Blockchain in Traditional Finance: Correcting Inefficiency and Limited Accessibility
TradFi, or traditional finance, has considerably improved the development of companies’ budgets and the circulation of money. However, it has become less efficient in the past years due to economic shifts and crises that challenge nations. Although it’s widely accessible to most people, there are numerous places worldwide where individuals are not provided with banking accounts or available financial services.
That’s why TradFi is slowly overtaken by DeFi (decentralized finance), which consists of blockchain technology, cryptocurrency transactions and underlying cryptographic security. Bitcoin is the most popular store of value. At the same time, Ethereum is useful for its blockchain capabilities, so if you want to know what is the price of Ethereum, it’s best to consider the development of dApps, DAOs and NFTs that influence it.
Regardless, TradFi will slowly but steadily change, and its improvements will be overtaken by blockchain technology. Here’s how it’ll help.
Blockchain in providing asset ownership
Within the blockchain ecosystem, the tokenization process allows most real-world assets to be transformed into digital ones and, therefore, be more straightforward to transact and use. For instance, real estate can be offered for selling in the form of unique tradable units accessible to a broader range of investors and improving liquidity levels.
Meanwhile, traditional ownership requires consistent capital investment and ongoing signing of documents. These practices aren’t transparent and bring unnecessary complications within transactional processes, which is why tokenization on blockchains is better and more efficient.
This system is based on smart contracts that automate all transfers when both parties reach the predetermined requests. Without intermediaries and other third parties, transactions are faster, safer and more accessible to various investors.
Blockchain in expanding financial tools
TradFi has indeed expanded considerably during all these decades but has reached a dead end with ETFs (exchange-traded funds) due to their risks for regular investors. However, blockchain-based financial tools and instruments are finding their way out through better assets and ecosystems.
Let’s take the example of BTC ETFs or even ETH ETFs. Due to considerable liquidity and profit opportunities, they’re one of the most awaited assets on the crypto market and have only recently entered the market.
But that’s not the only asset that can diversify one’s portfolio. For instance, the Ethereum blockchain abounds with dApps, DAOs and NFTs that respond to specific communities’ needs and preferences regarding their finances. And since regular developers work on their maintenance and improvement, the blockchain environment is censorship-free and decentralized.
Blockchain in mitigating sustainability
There are numerous ways in which blockchain can have a positive impact on sustainability. First, it can help eliminate inequality since it gets distributed globally and offers democratic ownership structures to all communities. Social, collaborative economies and participatory practices have the ability to provide a new and fair structure of the world.
At the same time, blockchain and cryptocurrencies could offer greener alternatives to traditional
finance through their decentralized methods that automate the tracking of carbon emissions. At the same time, blockchain ensures more fairness due to the impossibility of data being falsified or manipulated, like in the case of traditional finance, that’s prone to corruption. However, there are some problems when it comes to mining since it uses too much computational power and electricity.
Blockchain in cost-efficient systems
Traditional finance is known to have slowed down when it comes to operational transactions due to the inefficiency of tackling costs and fees. Most banking and institutional processes require processing fees that take time until entirely handled, therefore hindering all other transactions.
On the other hand, transactions on the blockchain are rapidly processed, and fees are minimal, encouraging investors and regular users to enhance the movement of cryptocurrency and, therefore, contributing to a circular economy. Blockchain can also provide more scalability in this new and sustainable economic model due to tracking methods that can efficiently identify and monitor any component or material from the supply chain. That’s why an increasing number of financial companies approach blockchain for cost-effective solutions.
Blockchain in high-tech security
TradFi also struggles with technological advancements, such as proper antivirus enhancements, employee training for digital literacy, etc. This has led to an unfathomable number of cyber-attacks that are costly and affect a company’s reputation.
Luckily, blockchain is based on cryptographic technology, one of the most advanced ways of securing ecosystems. This technique protects user privacy and maintains data consistency through digital signatures and encryption keys. There’s also the use of hash functions within the blockchain that reduce transaction bandwidth and prevent data modification in blocks.
Overall, blockchains are secured through encryption, provide immutability and scalability and prevent hackers with success. However, using cryptography requires professionals who can access difficult information and protect systems against possible vulnerabilities.
The main challenges of blockchain technology
Although blockchain is one of the most revolutionary technologies in the past years, it’s hindered by many factors. For instance, the lack of regulation stops companies and users from connecting through blockchain since there’s no official guideline on being up-to-date with the government’s requirements.
At the same time, blockchain integration and operability require more advanced ecosystems and company cultures that haven’t been achieved yet, meaning businesses must adopt a new structure by collaborating at an industry level.
What’s also worrying is scalability, which has been a considerable issue since the first cryptocurrency appeared on the market. Maintaining large environments while providing fast and low-fee transactions is complex and must be tackled accordingly. Some blockchains, such as Ethereum, continuously seek scalability solutions to ensure seamless transactions and services for the regular crypto user. At the same time, scalability must be handled with maximum attention, even within smaller businesses or traditional industries, because it can lead to similar results as a website or a cloud system that is not used correctly.
Final considerations
TradFi, or traditional finance, is slowly losing ground to blockchain and decentralized systems due to a lack of efficiency and considerable costs. That’s why blockchain adoption is one of the main goals for the future of technology because it will significantly change how companies use money and provide digital services and products.
