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In the past two decades, blockchain has witnessed tremendous advancement in technology, precisely in front-office functions, leaving the middle and back-end office in the lurch. As blockchain depends on a peer-to-peer distributed ledger system, the consensus among the nodes, smart contracts, and cryptography, it functions as a public ledger of all cryptocurrency transactions wherein data is stored independently without the need of clearance of central authority. Distributed ledger technology (DLT) is used for transaction verification and cost-reduction by settling millions of transactions within seconds. DLT helps businesses to streamline internal operations and minimize delays caused by traditional methods for the reconciliation of records; it brings in greater transparency. It also helps in saving compliance cost—cost in conforming to government legislation and regulations.
Use of blockchain in the capital market helps in reduction of intermediaries which in turn helps in cost reduction. Additionally, the use of smart contracts helps in payment instructions and moving collateral. Firms can leverage movable assets into capital for growth and investment. Smart contract technology has helped validate contractual data entering distributed ledger; this assists in trade validation of digital assets. Applicability of trade validation in the blockchain is primarily for contract-based asset trade, basic cash equity, repurchase agreement, to name a few.
In the blockchain, we can be assured of a real-time settlement of the transaction; quick settlement of transaction reduces cost and minimizes settlement risks. Blockchain can be used for audit purpose as well. It provides a scrupulous history of transactions and assets ownership. As all participants maintain one version of the truth, there is no need for costly reconciliation. Further, companies write their transactions into the distributed ledger, which eradicates the need to maintain separate records. Each block has a reference to the previous block, thereby preserving a complete history of the transactions.
However, blockchain poses some challenges. It comes with a non-reversibility feature, which implies that transactions once recorded cannot be altered. What comes as a huge setback is that digital currency is still not supported by all the central banks globally. On top of that, digital currency is highly volatile which can create distrust among parties to the transaction.
The potency of blockchain is staggering. There is no interference of central authority, and the same ledger copy is maintained among all network participants. Further, it helps minimize data error.