Crypto Academy Week 6 - Homework Post for [gbenga]-Benefits of Applying Blockchain Technology and cryptocurrencies in the Banking Sector.

Introduction
Banks have been around for centuries and have proved to be one of the most important sectors of the global financial institution. Banks have played the role of a trusted intermediary between depositing, sending, and receiving parties. As a trusted body customer using the bank and their services trust the bank to keep their money safe and accountable.

Following the emergence of cryptocurrencies and blockchain technology, decentralization has gained so much attraction and fame especially with the rise of decentralized finance(Defi).

Bitcoin was designed to serve as a decentralized peer-to-peer payment system eliminating intermediaries in this case the banks. Users could now send assets anywhere in the world without using western union money transfer or other traditional means of sending and receiving value all you need to have is a bitcoin address. Transactions are stored in a distributed ledger system known as a blockchain.

Blockchain could be defined as a database or a ledger, however, it is distributed and shared across thousands of computers around the world, each computer has a full record of all the data since its inception and recorded in blocks.

The goal of blockchain is to allow digital information to be recorded and distributed, but not editted.source

Blockchain technology has the potential to disrupt not only the world’s currency market, but also the banking industry as a whole by cutting out these middlemen and replacing them with a trustless, borderless, and transparent system that is easy to access by anyone. Blockchain will potentially help facilitate faster and cheaper transactions, increase access to capital, create higher data security, enforce trustless agreements through smart contracts, make compliance smoother, and more. source

The Banking industry and to benefit a lot from blockchain technology and cryptocurrencies, in this homework, e are going to look at some of the problems facing the banking system and how blockchain technology could be implored to face out the outdated banking infrastructure today..

Problem affecting the Banking Industry and Benefits of Blockchain Technology and Cryptocurrency

• Security
  The centralized nature of banks is one of the highest security risks, the centralized nature bank creates a single point of failure because all of its data and transactions are sourced from a single point making it easier to hack and if there is to be a lag or attack on this system, this will surely lead to a loss of user data and assets.

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The banking infrastructure is old and rapidly becoming obsolete, data handling in a centralized setting require a lot of paperwork which most times are tampered with making it inaccurate. Take for instance in a centralized banking system like Nigeria, where all commercial banks are anchored to the central bank of Nigeria. User data and transitions are regularly audited and tampered with to match the interest of the regulatory body.

Practical Blockchain Solution

The blockchain-based architecture eliminates single points of failure and reduces the need to place data in the hands of intermediaries and is consequently able to withstand attacks more efficiently. Due to its distributed nature, information and data are stored across numerous computers Worldwide making it difficult for hackers to compromise the whole system and forge a balance or make a false transaction. For a successful breach of a blockchain system, the hacker would have to hack virtually all the nodes or servers running that blockchain which is practically impossible as hackers would need to breach each node simultaneously.

For instance, if a hacker plans to attack the bitcoin system and successfully attacks a single node of the bitcoin network to forge a balance or make a false transaction, they wouldn't succeed because they will have to hack not a single node but thousands of other nodes at the same time, at least he will have to corrupt 51% of active nodes running the bitcoin network and considering the size of the network, this is very difficult and expensive as they would need to redesign all of the blocks because they would now have different timestamps and hash codes.

The exchange of transactional value in blockchain involves the use of unique digital signatures that rely on the public as well as private decryption codes, it is therefore governed by strict cryptographic rules. This reduces the risk of fraud.

Also because of the decentralized nature of blockchain, all transactions can be transparently viewed by either having a personal node or by using blockchain explorers in real-time but the value of the record can not be changed. Each node has its own copy of the chain that gets updated as fresh blocks are confirmed and added.

The high level of security of a distributed ledger system makes them particularly attractive to financial institutions like banks, such applications will surely create a secure and safer banking system.

The World Economic Forum anticipates that 10% of all gross domestic product will be stored on some form of distributed ledger by 2027. Already banks, regulators, and financial exchanges are researching ways to adapt blockchain technology to securely record data on stocks, bonds, property deeds, or even the energy distributed over smart grids.source

• Monopolized Lending
  Accessing a loan in a centralized banking system is a very lengthy process, which includes a lot of paperwork and proof of creditworthiness based on your past credit records known as credit scores.

When you fill out an application for a bank loan, the bank has to evaluate the risk that you won’t pay them back. They do this by looking at factors like your credit score, debt-to-income ratio, and homeownership status. To get this information, they have to access your credit report.

Huge interest rates and government regulation also possess a real challenge for SMEs that looking to fund their start-up and build on something in Nigeria.

Practical Blockchain Solution

Blockchain technology has made lending and access to short-term and long-term loans easy and transparent, it literally allows anyone to get access to loans. Defi applications built on public-based blockchains like Etherum-Compound and maker and Justlend on the Tron Blockchain are really revolutionizing lending with transparent and great interest loans.

Peer-to-peer(P2P) money lending, enabled by blockchain, allows anyone to borrow and lend money in a simple, secure, and inexpensive way with no arbitrary restrictions. With a more competitive lending scenery, banks will also be forced to offer better terms to their customers and adopt blockchain-based lending.

Use cases

Salt Lending

Salt Lending lends cash using a blockchain. Users of SALT Lending’s platform can borrow money against any bitcoin, ether, or blockchain asset as collateral. Loans are approved based not on a borrower’s credit score but on the value of the collateral. To use this platform, a user must buy the platform’s cryptocurrency, SALT. This grants a user membership to be able to take out loans.

Dharma Labs

Dharma Labs is a protocol for tokenized debt. It aims to provide developers with the tools and standards necessary for building online debt marketplaces.

Bloom

Bloom wants to bring credit scoring to the blockchain and is building a protocol for managing identity, risk, and credit scoring using blockchain technology.

While most of these projects focus on creating liquidity through loans around people’s existing crypto assets, they’re also jumpstarting the infrastructure that will enable bigger disruption in loans via blockchain.

I believe blockchain technology and cryptocurrency are applicable in almost every growing industry in the world and I believe it wont be long now we get to that reality especially in the banking industry, It will be great to interact with bank defi application.

You can share your thought on the subject discussed in this post in the comment section.

Unless otherwise stated all the images used in this post were designed and screenshotted by me

Thanks for reading up to this point guys and I hope you enjoyed my #cryptoprofessor homework.

This post is made in response to the #cryptoacademy program and the #cryptoprofessor homework by @gbenga.