Blockchain technology's growth as a vehicle for transferring data and value between parties has the potential to change businesses around the world, including financial services.
The Organisation for Economic Co-operation and Development (OECD), an international organization focused on a range of economic, social, and environmental challenges, recently published a primer on blockchain that highlights the variety of opportunities and challenges that blockchain's growing popularity could have on the financial industry, among other fields.
Blockchain is a distributed ledger technology that stores data that is cryptographically validated among a group of users. Blockchain is well known for its use in digital financial asset applications thus far (cryptocurrencies such as Bitcoin and Ethereum).
However, the OECD and others have stated that blockchain has a wide range of possible applications since it can reduce the need for middlemen in data transfers while also improving the security and cost of those transfers.
In the words of the OECD, "Blockchain has the potential to transform the operations of a wide range of businesses." "Commodities, data, and financial assets, as well as market access and transaction efficiency, can benefit from its capabilities of transparency and traceability."
Blockchain is a distributed ledger that records transactions between network participants. Without a central authority, all transactions between the participants in the network are stored and recorded in the network, and each party has access to the same records.
The OECD sees far-reaching potential for blockchain in the global economy due to its basic qualities.
According to the OECD, "the sectors where significant blockchain advancement is taking place are as diverse as the applications they're developing." "There are more opportunities for wealth generation and economic development because of the global nature of blockchain development."
Brief introduction to the blockchain
Open and public blockchains allow anybody to contribute and add data to the ledger, whereas closed blockchains restrict participation to a small set of authorized participants. Blockchains can operate in any of these ways.
According to the OECD, an example of a private blockchain may be many banks operating a shared ledger. Open networks include well-known instances like Bitcoin.
There are three fundamental layers to a blockchain:
The protocol layer provides the framework for the blockchain, including its computer language and computational rules.
The networking layer is responsible for setting the rules of the network and implementing the protocol layer's structure.
Layer at which apps are developed for end-user interaction.
Each node in a blockchain's network is responsible for updating and maintaining the database. According to the OECD, one of the primary advantages of blockchain is its immutability, which makes it nearly impervious to hacking.
Once a transaction has been entered into the ledger, it can't be reversed. It's possible in a typical database for a hacker with access to the central server to alter data undetected.
Peer-to-peer currencies, like as Bitcoin and Litecoin, are the most notable blockchain applications because they allow users to send and receive value between themselves without the involvement of a bank.
Financial advisers impacted by the use of Blockchain Tech
When working with clients interested in investing in cryptocurrencies, financial advisers face a variety of obstacles due to the new and evolving nature of the technology. According to CNBC, the first U.S. bitcoin futures ETF will be available in October 2021.
According to the 2021 Natixis Investment Managers Pro Fund Selector Survey, which polled 141 U.S. investment professionals representing $2.7 trillion in client assets, 40% of fund selectors report that clients are increasingly demanding cryptocurrency solutions, and 45% feel pressure to add cryptocurrencies specifically to appeal to younger investors.
Most respondents (68 percent) said that individual investors should not be exposed to bitcoin, while 70 percent said that their companies needed more training on digital assets and cryptocurrencies before investing.
Investing professionals' hesitation to adopt cryptocurrencies can be related to their lack of transparency and regulation, according to Dave Goodsell, executive director of the Natixis Center for Investor Insight.
According to a Natixis survey, 87% of respondents believe that greater transparency is necessary for crypto assets, and 84% believe that regulatory control is necessary.
A fiduciary duty is a legal obligation that some firms have to their clients, which makes it difficult for them to propose such things, Goodsell added. There may be a reluctance to take action because of this.
Some of the most popular blockchains have struggled to satisfy user demand as the crypto industry has expanded in popularity.
Some of the largest blockchain networks are plagued by issues like as excessive energy consumption, heavy gas prices, and limited transaction throughput, which are being addressed by new projects. It's been announced that Ethereum, for example, plans to shift from its energy-intensive proof of work system to a more sustainable proof of stake system that allows users to help validate the network's transactions by depositing, or staking, a certain amount of Ethereum tokens for the duration of the transaction.
Co-founder and CEO Jeremiah Wagstaff tells TechCrunch that Subspace Labs has just raised $32.9 million to further create a new blockchain that attempts to balance scalability, security, and sustainability.
While "third-generation" blockchains like Cardano, Solana, and even the redesigned Ethereum (known as ETH 2.0) are more scalable than its earlier versions, Wagstaff noted they still make security and decentralization choices inherent to the proof-of-stake mechanism. Due to the fact that it scales linearly as the number of nodes on the Subspace network grows, Wagstaff dubbed Subspace "the first fourth-generation blockchain."
In spite of this, Wagstaff says that proof-of-stake is "neither fair or permissionless" since it maintains inequality as those who already hold significant quantities of tokens receive bigger benefits for mining, likening proof-of-stake protocols to the plutocracies of Proof of Stake. Using a "one coin, one vote" approach is common in proof-of-stake, however with Subspace, users' hard drive disk space is used to validate transactions instead.
Proof of capacity systems have been shown to consume less energy than proof of work systems, however there have been worries about the e-waste costs involved with the networks and the impact on global supply chains. Wagstaff believes that Subspace's "one disk, one vote" technology is even more energy-efficient and has additional advantages, including file storage, despite the fact that proof-of-capacity trials have been attempted before.
On top of Subspace's consensus method, Wagstaff claims that archival nodes, which retain historical data related to a particular blockchain, are rewarding users to run. While it is true that you may write data into the history of a blockchain to keep data on Subspace, this is by design, since we wanted to include a price mechanism in the system from the outset.