How finance embraces blockchain technology

After finishing the sixth year of learning finance,I graduated with the idea of a ride on the crest of success in the financial market and earning a hundred million in the financial market. My university attached great importance to building students’ confidence in their teaching. I came to a securities company to work as a PE analyst. Due to automation, most of my work is operating the system, verifying and correcting errors. When “options, futures, and hedges, etc.” started to blur in my mind, I realized that I was getting further and further away from being “The Wolf of Wall Street”. So I resigned. I didn’t want to end up being a system operator.
With the application of emerging technology in the financial field, the recruitment of talents in the financial market also pays more attention to assessing their technical ability. Therefore, a friend of mine, a finance major graduate student, spent the whole summer learning Python online. But after the summer, his knowledge of Python was stuck in the “HELLO WORLD.” I wonder what kind of changes the financial market are going through.

Blockchain and cryptocurrency

The biggest change Blockchain’s technology has brought to the financial industry is Defi. What is Defi?The traditional finance is centralized finance. All service rely on a central authority. In contrary, Defi means financial service with no central authority or someone in charge.

Defi is the short for Decentralized Finance. Defi ecosystem is based on blockchain technology. Defi includes digital assets, protocols, smart contract and dApps. So what is the difference? Defi gives you full control of your own asset. The blockchain technology brings speed, accuracy and efficiency to the financial market.Defi’s components are decentralized infrastructure(Ethereum),decentralized money(stable coin-DAI),and decentralized financial services( DEX, money markets, insurance, etc.).

Stablecoin

From my research, stablecoin is a stable cryptocurrency. Unlike Bitcoin, it is pegged to the value of a real world asset like US dollar or Gold. It might be hard for us to do the daily transactions using cryptocurrencies like Bitcoin. This reminds me the news that 10 years after the guy who bought 2 pizza for 10K Bitcoins has no regrets.So how do stablecoins keep away from volatility? Companies try and maintain its stable coins’ peg to a fiat currency by collateral and control the supply of stablecoins. For example, each USDT is backed by an actual US dollar which is hold by Tether as a collateral. And they can also decrease the supply of stablecoins as the demand decreases to maintain the value. Stablecoin now is not accepted as a payment method.They are used in cryptocurrency exchange. But I am skeptical about if stablecoin is decentralized or not.After all, there are still companies behind to maintain the peg.

Payment

A professor of mine said “Bitcoin and Tesla ‘s intrinsic value are all hope.”Although there has been a lot of buzz around cryptocurrency and blockchain, Visa, Mastercard, and Paypal feel they need to put a stake in this ground. Mastercard obtained over 30 patents for technology to process cryptocurrency payment with the traditional credit card systems. One of the best patents is the blockchain-based payment system. It is expected to provide merchants with instant payments, quick customer tracking, and secure verification of payments. For Visa, they focus on the approach to create value for businesses by blockchain technology. Visa B2B Connect platform assists the progress of transactions between businesses by providing a way for their clients and vendors to be paid without third-party involvement.PayPal continues to battle with Square in the cryptocurrency space. In late November, PayPal launched a cryptocurrency trading service, allowing clients to buy and sell Bitcoin. Also, PayPal customers will be able to use cryptocurrencies to shop at the 28 million merchants on its network starting in early 2021, the company said. For Square, their cryptocurrency transactions platform Square’s CashApp is appointed as their main driver to their third-quarter earnings performance success.Square also said it purchased $170 million in Bitcoin in February to raise its holdings to about 5% of the company’s cash and equivalents.Co-founder and CEO of Crypto.com, Kris Marszalek, said that “blockchain payment platforms provide a better way to handle online payments which will also replace credit card payments soon in the coming years.” I wonder when the replacement will happen? With so much information, I couldn’t wait to close my first cryptocurrency transaction. Maybe the replacement is not in the coming years but is happening now.

Decentralized Exchange and Decentralized Insurance

Decentralized exchanges is peer to peer. Without the central authority, we don’t have to have accounts, sign up or verify id to make a deal because there is no exchange operator. The smart contracts enforce the rules and execute the trade.Since the blockchain runs on smart contracts, the investment can be completely autonomous.

Decentralized insurance is a decentralized platform connects the people who are willing to pay for a insurance with the people who are willing to insure them for a premium.There is no insurance company in the process.

The decentralized financial services are like playing lego to find matches.We could get more creative when we can decide what we want to build.

Do you think the future will be a combination of traditional finance and Defi or Defi will totally replace traditional finance?

https://everfi.com/blog/financial-education/emerging-tech-in-financial-services/

https://builtin.com/blockchain/blockchain-banking-finance-fintech

https://consensys.net/blog/news/the-100-projects-pioneering-decentralized-finance/

15 comments

  1. ritellryan · ·

    I find it funny all of these banks will have their own blockchain protocols. While they won’t have central authority to actually be able to freeze accounts or anything, part of the reason blockchain exists is to get away from these centralized authorities. One of the examples indicated in our blockchain class was PayPal randomly freezing accounts or reversing transactions if disputed. If you were frustrated dealing with PayPal, would you want to use their blockchain protocol?

    Otherwise, I think this is really cool and a great application. My next blog post in a few weeks will likely have to do with blockchain and smart contracts as there are so many applications of it that are so valuable in the business world. I don’t think people will be completely replaced, but I do think this will allow people to do a lot more value added than administrative work.

  2. conoreiremba · ·

    Chang, I am glad to know that I was not the only one who had the ambition of becoming the Wolf of Wall Street when I first started out in finance until I realized that I was getting closer to becoming more of a sheep than a wolf with every passing day as elements of my role became better served by automation.
    I still think there is a place for traditional banking services going forward. Having worked in wealth management, I understand a client’s need to want to connect with a trusted advisor at points of uncertainty around planning for their financial futures. However, to Ryan’s point, technology and particularly blockchain can only serve to remove admin and other efficiency barriers in order to enhance traditional services rather than replace them, particularly for things like remittances as we discussed in class. I used to have a hard time telling clients that I could not send them money immediately after selling a stock as I had to wait (days in some cases) for the stock to settle. So, a decentralized approach that cuts out inefficient intermediaries, in this case, can only serve to benefit everyone. Great post and I loved the lego analogy.

  3. Chuyong Liu · ·

    Finance sometimes has the power of giving me the illusion that the world is under my control and manipulation. You and Conor are definitely not the only ones that were aiming for becoming a Wall Street Wolf!
    I think the future will be a combination of finance and Defi at least for the coming years. Decentralization is a great technology that can be used in many different ways, however, finance and currency might not be the way to use it. I always hold the thought that there is too much noise in the coin world. Currently, there are more than a dozen different coins that declare themself as a good choice to replace our traditional currency but none of them seems really outstanding. I am curious to see how things go as different stakeholders try to push different currencies.

  4. shaneriley88 · ·

    Great post, Chang. I do not come from a finance background, and my exposure to FinTech is nearly all built off this semester at CGSOM. It’s very easy for me to steamroll through the more intimate inter-personal details – like investment client service. I enjoyed your interweaving of personal experiences, and the follow on comments.

    I would offer that the smart contacts & dApp abilities of proof-of-stake (PoS) blockchains are/becoming a cosmic shift for the finance world. Boston-based blockchain firm Algorand offers what I feel is a more pure form of decentralization. Algorand and its newer blockchain peers (fast followers to Etherium) utilize proof of stake methods that provide a more accurate version of decentralization, unlike bitcoin, where 3-4 pools hold the sheer computing power (thus control = pseudodecentralized)

    I think that as newer PoS smart contracts / dApps blockchains approach sustainable network size and transaction speed on par with credit card companies, BIG shifts will occur within the space.

    However, should I ever make it big or win the lottery, you can rest assured I would be meeting with a living financial advisor and an attorney. Hopefully, one that is well versed in smart contracts!

  5. alexcarey94 · ·

    This is an area I am always curious to learn more about as each presentation and post brings more surprises to me. I think it is interesting to see how each crypto is valued differently as we saw last week in class that some are allotted an app so you have some type of physical ownership/ stable coin being pegged to the US dollar to avoid major fluctuations. It is interesting to see the different theories of people also investing in crypto as some investors are putting money in in hopes of it being volatile and soaring over night while other’s are investing as it is an independent alternative in times of high uncertainty. I think this year we might see either crypto continue to soar or eventually gradually fall off towards the end of the year when the volatility eventually goes the other way.

  6. Great post Chang. I think Defi has a bright future. As your diagram illustrates there are so many unnecessary middlemen for most transactions. This is where I see defi really shining through. It will be great for small businesses and entrepreneurs who will not have to deal with expensive cumbersome equipment to process most payments. I am really interested to see how these intermediaries adapt as their businesses change.

  7. lisahersh · ·

    Excellent post, Chang! I think blockchain, like many technologies, will be a human + tech joint effort, and it’s a smart move that many banking/financial institutions are looking at incorporating it into their platforms and/or business models. I must admit I’m still wrapping my head around blockchain and cryptocurrencies and I know I’m not alone in my confusion. Even though one of the benefits of blockchain is the elimination of the middleman, many people who are not well versed in financial or technical matters will need companies, and thus the people who work there, to help them with their financial decisions. As algorithms, AI, and blockchain alter many traditional financial roles – those customer-centric and service-minded positions will become all the more important during that tradition.

  8. sayoyamusa · ·

    Highly informative post, Chang! It was amazing you took a deep dive by leveraging your finance expertise! The video was also helpful for me to understand the fintech revolution. Thanks for sharing it!
    I’ve found that decentralization can bring solutions to social inequality problems because middlemen in the value chain tend to do more harm than good by exploiting poor workers who have much less bargaining power (this is what I’ve learned in another class about corporate ethics.) We could enjoy freedom of democratization, but at the same time, we should also take full responsibilities for our own assets individually. There needs to be education of how to manage various risks, but my question is who would be in charge of that without any authorities…? It will be interesting to see how the fintech world evolves and how the traditional banks react to this disruptive change.

  9. Scott Siegler · ·

    Thank you for writing this, I feel like I have learned so much from this post. I have been aware of the incoming Defi trend that is poised to disrupt traditional finance, but you’ve added a lot of great context that has helped me understand it better. I’m wondering if the rapid emergence and adoption of Venmo is a signal that the peer-to-peer nature of blockchain smart contracts will catch on quickly too. And I feel like, in general, the emergence of this technology will follow a similar trajectory to what we learned about in The Technology Fallacy, where it is first adopted by individuals, and then businesses, and then government institutions.

  10. williammooremba · ·

    Really interesting post. I wonder if Defi could expand without a central authority using an open-source model. This would be like open-source software where anyone could use the platform outside the control of a single company. Like open-source software to me it would make the most sense if these new platforms are community driven, maybe helped by a select nonprofit. I could imagine an insurance platform for instance where the premiums primarily just pay claims and some volunteers just work on developing the infrastructure. At least to me it seems like it could be a good fit to help realize decentralized financing.

  11. Jie Zhao · ·

    Great blog post, Chang! As someone who has never been exposed to blockchain technology until this class, I enjoyed learning more about how it works and can impact the finance industry. I think that your professor’s quote is very true, that the value of cryptocurrency is solely based on how much we hope for it to be valued in the future, without having any real worth on its own. I think that there is so much potential for DEFI, but also think that it will be some time before traditional finance will be replaced. Definitely looking forward to seeing how government, institutions, and people’s money behavior will change in the future as blockchain technology continues to develop and becomes more common.

  12. This is an interesting post! I actually hold some USDT in my digital wallet. One thing I found that is very annoying is that there are different types of encryption for USDT, such as USDT based on TRC20, ERC20, and EOS. These different types add tons of complexity while transferring money in and out of the digital wallet. If you select the wrong type during a transaction, your money will be lost forever, and not every exchange supports all types of USDT transactions, finding the one that supports the type would be extremely hard. Besides, if you wanna really transfer out/in USDT, you have to purchase a TRX coin and pay a small amount of the network fee with TRX, because the transaction all happened on the ETH blockchain, and TRX is build on ETH blockchain. Thus, you also need ETH in your wallet. The complexity of purchasing/transferring USDT between accounts is painful. Thus, I understand that blockchain is designed to decentralize the central authorities, and thus improve efficiency, but with such a complicated process in between, I’m not sure how much an average user would use.

  13. I hope someday, the process is as simple as a few clicks in the future!

  14. courtneymba · ·

    Great post! Similar to what Shane mentioned above, basically all of my cryptocurrency and blockchain knowledge has come from this class. Your post really broke down some complex concepts in a way that I could follow though. It’s hard to make the complex simple! It’s so interesting to hear how each of the card brands and big payment tech companies are handling their blockchain/crypto strategy, and already trying to carve out a bit of a niche focus.

  15. Divya Jha · ·

    Chang, I found so many things enjoyable in your blog post. Not only do you weave your personal experience into it, but you’ve also managed to teach me something wholly new. This class is the first time I’ve truly been a part of blockchain discussions, so it isn’t surprising I’d never heard of Defi. I think the Defi mode of finance won’t replace traditional finance but can certainly be used hand-in-hand with it. I don’t see institutions wanting to give up their current amount of control.

    Please keep writing more about how your personal experiences lead you to finding more relevant tech applications, I find your posts very interesting, informative and fresh!

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