How Blockchain-Based Financial Services Are Better
Decentralized financial services are theoretically a vast improvement on the centralized banking system, and many believe that distributed ledger technology will work to disrupt these institutions as we know them. Before Satoshi Nakamoto created digital currency that can only be spent once, solving the double-spend issue that long stood as an obstacle to digital banking, there was no way to avoid centralized banking without storing cash under your mattress.
Now blockchain technology is used to convert fiat to digital currency using a peer-to-peer verification protocol. Rather than having a bank authenticating your financial activity, with decentralized banking the distributed network supports and verifies each transaction through mining (like with Bitcoin) or another protocol.
Blockchain explained in the simplest terms, converts fiat into a digital currency through a peer-to-peer electronic cash system. With blockchain banking, every peer on the network has a list with all transactions and can validate transaction via consensus rather than by a single institution like a bank. How does this competing method of money management eliminate overhead and ramp up efficiency?
Here is how decentralized banking improves upon the centralized banking model:
- More efficient
Blockchain technology enables faster global trade across time zones. As we move towards a more globalized economy we will need more effective protocol to deal with increasing cross border transactions. Traditionally, these transactions can take days or even weeks to process. Blockchain is faster because it works to automate the verification process, eliminating the need for multiple parties to confirm manually. Blockchain technology will continue to increase in speed as its scale increases.
- More secure
Blockchain technology allows liability for funds to be distributed throughout the network. Distribution as a strategy has been a historically logical approach to one’s storing assets. If just one singular, centralized institution controls access to funds, when faced with market volatility, you could potentially be denied by an all-powerful gatekeeper. Centralized systems are more vulnerable because there is one point of entry and one point of exit. Conversely, a large peer-to-peer network with automated verification has no single proprietor and risk is dispersed accordingly.
- Higher potential for increased value on digital assets
While high interest rates are attractive to banking customers for savings accounts, they are rarely more than one or two percent. While crypto markets might fluctuate, the potential return on investment for owning digital assets is infinitely higher. Cryptocurrency value is determined by how many peers are using that currency and network. The more efficient and widely used coin platform, the more likely the digital asset will increase in value.
- Lower associated costs
There are little to no associated costs with smart contract-based transactions. No more domestic or international wire fees or overdrafts. There are, however, many hidden fees associated with centralized banking that exist to support the enormous overhead operating a central bank requires. With decentralized financial services overhead is at a complete minimum. The tamper-proof ledger also helps prevent fraud, identity theft, and the costly legal services that follow.