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  • Writer's pictureTodd Bertsch

Blockchain; Re-shaping The Future of Financial Services

With each passing year, technology is establishing itself as a man’s ultimate best friend, fitting its place in our everyday life. Expanding impeccably across industries, technology adoption has evidently grown to transform the way we interact. With the Covid-19 outbreak, the use of digital and the internet around the world witnessed an unprecedented hike.

As civilization claims the growing efficiency and benefits of tech-based innovations such as artificial intelligence, Machine Learning, the Internet of Things, etc. another visionary technology has been spinning heads around the globe. Claiming the reputation of being the tech innovation of this century, Blockchain technology has been gaining huge traction since its debut in 2009.


 

Blockchain Technology: Budding On The Blocks of Data Decentralization

Making its debut along with Bitcoin over a decade ago, Blockchain Technology has expanded to penetrate almost every sector including finance, healthcare, agriculture, energy, etc. worldwide. While Bitcoin and other cryptocurrencies that followed after it have been a frowning line across the foreheads of economies, blockchain technology has established itself as impossible to overlook among data technology.



With data heading as the leading player behind every innovation and industry operation, blockchain secures data as well as liberates it from the hold of central entities ie. centralization. And the message has been efficiently received around the globe with industry leaders recognizing the technology’s potential and visionary entrepreneurs leaning towards blockchain technology for their ventures.


One of the major factors leading the growth of the blockchain market includes the application of blockchain-based solutions in banking and cybersecurity, venture capital fundings, growing investments in blockchain-based projects, etc. According to Research and market, the blockchain market is projected to expand from $4.9 billion in 2021 to $67.4 billion by 2026 with a Compound Annual Growth Rate (CAGR) of 68.4% through the forecast period.


There are various projections for the blockchain that forecast its market to grow over $100 billion in the years approaching. According to Statista, the size of the blockchain technology market is projected to grow to $163 billion by 2027.



Blockchain Technology: Spreading Roots in Finance

With statistics consolidating the use of blockchain technology in the future, finance is one sector that witnessed a front-seat view of its potential future on the blockchain. Cryptocurrencies have proven their market and have stood as a threat to the shortcomings of the centrally regulated financial systems. While the notion seems challenging, it's a solution to the inefficiencies in the banking systems, payments, cyber security, transactions, etc.


According to Industryarc, blockchain in the Banking and Financial Services market size was estimated at $1,218 million in 2020 and is projected to attain a market size of 13,946 million in 2026 with a CAGR of 51.4% during the forecast period.


Blockchain has showcased itself as a tamper-proof technology that can operate on millions of devices at the same time in a network. Offering immutability, transparency, and security to any network, blockchain has created an unavoidable need in the banking and financial market. The basic principles underlying blockchain technology directly aid the current financial services and institutions in their inefficiency in terms of trust, reliability, safety, user protection, etc.


● Decentralized Ledger: Working on a distributed ledger model on the digital grounds, blockchain allows transactions to be updated simultaneously on all nodes in the network. This build allows all the participants in the network to access the same data in the distributed network making it decentralized.


● Consensus Validation: Blockchain-based network allows technology to regulate the agreed-upon validation process known as a consensus mechanism in order to add transactions to the blockchain. This allows trust in the transaction validation, away from tampering and control of a central authority.


● Tamper-Proof Transactions: By their very built, the blockchain-based networks only allow verified transactions to be added on the digital ledger. With a distributed model, no one person or entity can tamper with the blocks of transactions.


● Smart Contracts: Transactions on a blockchain network are programmed through smart contracts that are encoded with the required commercial and regulatory rules that need to be enforced for initiating a transaction. Hence, unless every requirement coded in the smart contract isn’t met, the transaction won’t trigger altogether.


The application of blockchain in technology holds several use cases in the finance sector including Capital Markets, Asset Management, Payment and Remittances, Banking and Lending, Trade Finance, and Insurance.

The Emergence of Decentralized Finance (DeFi)

Since the debut of Bitcoin, the blockchain sector has evolved enormously, shifting and initiating trends all the way into building an entirely new finance ecosystem also known as Decentralized Finance (DeFi). Constituting several financial products on a blockchain built, Defi networks are generally governed by a consensus mechanism.


While Defi has taken traditional financial services including trading, borrowing & lending, asset management, issuance, payments, insurance, etc. on the grounds of decentralized infrastructure, Defi has evolved to culminate unique and innovative financial products and services such as Yield farming, Automated market makers (AMMs), staking, etc. While Defi came to the limelight and caught an impressive pace barely over a year ago, the market holds an enormous amount of value locked in it, according to Defi Pulse.


As indicated in the above image, currently over $97 billion dollars are locked in defi as lending protocols and applications such as Compound and Aave are leading the market, supporting many digital currencies and inspiring further growth in Defi applications. The Defi market was met by profound volatility through its run in 2021, expanding traction on its byproducts/applications such as Decentralized exchanges (DEX), Derivatives, Asset Management, and Stable Coins.


While the growing engagement and traction of defi applications (Dapps) have contributed to its exponential market growth, Stablecoins have evidently played a significant role in bridging the gap between traditional finance and the budding decentralized ecosystem.

Stablecoins: Defi’s Ace Against Volatility

Crypto market or Defi market has seen its fair share volatility as the traditional market, regulators, and economies came around the idea of cryptocurrencies. With the initial backlash received in association with black market involvement, scams, Fomo, etc. the crypto market has witnessed major market crashes. Decentralized exchanges and lending protocols are now increasingly relying on stablecoins including USDT, USDC, etc to work against sudden market volatility and crash, providing assurance and protection to investors and traders during severe market volatility.


As Defi gains an accelerating amount of traction and engagement around the world, financial services built central infrastructure are getting challenged. As regulations around cryptocurrencies are growing at an unprecedented rate, and political administrations considering and acknowledging the benefits of decentralized financial services, blockchain technology is already transforming the traditional financial built of leading economies into a safer, transparent and efficient version of decentralized liberation.


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