In the digital world, where cyber-attacks are as easy as they can get, centralized networks are failing to offer premium protection to systems and other financial assets. This has resulted in a significant dent, which has gone on to cost commercial service providers more, in a bid to combat and achieve complete eradication of the vice. Security is a pertinent and integral part of any network system, and the centralized networks have failed to provide this in an optimal way.
Influence of Technological Innovations on Finance
All sectors of human labor and activity have experienced the impact of technical innovations over the past few years.
During the dot com boom, the financial industry has witnessed a rapid and drastic change, in which financial institutions were located on the web. One major pioneer in the dot com boom era was X.com. X.com, a company founded by controversial Elon Musk, was tagged as an Online Bank. The company later went on to merge with a fellow startup – PayPal, which today has become an online financial juggernaut.
Over the past few years, technical innovations have brought about the birth of decentralized ledgers that make virtual finances are more secure and traceable. The very integral core of the decentralized ledger is blockchain. Here is some numeric data concerning this issue:
- The estimated amount that financial and technology firms invested in blockchain in 2016 is $1.4 billion;
- The annual savings potential for banks using blockchain technology is about $8-12 billion;
- The percentage of major North American and European banks exploring blockchain is 90%.
Now let us have a look at what decentralized ledger means, what its advantages and future are.
Definition of Decentralized Ledgers
Decentralized ledgers are also known as distributed ledgers. These are the ledgers which make use of independent computers in the recording, sharing, and synchronization of transactions, all done in their separate electronic ledgers. These systems work as against the traditional ledgers that keep data in a centralized location.
As it was stated earlier, the core of this framework is blockchain, which is designed to organize data in blocks connected in an append-only mode. In this framework, there is no need for a coordinating entity at the core of the transfer of value from peer-to-peer. This system is the building block of the internet of value, and it has resulted in a financial revolution, currently witnessed in the case of Bitcoin.
The future of decentralized ledger is as reliable as it can get, as it is bound to render the financial sector more efficient, resilient, and secure. These overall effects are a defined trajectory for the financial industry, which would help it tackle the continuous challenges. It is also bound to change the roles of the various stakeholders involved in the sector.
The use of the decentralized network offers several perks that are of immense importance in the financial sector. These advantages have caused the extensive and continuously expanding adoption of the system so as to execute broader and faster global business transactions.
Benefits of Decentralized Ledgers
Decentralized ledgers have come to stay, and we can only anticipate the various innovations that would be imbued in the system, to ensure a safer adoption. The adoption of the decentralized ledgers in the financial sector offers the following benefits:
- Fraud prevention — Decentralized ledgers are designed to be open-source, and they have a recording of every transaction that goes on, on the system. Hence, it is straightforward to detect fraudulent activities taking place. This system has a great deal of integrity incorporated into the structure right from the get-go, with crypto-currency miners validating daily transactions all day long. Due to a large number of people performing this validation task, there is a great deal of oversight on the cryptocurrency traded on that system. This high level of monitoring renders fraudulent activities almost impossible to execute.
- Increase in transaction speed — Transactions on decentralized networks are known to be executed faster than transactions via traditional banks. Some deals in banks can take days to go through. However, operations on the blockchain take less than a minute. The rate at which transactions can be performed accurately on this network, coupled with the security is one massive win for businesses. With the decentralized network, the global transaction comes with ease, and with a simple connection to the internet, businesses and individuals can transfer money to any part of the world. The faster money can be moved, the quicker decisions can be made, and goods can move faster — this increase in the rate at which processes are carried out leads to overall efficiency.
- Government’s inability to meddle — Government is known for having control of most systems, especially the finance sector. However, cryptocurrencies that run on the decentralized ledger systems are away from the grip of the government or a central bank.
Checking through history, it can be traced that the government’s meddling in significant currencies has led to their devaluation. This is expressly seen in the Denarius in the Roman Empire, as well as German Mark in Weimer Germany. In recent times, there are also issues which plagued the Zimbabwean dollar. The financial sector has always taken a considerable hit whenever there is the overstepping of bounds by the government.
With the decentralized ledgers, this is wholly eradicated. There is no risk of inflation being created by the government’s meddling. When the government meddles, there are bound to be problems of debasing, devaluing and over-printing money, within a short period — this results in the least of inflation, with hyperinflation occurring in some cases.
Currencies on this ledger stand out based on the fact that they are simply software, which is finite. However, fiat currencies are not. This makes the crypto coins very resistant to inflation.
Future of Decentralized Ledger
Currently, blockchain and the whole idea of decentralized ledgers are being employed with cryptocurrency. However, that would change in the future. The future of decentralized ledgers transcends digital currencies to being used in non-cryptocurrency sectors. In 2018 enterprise blockchain accounted for about $4.6 billion in various sectors. The revenue is expected to rise to about $20.3 billion by 2025, with finance leading in the adoption of blockchain.
It is believed that decentralized networks will outpace digital currencies shortly. Other than crypto, here are some areas in which the blockchain technology is most likely to be used:
- Smart contracts — These systems are already in play. However, they would be extensively deployed in the nearest future. Smart contracts are financial software powered by blockchain technology. They are designed to oversee every segment of an agreement, right from the stages of facilitation to the steps of execution. When necessary conditions are met, the applications can autonomously execute and enforce. This would nearly eradicate the need for contract law, because it is autonomous and way cheaper.
Software developed for this task has limitless capabilities and can be used in just about any field of business. Once contract law holds ground in such a company, smart contracts can be employed. A smart contract might not be a total and magical eradication of the traditional contract system, as it relies on information input into it. However, it is one exciting usage that we are thrilled about, concerning decentralized ledgers’ application.
- Identity management — One major problem that has plagued the internet age is the security of identity. Companies and individuals have been meticulous about the safety of digital identities and other information. However, individuals are lying in wait to take advantage of these entities. With blockchain technology, there is a potential transformation of the processes involved in identity management.
Security is one thing that the decentralized ledgers are known for. Verification takes place all through the different computers involved in the network. The mechanism of verifying and approving transactions that are currently in use with digital currencies can be employed with identity. This way, there is a reduction in the risk of identity fraud.
Technical innovation would not cease, and it is only right to expect improvement to the current systems, and the evolution of new systems. Decentralized ledgers have proven to be effective in the maintenance of a seamless financial system. It is a relevant and widely used framework at most enterprises and other commercial companies. Its future is bound to transcend just finances.