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How can blockchain transform the financial market?

How can blockchain transform the financial market?

You’ve probably heard of cryptocurrency, haven’t you? This subject has become quite popular in recent years due to the appreciation of these assets. However, the technological innovation behind the digital coins – called the blockchain – also deserves your attention.

Although it seems like a complex subject, the use of blockchain may solve many common issues in our society, such as the lack of access to financial services, the delay in the transfer of capital and the lack of security of these activities.

If you want to understand how cryptocurrency and blockchain are revolutionizing the financial market, just read this article until the end!

The need for credibility

In 2008, the whole world was facing the challenges posed by the US economic crisis. The bankruptcy of Lehman Brothers led the United States to its greatest recession since the 1929 crisis, increasing the number of unemployment and creating a bleak scenario for the future.

At the same time, emerging countries faced reduced domestic and foreign investment, which affected the speed with which their economies advanced. In a simple way, we can summarize the American crisis as the result of the lack of transparency in financial operations.

However, this conclusion opens a question: if large institutions don’t have credibility, what will? The history of world economy shows us that, for a currency to have value, it needs to have reserve.

In ancient times, this was possible using precious metals, such as silver. Currently, this reserve is linked to the credibility and solidity of a nation’s economy, as the currencies are regulated by a Central Bank that guarantees reliability to that financial system.

In 2008, the year of the crisis, some people understood that banks had no way of guaranteeing – or even monopolizing – the credibility of financial transactions. This scenario favored the development of the concept of cryptocurrency.

The emergence of Blockchain

According to a report published by the company Hootsuite, more than 4 billion people are connected to the internet. All of these devices together create an impressive information processing power.

In 2008, Satoshi Nakamoto saw this processing potential as an alternative to revolutionize the financial market. In practice, he understood that a financial transaction could be done digitally, without a bank acting as an intermediary.

To do so, it would be necessary to create an all-digital currency, the Bitcoin. This money would not exist in a physical way, and a kind of audit made up of ordinary people would validate the transaction.

These people would earn a very small percentage of the new currency in exchange for the service provided. The more transactions are legitimized, the more profit they would have. To avoid a flood of Bitcoins on the market, such validation would only be possible by solving complex mathematical problems.

To this activity, we give the name of “mining”. Since many people are mining bitcoins, the transaction is made quickly. Each one is recorded in an information block, called the blockchain.

The information recorded on this system can be accessed by anyone, which makes operations even more transparent. Also, there is no way of erasing or modifying them. To hack a transaction recorded in the blockchain, it’s necessary to simultaneously alter all operations previous to that one. This makes it impossible to alter these data.

Before we talk about the other characteristics of this technology, it’s important to clarify that there are still some doubts about the identity of the system’s creator, Satoshi Nakamoto. Until today, it hasn’t been possible to verify if he is real or a pseudonym. Now, let’s understand how this technology contributes to the advancement of the financial market?

Easy access to financial services

According to information published by the UN’s International Fund for Agricultural Development (IFAD), immigrants send about U$ 500 billion to their countries of origin. Obviously, this transfer must be done by a banking system.

The problem is that not all immigrants can use it. In some countries, it’s necessary to have a permanent visa to have a bank account. In addition, the fees charged for this service may be high compared to the amounts that will be transferred.

For this reason, many immigrants use third parties in regular situation in the country to make the transfers. This may put them at risk of being stolen. When using cryptocurrency, none of this is necessary.

An immigrant in Europe is able to transfer money to his family in Latin America using a mobile application that uses blockchain to validate the transaction. This whole process is completed in minutes because there is no communication between banks, but between people – that is, the time spent in the process is optimized.

Decentralization of information

From time to time, we’re taken by surprise by news that report information leaks. Large companies such as Facebook, LinkedIn and Yahoo have already been victims of cyber attacks that exposed information about their users.

At the same time, digital financial transactions have always been targeted by criminals who pretend to be branch employees, create websites identical to those of these companies, or invade their systems to harm people.

This is only possible because these data are centralized, stored on the servers of these companies. As we’ve seen in this article, the blockchain is decentralized, operating on millions of computers worldwide.

That way, a hacker attack becomes impossible, as the criminal would have to invade millions of computers at the same time without being noticed. In addition, the transactions are all encrypted.

Reduction of expenses with fees

Banking charges represent a burden on the budget of clients of financial institutions. To avoid such expenses, many prefer to not use these services and are left without access to financing, loans and online payments, for example.

This cost is also borne by corporate clients, as their financial processes require the use of banking services. Imagine how much a company could save if they could pay their employees through a safe, quick, and cheaper system like those used by cryptocurrency!

In addition to optimizing the operating costs, how many people who don’t have access to banking services could become customers of these companies, making their payments using such a system?

As we’ve seen in this article, cryptocurrency and blockchain make it possible to increase the amount of money available in the economy, democratize access to banking services and improve the security of these transactions.

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