Blockchain is a distributed, shared database or ledger between the nodes of a computer network. In cryptocurrencies such as Bitcoin, blockchains are crucial in maintaining a decentralized and secure log of transactions. The innovation of blockchain technology guarantees the integrity and security of a data record without the need for a third party (Hayes, 2022). The Ethereum blockchain is a distributed ledger that will allow the creation of new banking and financial goods and services. It permits the issue of digital securities in shorter periods, at lower unit prices, and with greater levels of customization. The adaptability of digital financial products to investor preferences expands the market for investors, reduces costs for issuers, and mitigates counterparty risk (ConsenSys, 2020).
Benefits of Blockchain Technologies
Five significant benefits of blockchain include enhanced security, greater transparency, instant traceability, increased efficiency and speed, and automation (IBM, n.d.).
Enhanced security
The blockchain helps prevent fraud and unlawful behavior by generating immutable, end-to-end encrypted records. The technology may also solve privacy concerns by anonymizing personal data and employing permissions to restrict access. In addition, information is kept throughout a network of computers as opposed to a single server, making it harder for hackers to access it.
Greater transparency
Blockchain is a distributed record of all transactions and data that lets users see the whole transaction history and virtually eliminates fraud. All network users with authorized access view the same information simultaneously, entirely transparently. Without blockchain, each company must keep its own database, meaning that each network participant sees only one copy of the data.
Instant traceability
Traceability data may also indicate gaps in a supply chain, such as when items are awaiting shipping on a loading dock. At each step of an asset's journey, the blockchain creates an audit trail that documents the item's origin. In industries plagued by counterfeiting and fraud, or where consumers are concerned about the effect on the environment or human rights, this helps provide proof.
Increased efficiency and speed
Traditional paper-intensive techniques are time-consuming, susceptible to human mistakes, and often need the assistance of a third party. By using blockchain technology, transactions may be conducted more efficiently and swiftly. In addition, the blockchain may maintain documentation and transaction data, eliminating the need for paper transactions.
Automation
Smart contracts may automate transactions; when a trade or operation conditions are met, the next step is automatically begun. Smart contracts reduce the need for human participation and reliance on third parties to verify contract compliance.
Recommendations
When dealing with risk, there are four risk treatment options:
Mitigation
Something is changed to reduce the risk to acceptable levels or eliminate the risk.
Acceptance
Nothing is done to treat the risk; the risk is already at an acceptable level.
Avoidance
Avoiding an activity that introduces risk.
Transfer
Transfer risk to another organization, usually by purchasing insurance.
In financial organizations, risk acceptance and avoidance is typically not an option due to the high sensitivity levels. Therefore, organizations involved in the financial industry should focus on risk mitigation above all else. Risk transfer is a good option, but insurance can be more expensive than mitigating the risk in most cases. Risk transfer should only be done when risk mitigation is not feasible or more costly than risk transfer.
When implementing blockchain technology into an organization for the first time, it is essential to know that the wrong implementation could have negative impacts. These negative impacts could leave an organization worse than never implementing blockchain despite all the benefits. According to Paul Brody from TechTarget, five tips to successfully implement blockchain for businesses include:
Use public blockchain's over private ones
Private blockchains aren't very different from the old way of doing things on a centralized server. Private blockchains don't provide the transparency that consumers are looking for in today's digital realm.
Don't try to find the best technology
There will always be a better, faster, and more efficient way of doing things. Don't get caught up looking at the technical details in the choice of blockchain that your organization will use. Instead, focus on technologies that are proven to work over long periods. The network with the most users wins.
Think in blockchain technology terms
Blockchains contain tokens and smart contracts, similar to business processes. Therefore, companies that adapt their heritage vision into blockchain-native principles have the most influential blockchain deployments. This implies that they will focus on smart contracts and tokenization instead of transferring papers back and forth.
Fix something that is broken
Trying to improve something that isn't broken generates a minimal return on investment (ROI) and is an inefficient use of time and resources. Large-scale approaches to problem-solving are admirable, but they seldom pan out. Instead, throughout the history of technology, we have repeatedly built platforms around items that handled a single tiny issue very effectively. Successful blockchain initiatives generate value and tackle existing issues rather than just establishing the groundwork for future problems.
Connect multiple external parties
Due to their decentralized nature, blockchains are ideal for integrating business processes amongst organizations. Unlike other systems, such as electronic data exchange, they provide the sharing of information across numerous parties and the incorporation of business logic into the shared process.
Summary
Blockchains are vital to maintaining a decentralized and secure ledger of transactions in cryptocurrencies like Bitcoin. The Ethereum blockchain is a distributed ledger that will enable the development of new banking and financial services and products. It allows the issuance of digital securities over shorter periods, at lower unit costs, and with more customization. Five significant benefits of blockchain include enhanced security, greater transparency, instant traceability, increased efficiency & speed, and automation. Financial institutions need to prioritize risk reduction above all else - and insurance is a viable alternative - but insurance is often more costly than risk mitigation. Risk transfer should only occur when risk mitigation is impractical or more expensive - such as in the case of financial institutions - rather than risk acceptance and avoidance. Five tips to successfully implement blockchain for businesses include using public blockchain over private ones, not trying to find the best technology, thinking in blockchain technology terms, fixing something that is broken, and connecting multiple external parties.
References
Brody, P. (2021, June 11). 5 tips to successfully implement blockchain for businesses. TechTarget. https://www.techtarget.com/searchcio/tip/5-tips-to-successfully-implement-blockchain-for-businesses
ConsenSys. (2020, January 10). Blockchain in finance & Fintech: The future of financial services. Retrieved August 28, 2022, from https://consensys.net/blockchain-use-cases/finance/
Hayes, A. (2022, June 24). Blockchain explained. Investopedia. Retrieved August 28, 2022, from https://www.investopedia.com/terms/b/blockchain.asp
IBM. (n.d.). Benefits of blockchain. Retrieved August 28, 2022, from https://www.ibm.com/topics/benefits-of-blockchain