Categories: Bitcoin Business

Blockchain Creates Open Finance System to Compete With Legacy Providers

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Digital products using blockchain technology already offer entrepreneurs financing alternatives in secured lending services -- but also in decentralized prediction markets and security tokens.

These tools are creating an open finance system that provides much greater transparency and accessibility to companies. This doesn't mean we're on the brink of transitioning to a new open system, but there's growing potential for a hybrid system that allows the new technology to exist alongside traditional financial systems.

Blockchain, or distributed ledger technology, underpins bitcoin and other cryptocurrencies. The transparency and self-verification of a blockchain lends also itself well to secured lending, allowing lenders and borrowers to transact a loan without involving third parties, yet with security that the transaction is permanently recorded and visible to all.

Improving digital assets' reputation

This means blockchain can move away from cryptocurrencies and some of the baggage they carry -- notably the possibility they are used for money laundering and terrorist financing.

Instead, digital assets that comply with know-your-customer and money-laundering regulations and security tokens that are also subject to regulation can bring the benefits of blockchain without the volatility and risks of bitcoin and similar utility tokens.

Startups are evolving from initial coin offerings to these more transparent and regulator-friendly assets. Security tokens, as opposed to utility tokens like bitcoin, are designed as investments, with returns out of profit. Utility tokens are intended to be a means of payment, though they have become primarily an object of speculation.

The future of secured lending?

Secured lending is one of the major uses of decentralized finance (DeFi) in this initial stage. Some advocates claim it'a the future for all personal loans as it widens the pool of potential lenders well beyond traditional banks or loan companies. The irreversible transactions on a decentralized ledger renders unnecessary the third-party verification provided by a bank.

For the moment, collateral is usually a stablecoin or some other digital asset. But with the interoperability of blockchains, the platforms are bound to widen their transaction base. MakerDAO and EOS REX currently dominate the market, but others are Cred, Block Fi, Lendoit, SALT, NUO, ETHLend and Colendi.

Decentralized prediction markets, meanwhile, put blockchain technology to use in a market created by Predictit and other traditional platforms, which allow participants to bet on event outcomes such as a presidential election.

Blockchain builds blockchain

These decentralized prediction markets can be more flexible and secure and cast their net wider. Among other things, this can make for bigger payoffs. The biggest ones right now are Augur, Stox, Gnosis, and Bodhi.

In the crypto environment itself, new tools like BTC Profit System use algorithms to predict the behavior of the currencies to help traders check market conditions before investing.

All of these tools are open source. Along with transparency and accessibility, they provide increasing standardization and financial inclusion. Greater attention to Know Your Client (KYC) and anti-money laundering gives users greater confidence that the tools will work to their benefit.

Best of all, having blockchain tools will foster digital asset development. These tools are most useful for companies pursuing their own blockchain projects. The crypto ecosystem still needs significant innovation and infrastructure to compete with legacy finance. But it could be a wise move for CFOs to get familiar with these developments.

Simon at VitalBriefing is a journalist, editor and writer with vast experience covering subjects across a wide range of industries and has worked regularly for top global news organizations including Reuters and the Financial Times. Specializing in corporate communications and the financial sector - especially fintech - Simon is an expert on a variety of business technologies, such as data storage and flash storage, VoIP, mobility, network and edge computing, and the cloud.

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