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In 2022, the value of the blockchain market is expected to reach 4.2 billion in the U.S alone. Whatâs more, the market capitalization of Bitcoin equaled 144.96 billion U.S. dollars in 2019. Currently, fintech companies are exploring the benefits of a rapidly growing market and looking for ways to incorporate cryptocurrencies into their financial operations. How should financial institutions approach blockchain adoption and where to start? Here we provide a detailed overview that will help you to learn more about Ńryptocurrency and its impact on fintech.
Blockchain is an immutable ledger where information about transactions is recorded in unchangeable nodes. The transaction is approved by all participants of the network - there is no single centralized system. Generally, cryptocurrencies are used as units that power these transactions and define the value of the block. Letâs take a closer look at the definition and technology behind cryptocurrencies.
What is cryptocurrency?
Cryptocurrency is a digital value of blockchain exchange that uses cryptography to record and transfer financial information. Cryptocurrencies utilize blockchain technology because of its decentralization, immutability, and transparency. It provides all network participants with detailed reports that canât be edited or deleted.
The main cryptocurrency characteristic is that itâs not supervised by the centralized institution. The value of the currency is determined by demand and independent from governmental changes and economic distress.
To secure a transaction, a cryptocurrency uses public and private keys. Public keys are available to all network participants - all members can use them to see public information on the currency and ensure that it is valid. In addition to that, private keys store sensitive personal information and require a whole set of special security measures to properly protect them.
How does cryptocurrency work?
Each cryptocurrency is based on a peer-to-peer network that has a shared database with the full record of all cryptocurrency transactions. This data can never be modified and forged, which guarantees the validity of the cryptocurrency.
Each transaction is recorded in a file that specifies the identity of the sender and receiver, as well as the sent amount and type of currency. This information is disclosed in the public key and available to all network participants. The personal key is used to sign the transaction - a sender has to approve the decision by making a key signature, and the receiver does the same thing.
- Step 1: a sender or receiver requests a crypto transaction via a blockchain network.
- Step 2: the transaction data is transferred to the peer-to-peer network where itâs publicly displayed to all nodes of the network, which are all connected devices.
- Step 3: the P2P network approves the transaction and creates a file that describes the details of the transfer. The transaction can be verified if both parties satisfy the requested conditions for the transaction.
- Step 4: the new block becomes the part of the immutable blockchain, where it will stay forever, unchanged, as the part of the general network.
- Step 5: the transaction is considered complete and the receiver has access to the currency
Properties of a cryptocurrency
Cryptocurrencies are defined as valid if they comply with several key characteristics. Letâs take a look at them below:
- Irreversibility: the transaction canât be undone by any entity. If you confirmed the transaction and sent the money, no central institution could reverse the transaction. Network participants have all the responsibility.
- Anonymity: users are defined by their blockchain addresses which are random chains of 25-30 characters. The transaction doesnât lead to any real identity - people wonât find out your name from the address.
- Speed and accessibility: cryptocurrencies arenât tied to a particular location. There are no transactions between banks and cross-border commissions. The network is opened to any participant, regardless of location.
- Security: cryptocurrencies are secured with public and private keys. Each coin is ciphered irreversibly, so even participants of the network canât decipher the contents of the block.
- No permission required: anyone is free to purchase and trade cryptocurrency. You donât need to make a bank account or present personal documents.
How cryptocurrency is changing the FinTech sector
Many experts are confident that cryptocurrencies, with their security and decentralization, threaten traditional banking systems. Financial institutions are highly centralized and regimented, which makes transactions last longer and cost more.
In reality, banks donât have to compete with crypto technology, but rather, embrace the innovation and solve the main industry problems. Letâs take a look at the key areas of the financial industry that are already disrupted by cryptocurrencies.
Provide easier access to credit
Cryptocurrencies are immutable and transparent - once the conditions for the loan were set, both parties have no choice but to follow it. This can be achieved with the help of smart contracts - a set of conditions, written in code, and approved by a blockchain network. Both parties agree on conditions for the agreement, and as soon as they are met - or not - the system takes actions automatically.
Banks will be able to easily track the credit history of a user because itâs stored in an immutable and unfalsified ledger. Similarly, clients will be able to check the reputation of the financial institution before agreeing.
Securing money transfers
Cryptocurrencies make global payments more secure and easier because users are independent of national politics, economic policies, and banking commissions. In addition to that, financial institutions can provide superior services and better customer experience for their users and increase their global presence. Moreover, itâs a way to cut staff expenses, documentation investments, and organizational spendings.
Shifting payments to mobile phone platforms
Blockchain networks can be used to power mobile transactions on mobile apps. Cryptocurrencies provide opportunities for fast, commission-free money transfer, available to users anytime and anywhere. Also, they can be used for everyday purchases, regular payments, bills, and commercial transactions.
Users donât need a bank account or physical currencies. With a mobile app alone, they can make personal purchases and carry out business transfers. With conversion tools and wallets, they can exchange these funds to real-life currency.
Preventing fraud
Without blockchain, financial companies need confidential documentation, multi-step verification, and authentication systems to assure transfersâ security. Cryptocurrencies record the full history of financial transactions of any individual. Itâs impossible to forge documents or corrupt the centralized authority.
Bottom line
Fintech and blockchain can enter a perfect partnership where the industry can push the technology further by investing in its innovation. Blockchain, on the other hand, has the potential to close the gaps of the financial industry, making advancements in global transfers, everyday transactions, loans, and security. Investing in cryptocurrencies allows banks to cut down investments in safety because the data will be stored on the decentralized network instead of single storage. Also, financial institutions will become more independent from government influence, increase their global reach and provide an improved user experience.
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Author's bio
Roman Zhidkov is CTO at DDI development company. Roman is responsible for DDIâs technology strategy and plays a key role in driving new tech initiatives within the company. He understands the context of the technology in terms of other technical areas, the customerâs needs, the business impact, and the corporate strategy.
Disclaimer
The views and opinions expressed in this article are solely those of the authors and do not reflect the views of Bitcoin Insider. Every investment and trading move involves risk - this is especially true for cryptocurrencies given their volatility. We strongly advise our readers to conduct their own research when making a decision.