The Federal Trade Commission reports that over 5.7 million people faced data breaches and identity thefts in 2022. It is, on average, 15,600 people every day.
Developing more robust security measures can’t keep up with the resourcefulness of fraudsters. In contrast, blockchain technology offers a secure and tamper-proof solution. It eliminates the need for centralized authorities by ensuring that all transactions are recorded on a public ledger that is accessible to all participants.
The union of FinTech and blockchain has the potential to revolutionize the financial industry.
Table of Contents:
What is Blockchain and How Does It Work?
Blockchain is a distributed immutable digital ledger, which is considered the most secure approach to storing data. It is the most widely known for cryptocurrency trading, but it can be used in Fintech applications to track transactions and enhance security.
The transaction goes through the blockchain in 6 steps.
- Translation: user initiates a transaction of digital assets with another user
- Verification: every initiated transaction goes through verification by nodes using a consensus algorithm. The most common example is named “proof of work,” which implies solving a cryptographic puzzle.
- Block: a bunch of verified transactions are combined into blocks. Each block contains a unique block identifier (hash), timestamp, list of transactions, and the hash from the previous block.
- Chain: blocks are connected into the chain by hash and ordered according to the timestamp.
- Ledger: the network of nodes creates the distributed ledger, where each node has a copy of the blockchain. Since the ledger is append-only, all the data can’t be removed or edited, which provides a precise list of transactions and absolute transparency.
- Smart contracts: that is the type of self-executed contacts. The terms of contracts are written directly into the code so the agreement is executed without involving third-party authorities. Also, smart contracts are either executed entirely, or all the operations are reversed due to the error. There is no partial execution which makes them the most secure contracts among existing ones.
Components of Blockchain:
- Consensus mechanism. It is an algorithm that is used for the verification of the transaction. There are many types of consensus mechanisms, like “proof of work,” “proof of stake,” “proof of authority,” and many others.
- Network protocol. The network protocol ensures that all nodes in the network possess a copy of the same ledger and receive updates on new transactions. This is usually achieved via a peer-to-peer network, where nodes can connect and exchange information.
- Node software. Each node in the blockchain system has its version of the node software to maintain the ledger.
- Cryptography. It is used to protect blockchain data via the hash of each block and private and public keys for transactions.
Implementing Blockchain technologies in Fintech applications brings many benefits.
Key Benefits of Blockchain Integration in Fintech Applications
The decentralized nature of blockchain technology ensures that no single entity has complete control over the financial system. There is a 51 percent rule, which means that hackers must control over half of the system to attempt to steal data or mislead transactions. This is literally impossible due to the broad decentralized node network.
For example, when hackers alter data on their nodes, they will have to convince millions of other nodes that their copy of the blockchain is valid. This decentralization reduces the risk of fraud and manipulation, making the financial system more trustworthy and resilient.
Also, the automatic execution of smart contracts without partial execution eliminates the possibility of manipulation by putting the error into the code. For example, if an error occurs or a condition cannot be done, smart contracts return all actions to the start canceling all previously executed actions.
The nature of blocks and chains enhances security too. Each block contains the hash of the previous one, which allows connecting them into the chain in the order of their timestamps. If any data inside the block is attempted to be changed, the hash is changing too. The previous blocks will not recognize the hash and break the chain. In most cases, the system refuses any altercations, so it is impossible to falsify data.
The blockchain network is open to anyone, so all participants can access the same information and see all transactions in real-time. Also, all blockchain transactions are traceable so that you can see the entire history and lineage of any piece of data or asset on the blockchain. They are published but encrypted, so only the data owner can reveal their identity. This way, blockchain provides transparency but, at the same time, anonymity for its users.
Greater Efficiency and Accuracy
The whole system is automatic; the only human action is initializing the transaction. Smart contracts are self-executed, so there is no need for human interference even for checking the execution of terms. Also, there is no need for centralized authority to control the data. Such automation eliminates even the tiniest possibility of human error. Also, blockchain makes all the transactions transparent and traceable, maximizing the report’s accuracy.
DeFi: Fintech Application with Blockchain Technologies
The most substantial advantage of DeFi is that transactions happen peer-to-peer without banks, exchanges, and more. Everything is automatic and transparent. DeFi aims to disintermediate the traditional financial system by offering financial products and services openly and transparently, without centralized intermediaries like banks and brokerages.
DeFi systems run autonomously using smart contracts, giving users more control and accessibility. Some examples of DeFi applications include decentralized exchanges, lending and borrowing platforms, stablecoins, derivatives, insurance products, and lending robots.
When users connect their crypto wallets to Zerion, it aggregates their DeFi-related data from various sources and displays it all in one place. This includes loan positions, yield farmings, tokens staked, and more. Zerion also shows metrics like total value locked, interest earned, and performance charts over time.
Provided functionality includes:
- Interaction with smart contracts.
- Managing cryptography as it includes libraries to generate and manage keys for signing transactions and encrypting data.
- Work with Ethereum wallets.
- Query the Ethereum blockchain for information like contract balances, transaction details, block details, and more.
- Ethers.js handles transactions, wallet management, and contract interactions more concisely.
- Ethers.js exposes more lower-level operations, giving you more flexibility and control.
There are some of the most popular cases of usage of Crypto.js:
- Storing hashed passwords instead of plain-text passwords.
- Encrypting sensitive data before storing it.
- Signing data to verify authenticity and integrity.
- Generating keys for encryption and many more.
Truffle provides a set of usable tools:
- Compilation and testing tools.
- Tools to deploy to any Ethereum network.
- Tools to interact with contracts from web apps.
- Migrations to manage contract updates.
- An asset pipeline to manage frontend assets
Lisk uses a sidechain architecture where each DApp runs on its own sidechain while being secured by the main Lisk blockchain. According to the requirements, sidechains can be merged or added, which provides flexibility and scalability for FinTech applications.
Blockchain is the most secure way of storing and manipulating data nowadays. This is about more than just cryptocurrency because this approach applies to any application that includes transactions. That’s why blockchain has become a popular solution for developing DeFi – decentralized financial applications.