Before an international payment comes through, it requires affirmations of nearly 36 third-party organizations.
It’s not surprising that it delays a payment transaction. The cost of a transaction is significantly higher. If these transactions are made using the Blockchain technology, the processing fee is much lower, and transactions are faster and secure.
Blockchain technology also lends immutability to these transactions, meaning transactions made using blockchain can’t be modified. All information related to a transaction is bundled up and put under one ‘block’, which derives its information from the block preceding it. Upon transaction, each block is verified by a group of participants called nodes.
This blockchain-based transaction mechanism is more efficient and transparent compared to traditional record-keeping and verification methods.
Efficient and secure transactions
Record-keeping and validation of records is an essential part of business processes across all industries. Complexity, however, arises in the supply chain, finance, and other processes where multiple vendors are involved.
Blockchain technology uses novel mechanisms to verify and secure transactions. First by limiting the number of participants required to validate a transaction. Second, by distributing the validation process over a selected number of participants. This mechanism is a census mechanism.
Cryptocurrencies like Bitcoin and blockchain-based applications primarily use two consensus mechanisms.
Proof of work: Cryptocurrency users including Bitcoin utilize their computer systems to participate as validators of transactions. When a transaction occurs, the blockchain requires nodes to solve mathematical problems. Once a selective number of nodes validate a transaction, a block with related information is added to the block. Typically, affirmations of 51 percent of nodes are required to add a block.
Bitcoin’s blockchain uses proof of work consensus mechanism for validating blocks.
Proof of stake: This is another consensus mechanism for validation of transactions. Opposed to proof of work, this protocol selects nodes randomly depending on a few factors including holdings, size, or time in operation.
Proof of authority, Byzantine Fault Tolerance, and Clique are other commonly used consensus mechanisms, that take different methods of validators.
For the consensus mechanism to execute, records (or blocks) are required to be present at each node. Thus, each node of a blockchain has a replica of unalterable blocks. Hence, the term distributed ledger.
All in all, blockchain technology makes financial transactions:
- Faster: Limited involvement of third-party organizations
- Secure: Consensus protocols and cryptography
- Transparent: Consensus protocols and accessibility
Smart contracts are digital contracts that extend the power of blockchain technology to non-monetary transactions. Smart contracts execute themselves upon successfully meeting the terms and conditions agreed upon by involved parties of the contract. They eliminate paper-work, reduce processing time, and reduce human errors, and facilitate transparent business processes.
Hyperledger, NEM, Corda, and Ethereum are a few popular smart contract platforms for the development of smart contracts. Over 41 million transactions have been successfully executed on Ethereum by February 2020. These platforms are eliminating middlemen. So it’s not a surprise that the smart contracts industry is growing steadily and is expected to reach $300 million by 2023.
Dapps (Decentralized applications) take the benefits of the blockchain technology further by helping blockchain professional build blockchain-based applications for fun and entertainment like games, casino, and social media. The number of such apps increased steadily during the last year.
Future of transactions
Blockchain technology has made financial transactions more fast and efficient. With the help of smart contracts, this benefit is extended to non- monetary transactions as well. As the blockchain technology matures and finds greater adoption in the industry, businesses will see more streamlined and business processes.