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Blockchain and the Banking Industry

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Banks Adopting Blockchain Technology

Over the past few decades, society has witnessed an enormous amount of change in the way people conduct their daily lives. Technological advances have completely altered the way consumers communicate, work, travel, shop, eat and educate themselves.  There have been major disruptions in various industries across the global landscape.

Without question, the biggest trend across all industry groups is the adoption of blockchain technology. This is particularly true in the banking industry, which has been in existence since the Bank of England issued paper banknotes in 1695. This marked the beginning of modern banking. Since that point, very little has changed within this industry.

Banks have no incentive to change the underlying structure of their business model because it is how they make money.

Removing Intermediaries

The core component of the modern banking industry is the use of intermediaries. Over time banks have discovered that this is an incredibly profitable business model. Intermediaries are in the middle of all banking transactions. The intermediary stands between the customer and their money.

Banks charge fees for their services. Thanks to the use of intermediation, banks enjoy a constant stream of revenue. This explains why banks have no incentive to remove intermediaries.

Blockchain has the capacity to be a major disruptive force in the banking industry because this technology can remove intermediaries. In fact, the removal of intermediaries offers one of the greatest long-term potentials in regard to blockchain use cases. Removing intermediaries from the banking industry would reduce cost and improve efficiency.

There are other ways blockchain technology will disrupt the traditional banking sector.

Suggested Read: What Is Ethereum Plasma? What Does It Do? – Cryptobite

Cross-Border Payments

As you know from our previous discussions, cross-border payments usually involve the unbanked population who reside in developing countries. These citizens have limited access to basic financial services. Consequently, they are required to use cross-border payment services when sending funds to family members in other countries.

These types of transactions are generally very expensive because the payments involve foreign currency fees. It’s not uncommon for fees to exceed 10% of the transfer amount.

During the past few years, an increasing number of the unbanked population have been reducing their dependence on money transfer agents (MTA) when conducting cross-border payments. Instead, they are using crypto wallets stored on a public blockchain. They have enjoyed a substantial reduction in transfer fees. A typical crypto fee is 3% compared to 10% with a money transfer agent.

International Trade

Historically, one of the most lucrative businesses for banks has involved the financing of international trade. International trade is the buying and selling of goods and services between countries. It allows countries to expand their markets and gain access to other products that are not available domestically. An example of international trade would involve Wal-Mart purchasing a shipment of bananas from a South American farmer. Another example includes a United States restaurant purchasing several bottles of wine from a French vineyard.

The trading of goods and services between countries is the driving force behind the global economy. Without economic trade between countries, the growth rate of the global economy would be incredibly small. Based on data provided by the World Trade Organization, the total amount of international trade between countries in 2017 was $22.0 trillion. The number increased to $25.3 trillion in 2018. As you can see, these numbers are staggering, and it explains why international trade is such a profitable business for banks.

Paper Trails and Traditional Banking

Despite major advances in technology, banks have failed to modernize international trade. For example, the vast majority of trade between countries is still conducted using antiquated paperwork. This includes documents such as bills of lading, invoices, letters of credit, banker’s acceptance, and bank drafts.

During the past few years, blockchain technology has dramatically improved international trade between countries. Blockchain technology has removed the bulk of paperwork, which is quite common when dealing with foreign countries. Additionally, blockchain technology provides all participants with a secure network for monitoring each transaction in a real-time fashion. This allows each participant to know the location of all merchandise throughout the entirety of the transaction.

The blockchain network is a substantial improvement over the outdated system used by the legacy banking system. International trade conducted in this way suffered from lost merchandise, costly delays, inaccurate paperwork, and poor communication between the participants.

Banks Adopting Blockchain Technology

Over the past two years, several banks have started adopting blockchain technology. This was because they were losing their international trade clients to the shadow banking system. Shadow banking consists of financial institutions with access to large pools of available capital for lending purposes. Examples of shadow bank institutions include peer-to-peer lenders and private equity funds.

Over the course of the past decade, shadow banks have slowly been stealing market share from traditional banks. Beginning in 2018, shadow banks used blockchain technology as a way to differentiate themselves from legacy banks. Companies established working relationships with shadow banks because they discovered that blockchain technology was cheaper and more efficient. This explains why traditional banks are now keen to adopt blockchain technology.

Identity Verification

Each year, banks devote an incredible amount of time and resources to regulatory compliance. Commercial banking is one of the most heavily regulated industries within the global economy. The area that generates the greatest expense is the KYC identification policy. KYC is an acronym for “Know Your Customer.”

This policy was introduced on 26 October 2001, as part of the USA Patriot Act in response to the 911 terrorist attack. KYC requires banks to obtain the name, address, identification number, photo ID, and a brief financial profile. The main objective of KYC is to prevent money laundering and fraud.

Unfortunately, particularly for small financial institutions, implementing KYC is very expensive and labor-intensive. Thankfully, blockchain technology is capable of eliminating redundant KYC procedures. This is accomplished by allowing customers to register their identity on a secure peer-to-peer network.

Banks and other financial institutions have access to the network when approved by the customer. Thanks to the blockchain, customers are only required to provide KYC information one time.

Brief Summary of Blockchain and the Banking Industry

  • There have been major disruptions in various industries across the global economy.
  • The biggest disruption is the adoption of blockchain technology.
  • Blockchain technology will have the biggest impact on legacy banking.
  • The core component of the modern banking industry is the use of intermediaries.
  • Blockchain can remove intermediaries from legacy banking.
  • Banks are reluctant to adopt blockchain because the current model is very profitable.
  • Banks are slowly embracing blockchain because they are losing customers.
  • Blockchain networks are lowering the cost of cross-border payments.
  • The unbanked population is selecting Bitcoin wallets over money transfer agents.
  • International trade is a multi-trillion-dollar industry.
  • Legacy banks initially made no effort to modernize international trade.
  • In 2018, the shadow banking system combined blockchain with international trade.
  • Customers preferred dealing with shadow banks because of blockchain technology.
  • Many traditional banks are now conducting business on the blockchain network.
  • Commercial banking is one of the most regulated industries.
  • KYC was introduced in response to the 911 terrorist attacks.
  • KYC is very expensive to implement, particularly for small banks.
  • Thanks to blockchain, legacy banks are finally beginning to modernize.
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Blockchain and Artificial Intelligence

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Artificial intelligence (AI) was introduced in 1955 by John McCarthy

Artificial intelligence (AI) is the ability of a computer program to think, learn and mimic human thought. Introduced in 1955 by John McCarthy, artificial intelligence has several different fields of study. These fields include computer science, mathematics, psychology, and philosophy, among many others. AI is linked to several different use cases. The most prominent use cases include machine learning, supply chain optimization, speech recognition, self-driving cars, and manufacturing optimization.

Now we know a bit about AI, let’s review a few examples of how AI is improving decentralized networks like blockchain.

Cryptocurrency Trading

During the past few years, artificial intelligence has substantially increased its presence in the area of crypto trading. This is particularly true with high-frequency trading (HFT). Essentially, HFT is a type of algorithmic financial trading characterized by high speeds and high turnover rates. High-frequency trading is a perfect vehicle for cryptocurrency trading because the crypto universe has several different exchanges.

HFT uses artificial intelligence to analyze multiple technical indicators across various exchanges in an effort to take advantage of market opportunities. AI is still in its infancy stage in regard to crypto trading. Going forward, artificial intelligence will play a pivotal role within the crypto trading community. These are commonly known as trading bots.

Suggested Read: What Are Public, Private, and Consortium Blockchains? – Cryptobite

Blockchain Security

Unfortunately, industries that find themselves in a hyper-growth phase are more susceptible to cyberattacks and malware. Without question, blockchain technology, along with digital assets, is currently experiencing an explosive rate of growth. Consequently, the blockchain industry has endured an exponential increase in malware, phishing, fraud, and digital theft. Based on data provided by industry experts, $9 million is lost to cryptocurrency scams on a daily basis.

The key to successfully thwarting a blockchain hack is to identify the threat and understand the nature of the attack as quickly as possible. Hackers are acutely aware that they must strike quickly in order to launch a profitable attack. Unfortunately, crypto exchanges have a poor track record in preventing cyber-attacks. AI-based cybersecurity systems are designed to detect a hack in real-time and dramatically increase the likelihood of stopping the attack. AI systems are far superior to traditional cybersecurity systems because AI has the ability to detect patterns from previous attacks. This information can be used to prevent future cyber threats.

Bitcoin Mining

As you know, all crypto transactions are verified and added to the blockchain by Bitcoin miners to maintain the integrity of the network. In exchange for their work, miners are rewarded with Bitcoin. Crypto mining requires energy consumption and computing power. Over the past few years, Bitcoin miners have explored the idea of using artificial intelligence to reduce energy waste and computing power to reduce costs.

A few of the largest mining companies have created AI-based systems, allowing companies to share power and increase profitability. AI algorithms have made crypto mining faster, more profitable, and more efficient. Without question, artificial intelligence will continue to play an essential role throughout the crypto industry.

Brief Summary of Blockchain and Artificial Intelligence

Artificial intelligence (AI) was introduced in 1955 by John McCarthy

  • AI is the ability of a computer program to think, learn and mimic human thought.
  • AI encompasses several different fields of study.
  • AI has increased its presence in cryptocurrency trading.
  • High-frequency trading uses AI to analyze technical indicators across many exchanges.
  • AI-based cybersecurity systems are designed to detect a hack in real-time.
  • Bitcoin miners use AI to reduce energy consumption and computing power.
  • A few of the largest mining companies have created AI-based ecosystems.
  • AI algorithms have made crypto mining faster, more profitable, and more efficient.
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Blockchain

How Does Blockchain Compare to Other Innovations?

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How Does Blockchain Compare to Other Innovations

Probably, the most innovative discoveries of the past 100 years are the world wide web (i.e., internet) and the mobile phone. By now, both these things have become a must-have of modern human beings. Let’s look at the stats. In 1995, only 17% of USA residents were using mobile phones. By 2018, only 5% of US residents still did not have this device in use. While in 1995, only 16 million people (0,4% of the world’s population) were internet users, by 2018, this number increased to 4.2 billion, which is more than half of all people. Interestingly, during the first 5 years of the internet’s existence, only 5% of all people have found it worthy enough to use.

These numbers indicate how we interact with new technologies. As a general rule, most people are skeptical of discoveries and innovations at the early stages of their existence. Still, when the benefits of using a certain technology become obvious, it spreads all over the world with the speed of light.

Typically, it takes about 10 years before the average consumer makes an effort to research a new product or service. By this time, approximately 10% to 20% of the overall population had adopted the innovation. The remaining 80% to 90% of the population is still on the sidelines, unwilling to implement this new technology into their daily lives. Within 20 years of the new product’s existence, the majority of the population finally adopted it. Without question, consumers are very slow to implement new technologies.

Suggested Read: Blockchain and the Banking Industry – Cryptobite

Adoption of Blockchain Technology

But should we wait another 20 years to see the adoption of blockchain technology? Most likely, it will occur much faster than the internet, mobile phones, automobiles, or air travel. Why? Because once the blockchain infrastructure is in place, the old ledger system becomes useless. Therefore, soon, consumers will not have to choose between the new digital ledger and the old manual ledger. Companies that won’t migrate to the blockchain will be left behind and eventually forced out of business.

Within the next decade, blockchain technology will permeate our daily lives. For example, everyday things like voting, purchasing a vehicle or a home, visiting a medical care provider, investing in the stock market, obtaining a bank loan, going to college, or shopping at a retail establishment, will encounter blockchain technology.

Most probably, within the next five to 10 years, we will encounter blockchain technology daily. This explains why it will be exponentially larger than the internet.

Brief Summary of Blockchain In Comparison to Other Innovations

  • As a general rule, people are skeptical of discoveries and innovations.
  • It takes approximately 10 years for the average consumer to become a regular user of innovations.
  • Full adoption of a new product or service takes 20 to 30 years.
  • The adoption rate of blockchain will occur much faster.
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What Is Blockchain Consensus Algorithm?  

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What Is Blockchain Consensus Algorithm

Blockchain technology has many different moving parts. Hence, to operate smoothly, the architecture must be properly designed. An important piece of Nakamoto’s architectural design is the use of a consensus algorithm. 

Blockchain Consensus Algorithm in a Nutshell

In its simplest format, a blockchain consensus algorithm is a decision-making process. It is designed to assist in reaching a common decision by a group of people. Of course, in this particular scenario, the consensus algorithm involves blockchain-related solutions.

How Does it Work?

Let’s assume that 20 co-workers are asked to collaborate and offer a recommendation on a specific project. Each participant in the group will reach a decision that will provide the greatest individual benefit. The group must listen to each recommendation and decide which of them will provide the greatest overall benefit. The final recommendation must be accepted by all group members regardless of whether it offers the best solution for each individual.

Let’s assume that 20 co-workers are asked to collaborate and offer a recommendation on a specific project. Each participant in the group will reach a decision that will provide the greatest individual benefit. The group must listen to each recommendation and decide which of them will provide the greatest overall benefit. The final recommendation must be accepted by all group members regardless of whether it offers the best solution for each individual.

Suggested Read: Luxury Fashion Brands Are Entering The Crypto Space (cryptobite.io)

Brief Summary of Blockchain Consensus Algorithm

  • An important piece of blockchain architecture is the use of a consensus algorithm.
  • It is a decision-making process that helps a group of people to make a common decision.
  • The consensus algorithm always produces the optimum solution for the overall group.
  • A consensus algorithm helps to create fairness and equality in a decentralized ecosystem.
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