Blockchain technology: evolution and impact on finance and e-commerce

Since its inception in the 1980s, blockchain technology has evolved significantly from its original use in timestamping digital documents to modern solutions revolutionizing finance and e-commerce. Its secure, decentralized structure has found applications not only in cryptocurrencies but also in logistics, medicine, and many other industries. This article discusses how blockchain is transforming the financial sector and the benefits and risks associated with its implementation.

What is blockchain?

Recently, there has been a rapid increase in the interdependence between the financial market and information and communication solutions. A prime example is the increasingly popular blockchain technology. It is said to be one of the most innovative and promising solutions in recent years, and according to experts, it could revolutionize the financial market, bringing benefits as well as certain risks.

The concept of blockchain was conceived quite some time ago, in the early 1980s, by David Chaum, a pioneer in cryptography, who laid the groundwork for this technology in his paper titled “Computer systems established, maintained, and trusted by mutually suspicious groups.” Blockchain was practically used for the first time in 1991, aiming to create a secure and tamper-resistant method for timestamping digital documents. However, this method did not gain as much popularity as initially expected. The breakthrough came in 2008 when a person using the pseudonym Satoshi Nakamoto described blockchain as a secure and decentralized method of electronic currency exchange – Bitcoin – in the famous document “Bitcoin: A Peer-to-Peer Electronic Cash System.” This pioneering cryptocurrency became a symbol of blockchain’s success and its first application. Bitcoin uses the Proof-of-Work consensus algorithm to confirm transactions and create new blocks. Network participants, called miners, compete by solving complex mathematical problems. The first participant to solve the problem has the right to add a new block of transactions to the chain, receiving a unit of cryptocurrency as a reward.

The nature of this currency is deflationary due to the programmed reduction in mining rewards. Exchanges like Bitstamp and Binance allow trading in Bitcoin, but its price is subject to market speculation. Initially, Bitcoin evoked mixed feelings in the financial market. Jamie Dimon, CEO of JPMorgan Chase, once said that Bitcoin is worse than the tulip mania and could end very badly, while the head of Goldman Sachs claimed that something with daily fluctuations of around 20% cannot be considered a currency. However, as it became clear over time that blockchain technology extends far beyond cryptocurrencies, banks worldwide began to invest in it. This is evident from research conducted by the non-profit organization The International Securities Association (ISA), which includes experts from the global asset services sector. It turns out that 55% of the surveyed companies are working on blockchain technology.

How does blockchain work?

Blockchain is a chain of blocks forming a distributed database. Each subsequent element in this network depends on the previous one. Since a specific user only has access to their transactions, they can be public with full access to their history. The system’s construction prevents modifying, deleting, or changing data – this would require modifying all subsequent blocks, which is unfeasible due to the computational difficulties. Moreover, such unauthorized changes would be noticed by other network participants. Since each new block is attached to the previous one and contains a timestamp, it is possible to trace the entire transaction history.

Applications of blockchain technology beyond cryptocurrencies

Blockchain can also solve issues encountered in the logistics industry – particularly those related to the supply chain, due to their similarity to financial industry challenges. During the logistics process, many pieces of information must be secured and accessible. Blockchain can be used for verifying the origin and authenticity of goods and their components.

As M. Henke says, blockchain technology is the missing link in realizing the vision of Industry 4.0 or the Internet of Things (IoT). In this world, everything should function autonomously. An example could be financial transactions requiring autonomous contracts. These can be ensured by smart contracts recorded in the blockchain network, which serves as a decentralized database. According to M. Henke, the desire for transparency in production will soon become the norm, prompting companies to improve quality, and managing the flow of information, finances, and materials will require this technology. During the transport of goods by ships, all parties involved (carriers, suppliers, and recipients) need constant information about the shipment status. Blockchain technology ensures this by providing a decentralized accounting system. For instance, the cooperation between the shipping company Maersk and IBM in the “TradeLens” project aims to automate maritime trade, saving time and costs. With a blockchain-based system, it is possible to track all shipment data, shipping documents, or container sensors in real time, detecting weight and temperature of goods, preventing data manipulation and smuggling. In other industries, such as food or pharmaceuticals, delicate supply chains can be monitored. Sensors in containers signal in real-time if any part of the cargo is still usable. Blockchain-based certificates allow producers to verify the origin of raw materials, preventing fraud.

Although this technology is often implemented and used in recording financial transactions, its potential applications are much broader. In medicine, it can record patient medical histories, and in agriculture, information about products and their origins. Another interesting application is digital identity verification – in video games or even voting in elections. The blockchain can securely store voters’ personal data, allowing digital voting. The system verifies voting rights and prevents multiple votes.

Blockchain in banking: a technological revolution in the financial sector

Should the financial sector and banks be concerned? Analysts working in new technologies answer affirmatively – they definitely should. Banking is a $135 trillion sector, and the financial market faces numerous problems. Key issues include ensuring fast fund transfers, preventing data breaches by cybercriminals, the ever-increasing costs of transferring funds, money laundering, and excessive regulation by supervisory institutions. Often, banking procedures are very inefficient and time-consuming. An example is the multi-step verification of customers’ financial situations, which repeatedly undergo similar processes, creating operational costs for both the bank and the customer. Blockchain can impact various areas of the banking sector such as payments, settlement systems, funding, securities, and loans.

International transfers involve numerous fees, and their execution is quite archaic in the 21st century. There are additional commissions – one part goes to the sending bank, another to the receiving bank. Often, there are hidden currency conversion costs. Such operations are particularly profitable for banks, so they are reluctant to forgo or reduce commissions. The current financial infrastructure slows down fund flow, making it take about a week to process such a transfer. This is not only inconvenient for consumers but also a logistical issue for banks. Intercontinental transfers require even more intermediaries, processed through the international SWIFT system. SWIFT doesn’t physically send any funds; it only transmits payment orders to intermediaries who then process the funds, each adding extra fees. Blockchain, acting as a decentralized transaction system, can revolutionize this by eliminating costly intermediaries. Ripple, a blockchain service provider, poses a serious threat to the SWIFT system, where each piece of information is one-way, meaning the transaction can’t be settled until accepted by both parties. Ripple’s product has a two-way communication protocol, allowing real-time transaction settlement.

The blockchain transformation revolutionizes the existing system, offering a secure way to transfer funds without intermediaries, eliminating the need for oversight and transaction correctness verification. Fintech companies and their solutions prompt a thorough analysis of the current banking system. New technologies and applications will enable direct operations (hence the name peer-to-peer) without any bank oversight. This will change the entire transaction system, allowing clients free, fast, secure, and transparent transactions.

Blockchain security: benefits and risks

Blockchain technology is considered the safest method of recording and storing data. Its transparency allows for the transparent implementation of the KYC (Know Your Customer) principle, required by financial institutions. All transactions are public and impossible to falsify, eliminating money laundering problems. Blockchain demands ethical behavior, increasing market trust, which translates to economic growth.

Another advantage of blockchain technology is the tokenization of traditional assets, allowing easier trading of real estate, stocks, or other values. Asset tokenization represents traditional assets, such as real estate, stocks, commodities, or art, using digital tokens based on blockchain technology. This completely changes how these assets are issued, sold, bought, and managed. However, it also brings new challenges such as legal regulations, digital asset security, and the need for education and trust-building in new technologies. One thing is certain – soon it might significantly change how people invest and use various types of assets worldwide.

Ethereum: what is it and how does it work?

Ethereum plays a crucial role in developing the blockchain ecosystem and promoting innovative solutions in finance, technology, and many other fields. Simply put, it is an open and decentralized blockchain platform. It allows developers to create so-called smart contracts – a special type of agreement that can only be executed when certain conditions are met, such as the agreement of all parties involved in the transaction.

These conditions can also be time-based: the contract must be executed within a specified time or related to payments: certain transactions must be completed within a set timeframe. This allows for building various types of blockchain-based applications. As for its working mechanism, the platform introduced the Proof-of-Stake (PoS) consensus algorithm, which is used to validate new transactions. It was meant to increase the network’s efficiency and scalability and reduce the amount of computational work needed to mine transaction blocks. Its concept involves the buyer depositing their funds into the system (stake), which are then locked. This acts as a security measure for the network. Only then is it possible to add new blocks to the chain. Stakers – as they are called – who contribute more coins have a greater chance of being chosen to mine new blocks. Subsequently, a random selection is conducted, after which newly chosen individuals propose transaction blocks. Therefore, they are often interchangeably called validators. Proposed blocks are checked by other validators, and when a specific group approves the new block, it is added to the chain. Participants are rewarded in Ethereum for this process. A significant advantage of this solution is the energy efficiency it offers compared to Bitcoin’s Proof-of-Work algorithm. However, PoS can lead to a higher degree of centralization since participants with higher stakes can have more influence over the network. Moreover, smart contracts have emerged as a major innovation in finance, enabling automation of complex transactions. However, Ethereum faces challenges such as high transaction costs and scalability issues.

Challenges and risks associated with blockchain in finance

Blockchain faces significant challenges and risks, especially regarding security and privacy. As a technology, it has shown potential in various fields but still requires improvements and adaptations to meet current market and user demands. Blockchain technology itself is secure, but its implementation is susceptible to attacks and vulnerabilities. In recent years, numerous examples of hacking blockchain-based platforms, cryptocurrency exchanges, and decentralized applications (DApps) have resulted in significant financial losses. It is crucial to understand these risks and the need to develop effective protection mechanisms.

In the realm of challenges, the scalability of blockchain networks is a pressing issue. As user numbers and transaction volumes increase, many blockchain networks face difficulties processing transactions quickly and efficiently. This translates into delays, increased transaction costs, and limitations in handling large volumes of data.

Energy consumption is another significant challenge, especially for blockchain networks based on the Proof-of-Work consensus algorithm, such as Bitcoin. The high energy consumption required for block mining raises environmental concerns and necessitates the search for more sustainable and efficient solutions. Furthermore, interoperability between different blockchain platforms is a critical issue for effective blockchain implementation. Various blockchain networks operate independently, making it challenging to share data and transactions between them. Efforts are being made to develop protocols and standards to facilitate interoperability, but much work remains.

In summary, blockchain technology holds great promise, but significant challenges and risks must be addressed for its successful implementation in finance and other sectors. Security, scalability, energy consumption, and interoperability are key areas requiring innovative solutions and continuous improvement.

Conclusion

Blockchain technology’s potential to revolutionize finance and e-commerce is undeniable. Its secure, transparent, and decentralized nature offers numerous benefits, from faster and cheaper transactions to increased trust and efficiency. However, the technology also faces significant challenges and risks that need to be addressed. As blockchain continues to evolve and mature, it will be crucial for stakeholders to work together to overcome these hurdles and unlock its full potential. The future of blockchain in finance and e-commerce is promising, but it will require continuous innovation, collaboration, and adaptation to fully realize its transformative impact.