10/19/2022

Blockchain

By: Jeongsik Park, Lalitha Gurajada, Tamara Aziz, and Radhika Aggarwal

Sector Description As defined by IBM, blockchain is a shared, immutable ledger that facilitates the process of recording transactions and tracking assets in a business network. Virtually anything of value can be tracked and traded on a blockchain network, reducing risk and cutting costs for all involved. The main reason blockchain is gaining this much traction is the amount of security, speed, accuracy, and transparency it provides for information and transactions. Out of all industries that can leverage blockchain to their benefit, the financial sector has more to gain than most. Even though the introduction of blockchain was first viewed as a threat to the fintech industry, the firms in the fintech industry have realized how to leverage blockchain and use it to improve operations. As a foresight to the blockchain's revolution, many fintech firms started their blockchain projects or partnerships. According to the 2017 PwC report, blockchain has been adopted in the finance sector for 55% of Payment Infrastructures, 50% of Fund Transfer Infrastructure, and 46% of Digital Identity Management. The following are some of the biggest Fintech companies in blockchain currently: Coinbase Global Inc. (COIN), Monex Group Inc. (MNXBF), BIT Mining Ltd. (BTCM), Voyager Digital Ltd. (VYGVF), HIVE Blockchain Technologies Ltd. (HIVE), Silvergate Capital Corp. (SI), Riot Blockchain Inc. (RIOT), Bitfarms Ltd. (BITF). In addition to these companies, other solution providers in the FinTech blockchain market are AlphaPoint Corporation, Microsoft Corporation, Ripple, Amazon.com Inc, Oracle, Digital Asset Holdings LLC, Bitfury Group Limited, BTL., Liquefy Limited, and others. Business Models When discussing the relevance of blockchain in finance, we are inclined to mention how blockchain has served as a catalyst for disrupting the way the finance industry has evolved. Most notably, blockchain has served as a propellor in the recent fintech boom. For this reason, blockchain's highest industry market share is for fintech companies. Beyond this, blockchain's original application was for the development of Bitcoin, the first cryptocurrency introduced into the now ever-expanding token economy. With the introduction of Bitcoin came the expansion of the crypto economy and the introduction of decentralized finance. Originally, blockchain was developed to encrypt and store transaction data. Naturally, this led to blockchain being the pioneer of a new financial industry and the expanding influence of technology in finance. The fundamental purpose of blockchain is the decentralization of the financial market, and Bitcoin is the first step in achieving this goal. Bitcoin created a decentralized market by deploying distributed ledgers. In other words, the transaction data is stored on a shared server that is accessible on different nodes; therefore, all participants in the Bitcoin blockchain network can bear witness to and testify to the validity of the crypto transactions. Decentralized finance, or DeFi, is the implementation of a financial market free of regulatory agencies like the SEC. The lack of regulatory agencies is possible because of blockchain's ability to prevent duplicate transactions and their implementation of smart contracts that can regulate participants' behavior through protocols. This autonomy means that DeFi further enforces decentralization of financial markets by eliminating intermediaries such as big banks and allowing wider accessibility of banking platforms by replacing brick-and-mortar bank servicing with internet servicing. This reduces the risk associated with human-ran financial institutions and the cost of transactions. While the discerning factor of blockchain and cryptocurrency is decentralization and the exclusion of regulatory agencies and intermediaries in the financial market, many government banks are adopting digital currencies. The digital currencies that the central bank of a government distributes are known as central bank digital currencies, or CBDCs for short. While CBDCs are a digital currency that can and often utilize blockchain technology, they cannot be classified as a cryptocurrency because they lack decentralization since a central authority–being a government in this case– mints and distributes the currency. Governments are therefore leading the initiative to create a cashless society through blockchain and cryptocurrency. As of March 2022, nine countries have adopted CBDCs to increase the accessibility and affordability of banking. Within the realm of the blockchain industry, there are many business applications. One of the most relevant business applications for blockchain is the development of blockchain as a service (BaaS). Blockchain as a service provides a cloud-based platform for businesses to develop their blockchain-based applications to promote security and encourage the adoption of blockchain technology across different companies. One relevant example is IBM's development of a blockchain platform using Hyperledger Fabric, which helps businesses achieve agility and operational excellence. IBM's blockchain platform is developed to allow cross-enterprise collaboration and communication to propel corporate growth. Notable Trends Blockchain: Past and the Future Most people first encountered blockchain as a cryptocurrency. Bitcoin first demonstrated the concept of a blockchain, followed by Ethereum, which implemented the idea of a smart contract. As such, there is a close relationship between blockchain and cryptocurrency. Not surprisingly, Satoshi Nagamoto, the creator of Bitcoin, solved the problems that occurred while developing Bitcoin by creating a blockchain. However, blockchain has found various applications outside of just Cryptocurrencies. Some blockchain applications outside of cryptocurrencies include CBDC, DeFi, NFT, Web3.0, and SCM, which have become popular over the past few years. CBDC (Central Bank Digital Currency) refers to a digital currency issued by a central bank, whereas DeFi (Decentralized Finance) refers to a system in which individuals can directly trade virtual assets through a blockchain network without an intermediary. Currently, DeFi services only target virtual assets, but if the central bank issues and distributes CBDCs, it will be possible to deploy CBDCs on the DeFi network, bringing widespread changes to financial services. NFT (Non-Fungible Token) is a virtual token that uses blockchain technology to track ownership of digital assets. Addresses pointing to digital files such as pictures and videos are stored in tokens, and are used to indicate their unique originality and ownership. Since each NFTs is unique and cannot be copied, their scarcity can be fully recognized, which helps various digital assets especially artworks traded with NFTs. In Web3.0, data is distributed and stored using blockchain technology which utilizes computing resources of network participants scattered worldwide, without administrator intervention thanks to smart contracts. In other words, it is a completely personalized Internet environment in which the storage, use, and ownership of data are given to the users. Finally, SCM (Supply Chain Optimization) has improved product record-keeping to help participants track manufacturing processes for various products. In addition, by disclosing data generated in the supply chain, it will be possible to record, provide, and share the supply chain history of the product to all participants, from the initial manufacturer of the product to the final consumer. Blockchain is applied across all industries, such as finance, logistics, and games, to improve data transparency and efficiency with stakeholders. Development in Blockchain technology is happening rapidly as more companies adopt blockchain in their everyday business processes. Advantages of Blockchain Adoption The primary advantage of blockchain is 'trust.' Individuals and businesses often buy and sell goods across the world. However, this paves the opportunity for illegal activities and scams to take advantage of the under-informed. The blockchain technology behind cryptocurrencies helps reduce fraud by creating more transparency about products and services traded on the blockchain. With the better data transparency and data access blockchain provides, the quality of financial services, the creation of transactions, and smart contracts for companies have been improving at a rapid pace. Limitations of Blockchain When building a database with a blockchain, the throughput is higher than in a relational database because users with the necessary data must be accessed and compared in a blockchain database, reducing the database's processing speed. For example, Ethereum is ten times slower than the Visa network, and Bitcoin is 500 times slower than the Visa network. The low transaction speed indicates a considerable burden on applying blockchain to finance and various Internet services, like gaming. Metrics Blockchain metrics are used to scale the ability and performance of blockchain applications when they are active. Based on these metrics, companies can compare and choose between the available blockchain implementations. Listed below are a few standard metrics seen in the industry. Transactions per second (TPS): Transactions per second (TPS) is the most important metric in the blockchain sector. TPS measures the transaction records submitted and stored per second. TPS is used to assess the volume of blockchain networks. However, a high TPS doesn't always indicate the success of blockchain implementation. For example, BTC has 5-10 TPS, compared to 1.5k TPS for XRP, yet BTC is far more successful than XRP. Transaction Latency: This metric is the measure of duration between transactions being submitted to the network that are accepted / rejected. Transaction latency helps provide insights into the efficiency of algorithms that accept or reject transactions. The number of validators: Validators verify the transactions in exchange for payment or rewards. Whenever a transaction is started, validators store the information in a block for verification. These are held by reference to prevent transactions from being modified. Validators perform all these tasks to keep the network efficient. So, the number of validators is a good indicator of performance for blockchain implementations.