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Introduction
Like the internet in the nineties, the blockchain represents a new and inevitable technological evolution that is gradually entering not only the financial reality, but also the world of enterprises and public administration. Born about twenty years ago, this technology is gaining everyone’s attention, knowledge and expectations. Transparency, sharing, consensus, decentralisation, security, and programmability are characteristics that do not work together in the technology we know today. However, these elements can be used inside the blockchain, and are the main reason why different sectors have found interest in the technology.
But what is the blockchain? The blockchain exploits the characteristics of a virtual network of connected nodes that interact and allow a user to manage and update the register containing data in a shared manner and without the presence of a central control system. The blockchain can therefore be defined as a decentralised technology. As the word suggests, it is made up of a chain of blocks. Each of them contains fundamental and encrypted information thanks to a code (hash) that makes a block unique and impossible to modify.
The blockchain is part of the family of distributed ledger technologies, that is, those systems that are structured on a distributed register. The changes made to the register are not validated, as mentioned, by a central entity but the nodes of the entire network must reach consensus. The main blockchains currently are Bitcoin and Ethereum.
In this analysis we will look deep into the evolution of the blockchain and the reason why there is this exponential interest in this “new” technology in various sectors.
In particular, we will analyse how the players of the financial world use this technology and which ones are the real benefits it offers. Let’s start by taking into consideration some relevant data.
Unique assets
The blockchain allows the possibility of realising solutions to create unique digital assets. To understand the opportunities of the blockchain it is important to consider the issue of the uniqueness of digital assets because it allows the digital world to “regain” the concept of scarcity of assets as in the real world. When we transfer a digital asset from our computer to another, using the blockchain, that document is no longer in our possession and is fully owned by the recipient. If they too, need to share it, they will lose possession of it in favour of another subject. Therefore, the asset will remain unique and it will not be possible to duplicate it.
Duplicating an asset designed to represent a cryptocurrency means diminishing this value until it is cancelled. This is why the world of finance has understood the value of the blockchain in its ability to guarantee the uniqueness of a digital asset. The same value is well understood by many other sectors that are digitally representing products and services, and that have realised that the digital world allows for much more efficient management of exchanges and transactions only and exclusively if the ability to avoid duplication is guaranteed , hence, only if the uniqueness of the asset is guaranteed. For the first time, thanks to the blockchain (virtual world), it is possible to recreate scenarios exactly as they happen in the real world.
One aspect to consider, however, is Double-Spending, which represents a potential defect of the assets that most use the blockchain: cryptocurrencies. Unlike fiat currencies, cryptocurrencies could theoretically be duplicated because they originate from digital files. Duplication would allow the same token to be used more than once. This would entail inflation and therefore devaluation of the currency itself, as well as a progressive expulsion of investors. Therefore, the fundamental characteristic of uniqueness discussed above would vary.
In a centralised network, to block double spending, it is sufficient to use a TTP (Trusted Third Party), which verifies that a certain token is used once and only once. In a decentralised network, on the other hand, the question is decidedly more complicated: having many servers that copy the transactions of the public ledger is not enough because the validation of the transactions takes place with a time lag between the various servers and this could lead to possible mismatch between transactions to be validated, and to be blocked for double-spending. To solve the problem, many decentralised systems have introduced consensus algorithms. The two most used consensus mechanisms are proof-of-work and proof-of-stake, which we will explore in other analyses.
Financial Industry benefits from the block
Financial services is the sector that most of all benefits from blockchain technology. The shared consensus in the authentication of transactions in fact drastically reduces the costs and commissions paid by customers, resulting in an increase in transactions and volumes managed by financial intermediaries.
The latter are starting to issue their own stablecoins to manage their transactions. One of the largest banks in the world, J.P. Morgan, has already started research to issue JPM Coin, through which it is estimated that transaction costs will be reduced by 75%, allowing cross-border payments in minutes.
The blockchain is also spreading in Central Banks around the world: ECB, FED, PBOC have already started experimental projects to issue their own digital currencies, which could allow greater control of monetary policy through the tracking of liquidity in the transmission mechanism. , as well as guaranteeing immunity from the criminal phenomenon of cash counterfeiting.
Beyond the strong rise in the cryptocurrency market, the reasons that have attracted and increased the interest of the financial industry in blockchain technology are to be found in particular in the reduction of operating costs, immediacy, security and transparency. Especially if applied on a large scale, distributed technologies make trading procedures more immediate and less expensive, and a bond of trust is also guaranteed between the contractors without requiring the intervention of a third party.
A shared blockchain, with specifications valid for all operators in the sector and accepted by most of them, would require an enormously lower economic sum than a system in which each institution used its own platform (most likely a legacy solution) for management. of transactions. To date, the determining elements in defining profit margins are for example: commissions for guarantors, costs for monetary transfers and fees for brokerage operations. All components that would be removedor change in a decisive way if you have a P2P system, distributed, interoperable and, as anticipated, shared.
The Blockchain is also useful on aspects related to execution times, making liquidations substantially immediate, regardless of the amount of capital involved. Speed is, in fact, a fundamental factor for reducing risk because the possibility that one of the contractors fails to fulfil their obligations is considerably limited. To this we can add that the need for manual interventions is drastically reduced, resulting in a lower commitment of human resources and less chance of making mistakes during the performance of operations.
We also remind you that the information on the blockchain is durable, virtually immutable, traceable in real time and transparent. Regulatory bodies can also participate in monitoring, providing guarantees from a compliance point of view. This also offers an excellent opportunity to implement smart contracts, which contain and remember the contractual information; they can be accessed freely by all interested parties and once a contract becomes enforceable, the clauses can no longer be contested.
Blockchain in the future
Blockchain, therefore, is a technology that can potentially redefine the way we think about value and trust, both in the social and economic context. It is difficult to imagine which applications of these possibilities could be more revolutionary. For example, we looked at some examples in the financial sector earlier.
One of the metaphors to represent a perspective of Blockchains is the “Internet of value”, a world in which the transfer of value becomes infinitely simpler and more versatile, just like information thanks to the Internet. Another possibility lies in the creation, thanks to smart contracts, of incentive systems, which can create new social and economic phenomena, such as orienting energy consumption towards sustainable forms.
A radical change in the relationship with public administrations is also possible, in the sense of transparency and participation. More generally, the possibility of developing applications, which today require gatekeeper permission to provide guarantees of reliability and transparency, could be fundamental and generative, allowing the creation of applications similar to that enabled by the advent of personal computers or the internet.
These and other reasons motivate the continuously growing trend of the added value of the blockchain.
Entering a more futuristic and distant context in time we consider that trust between devices, IoT (internet of things), can allow scenarios such as an autonomous security robot that controls the security clearance of drones flying overhead, or a self-checkout station at a grocery store reporting withdrawn meat when someone tries to purchase it. To date, these use cases exist mostly in theoretical modes or in pilot stages, while flashy crypto applications attract the most attention.
It will therefore be more and more interesting to follow all the scenarios and the evolution of blockchain technology between now and the next few months.
