Fintech, like other tech-driven industries, is always on the brink of something new. There is a new finance app every other day, a bold new way to manage and process payments. This industry, which was already accelerating, is about to shatter all previous expectations. All this super-powered finance engine needs is an injection of blockchain technology to break the sound barrier. We will examine how blockchain technology will forever change the way money is transacted, managed, and stored.
First, let’s define our terms. It’s essential to understand what fintech was to fully grasp how blockchain technology will utterly transform fintech into the financial system of the future. It would probably help also to elucidate the mysterious and often misunderstood blockchain while we are at it.
Fintech is a hybrid concept whose meaning you can probably deduce from the compound name. Fin + Tech. Essentially, when we say fintech, we mean that special intersectional region between the world of finance and technology. This intersection is far from static, however. A large part of looking at fintech is looking at change and how these two interwoven industries complement and enhance one another.
When looking for specifics, think of finance apps, investing apps, peer-to-peer transactional apps, and other payment apps. Your bank uses fintech to track transactions. You use fintech to order that RuPaul ice cube tray off of Amazon or to pay your friend for that pizza they ordered through Venmo. Fintech is scattered throughout your pay-to-play smartphone game or when you need a ride to work in an Uber.
You get the picture — fintech is pretty much a vital artery supplying our modern lives with the ease and convenience of seamless, effortless transactional power. It is the broad and ever-evolving region where finance and technology meet. It started with the abacus, transitioned to clay tablets, and eventually to telecommunications and the internet. It has recently been living in the world of the smartphone, but a larger, more fundamental shift is coming. Enter blockchain, stage left.
You can also get a basic idea of what blockchain means by looking at the word itself. Block + Chain. We will elaborate, but first, think of blockchain as a “chain” of “blocks.” Simple enough, but that doesn’t really get to the bottom of it. The “blocks” in blockchain are units of cryptographic data, which is fancy speak for saying that they are incredibly secure. These records of transactional data are nearly impossible to alter, fabricate, or destroy.
These data blocks are verified through complex cryptographic equations performed by a vast network of decentralized nodes (or CPUs) at set intervals of time. Once verified, the data is added to the long chain of previously verified blocks and cannot be changed unless a consensus of all the decentralized nodes agrees to the changes. Hence the indomitable Blockchain.
We get that it is secure, but what makes it so different from anything else we have seen before? The secret lies in decentralization. Let’s look at Bitcoin, the world’s first decentralized currency. It uses blockchain technology and verifies its blocks through a process called “proof of work.” The nodes that verify the blocks are scattered all over the world. There isn’t one company, one government, or other entity that can control the production, verification, and transaction of Bitcoin. It is genuinely peer-to-peer and “transparent.” Anyone with an internet connection can store, produce and transact bitcoin, or see a full history of the transactions made on the blockchain.
Though bitcoin was the first mover in the cryptospace, there are other faster, more environmentally friendly blockchain technologies that were designed solely around the idea of decentralized finance, or DeFi, as it is affectionately known by its proponents.
DeFi is a broad category of financial applications built using blockchain technology whose primary goal is to reduce or remove entirely the intermediaries involved in financial transactions. Though these are simply words on a page, imagine how disruptive and revolutionary this concept is in practice.
DeFi is a threat to the status quo of global finance — much in the way the internet was thirty years ago. Entire applications are being built on smart-contract crypto platforms like Ethereum, Polkadot, and Cardano. Big financial players, banks, and governments are being forced to incorporate crypto, adapt to DeFi, or become obsolete. Many big players are working on their own cryptocurrencies and blockchain applications or working closely with existing blockchain developers.
Consider that Venmo and Paypal already allow users to purchase crypto assets. Amazon and other e-commerce giants are working on ways to accept cryptocurrencies. However, the promise DeFi holds for the average person is what drives more and more people toward the cryptospace.
DeFi companies like Block-Fi will pay you as much as 8.5% of your annual holdings (varies with the type of crypto held) to keep your cryptocurrency stored in their massive liquidity pools. These giant liquidity pools allow account holders to take out crypto-backed loans and get a percentage of their holdings paid out as fiat currency, which can be paid off with fiat or as the price of the crypto asset appreciates.
Some DeFi companies are developing other ways to reward users with cryptocurrencies. Crypto.com and BlockFi both offer credit cards that pay their users back rewards in bitcoin or other cryptocurrencies.
Because of legitimate energy consumption concerns, many cryptocurrencies are switching from the “proof of work” model to the “proof of stake” model to verify blocks in the blockchain. Instead of consuming large amounts of energy by performing complex, circuit board-melting cryptographic equations, the “proof of stake” model relies on a certain amount of the native cryptocurrency to be locked away for a set amount of time. It is this staked amount that verifies the blockchain. However, some platforms are taking this even further.
Smart contract cryptocurrency platform Cardano allows users to stake their ADA, the native Cardano cryptocurrency, in specialized wallets that pay them in rewards simply to hold their ADA. The added benefit is that they can remove their ADA from their stake pool at any time.
Imagine – immutable digital identities, stored in the blockchain and only accessible to users who possess the private key to make changes and approve transactions. Blockchain tech can drastically cut down on instances of identity theft, reducing financial loss and other risks associated with the criminal enterprise. Not only can people have secure digital identities, but institutions as well, so you know for certain that you are sending your money to the correct entity.
Entire financial applications can be built out using smart-contract blockchain platforms. Whole monetary systems can be administered in a decentralized and consensus-driven way, opening the doors to genuine democracy and financial independence. This financial independence can help developing nations who clearly have the talent pools but lack the connections and capital to enter the pre-existing financial system. DeFi truly levels the playing field on a global scale.
James Melton is a writer, musician, and personal assistant to Veronica Baxter who works closely with David Offen, a successful bankruptcy lawyer in Philadelphia.