharias

Alex Petrovic

March 7, 2023

Here’s a real-world example: Using 10,000 BTC to buy two Domino’s pizzas. The use of blockchain technology for secure and transparent financial transactions on the spot!

But it’s no longer 2010. Businesses are becoming more aware of blockchain potential and value. Now, they’re using it for international and inter-company payments. Fast forward a decade — we have enormous companies building their blockchain payment processors and financial systems. 

The reason for that, of course, is taking advantage of the security and transparency that blockchain can bring. But what makes blockchain transactions so secure and transparent in the first place? Why are companies investing billions into this “technology that’ll revolutionize the financial industry as we know it”?

Blockchain and financial transactions – Modern Fintech 101 

A blockchain definition: A decentralized ledger that records every transaction in a secure, tamper-proof, and transparent way. Even the tiniest transaction is stored in a block and later on added into a chain of blocks, creating a blockchain that’s impossible to alter. 

What about transaction verification?

An enormous network of nodes or users does the verification process of every single block to make sure they are valid. Once they are added to the chain, they are impossible to modify or delete. That’s how the blockchain achieves its high levels of security. 

Transaction transparency is another blockchain virtue making it a poster child of the fintech industry. Every transaction gets a place on a decentralized ledger. Because of this feature, there’s no real need for a central authority to manage and control transactions. No Big Daddy fintech company to jeopardize your transactions and expose it to frauds or cyber-attacks. 

Since every user gets a full blockchain copy, a complete transaction history comes as a bonus package, creating a ZERO chance for any fishy, unethical transactions to slip by. 

Modern fintech users want decentralization, supreme company recognition, and accountability — all of which come with the blockchain. That’s why many companies use that premium transaction transparency to attract new customers who are already familiar with this tech from the inside out.

The summary of every technology expert on blockchain boils down to sweet, sweet decentralization, security, and transparency — the three essential pillars of blockchain.

Investors want to know: Does using blockchain for financial transactions work?

Blockchain seems all peachy in theory, but does it work in the real world? Are there any actual fintech institutions using it?

Yes, and there are some jaw-dropping names!

JP Morgan Chase, HSBC, Mastercard, Santander, and BNP Paribas all use blockchain technology for their transactions and interbank payments. Most of them went a step further and developed their flavor of this tech on the backs of different cryptocurrencies. 

Here’s how they did it: 

  •  HSBC partnered with R3, a leader in the digitization of financial services, to form their own blockchain platform, Voltron. This solution is responsible for streamlining and digitizing financial processes, making them highly efficient and fast.
  • Santander launched the first international blockchain-based payment app. Open Pay FX allows their customers something unimaginable a decade ago — blockchain-based cross-border payments.
  • JP Morgan created their blockchain network — Quorum. But they went even further. They based it on the Ethereum blockchain. Using Ethereum’s functionality, they built a user-friendly private blockchain ecosystem for interbank payments and transactions. 
  • Cash Without Borders is BNP Paribas blockchain child, based on open-source cryptocurrency Nxt. Cash Without Borders is aimed more toward corporate clients rather than retail investors. Using this approach, they overcame things businesses hate about international payments — delays and unexpected processing errors.
  • Mastercard’s Provenance platform took the whole 180-degree approach to blockchain. Instead of just focusing on tracking payments, Provenance went beyond and let its customers track everything from luxury goods to food products. 

Blockchain in fintech is no longer some ground-breaking, back-to-the-future concept like it was several years ago. Now, it’s in our everyday financial lives. From buying the next big cryptocurrency to paying for Domino’s pizza, blockchain has a say.

5 myths about using blockchain for financial transactions

Like any futuristic tech, blockchain swims in the ocean of conspiracies, false facts, and theories. 

These are the five most common myths about blockchain and its use for financial transactions:

  1. Blockchain is infallible. Even though it’s a highly secure technology, attackers will find a way to take over the network. If they gain access to the user’s key, game over! All your transactions and cryptocurrency are gone!
  2. Blockchain can prevent financial fraud. Yes, it uplifts transaction transparency onto envious levels, but it’s not fraud-proof. If a hacker steals a user’s keys and the network verifies fraudulent transactions, no blockchain solution can prevent it.
  3. Blockchain implementation is an effortless task. WRONG! For a business to implement blockchain, it first needs to get an abyssal understanding of the technology, what resources are required, and how to develop and maintain it. It’s not an implement once and keep your fingers-crossed type of tech. Blockchain needs constant maintenance and improvement.
  4. Blockchain provides full anonymity. Blockchain uses pseudonyms for user identification but is not 100% anonymous. Every transaction is recorded in a public ledger for everyone to see. So, transaction tracing is straightforward to its source, and pseudonyms are crackable.
  5. Blockchain is only for cryptocurrencies. DEAD WRONG! Sure, Bitcoin is the most well-known use of blockchain, but it’s just the tip of the iceberg. Cryptocurrencies were the one-trick pony blockchain used to get into the fintech world but evolved into so much more. Now, blockchain’s use varies from voting systems and tracking supply goods to even real estate deals.

How to win big when using blockchain for financial transactions 

So how do you implement blockchain tech into your business and make financial transactions more secure, transparent, and hassle-free?

The road isn’t easy. It has five key steps your business needs to take to enjoy the benefits of blockchain-based transactions.

They are:

  1. Find areas of your business suitable for blockchain. Don’t try to use it for everything, from marketing to HR. Stick to the financial side, like payment processes, fraud prevention, and supply chain management. 
  2. Match the right blockchain tech with your business. Research what different types of blockchain tech are currently available. Federated, hybrid, public, or private have their own perks. When pairing them with your business needs, look through security, scalability, and ease-of-use lenses.
  3. Approach with a plan in mind. Some of your systems will require turning full 360 degrees. With a developed plan, implementing blockchain into essential business systems becomes effortless. 
  4. Don’t DIY. Blockchain isn’t a weekend project you can tackle on your own. You need qualified blockchain developers or technology consultants to succeed. Otherwise, you’ll put your company into trouble and possibly break regulations or relevant financial laws.
  5. Monitor and pivot. After becoming your usual way of how you process financial transactions, you need to monitor and adjust the blockchain. If you just let it sit, you won’t enjoy its full potential. 

The biggest problem with using blockchain for financial transactions

Scalability! It’s the blockchain’s Achilles’ heel and what’s stopping it from wide adoption across the fintech industry.

Today’s Bitcoin-based blockchain tech only supports seven transactions per second. Ethereum-based goes twice the speed with 15 transactions per second. It’s lightspeed compared to Bitcoin, but it’s minuscule compared to regular financial transactions that go beyond 100,000 per second worldwide.

Scalability is the fundamental flaw of blockchain technology

That’s because, to have high levels of transparency and security, every transaction needs verification from multiple nodes. That specific verification process called consensus significantly reduces scalability. 

Overcoming scalability issues when using blockchain for secure payments quickly and efficiently on a global scale is a must!

How to fix it 

Is it actually possible to overcome such a fundamental issue? Are there any solutions on the blockchain horizon?

Several promising concepts restore hope for blockchain’s widespread adoption in financial transactions. They are:

  • Sharding — a process of breaking the blockchain network into smaller “shards” or parts. Each shard will be responsible for a subset of total transactions boosting scalability.
  • Off-chain solutions — Instead of dumping every transaction onto the blockchain, why not move some off-chain? Lighting Network solves the scalability problem by moving parts of transactions into a separate network connected to the main blockchain.
  • Layer 2 scaling solutions — Rollups and sidechains are all part of Layer 2. It’s what enables the aggregation of multiple transactions into a single one, thus increasing the number of processed payments per second.
  • New consensus mechanism — Current PoW (Proof of Work) consensus is excellent 

for certain things, but not so much for financial transactions. That’s because it limits the transaction processing capacity, and it’s resource-intensive. There are new types of consensus, PoS (Proof of Stake) and DPoS (Delegated Proof of Stake), promising better scalability and less aggressive computing power.

Where will blockchain and financial transactions be in 10 years?

Knowing the direction in which blockchain technology for fintech is going is like sprinting through a dense fog. You don’t know what’s ahead. But one thing’s certain — we’re past Bitcoin Pizza Day

With platforms like Penance, Voltron, and Quorum, you better be prepared for the lightspeed development of blockchain technology in the fintech industry. In the decade ahead, the widespread use of blockchain for financial transactions will be accomplished. Using newly modified consensus concepts, Layer 2 protocols, and sharding will make the fundamental scalability issues a thing of the past and blockchain payments a thing of the present.

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