When it comes to the financial industry, many people's first impression is probably that it is dealing with money. For ordinary people in their daily lives, finance is indeed dealing with money. However, more and more people now have mobile phones and don't seem to carry money at all. So is finance becoming more and more distant from us?

The answer is of course no. As the blood of society, the financial industry is closely related to everyone. In fact, the common financial industry includes banking, insurance, securities, stocks, funds, asset management, futures, trusts, exchanges, payments, microfinance, consumer finance, Internet finance and other industries.


1. Market Capacity of the Financial Industry

In addition, the market capacity of the financial industry is very large. According to the Financial Market Operation in 2017 released by the People's Bank of China, in 2017 alone, the bond market issued a total of 40.8 trillion yuan of various bonds, the total transaction volume of interbank credit lending and repurchase transactions was 69.53 trillion yuan, and the cumulative transaction volume of the interbank RMB interest rate derivatives market was 14.4 trillion yuan; in addition, the scale of online assets is close to 3.5 trillion yuan, the scale of online credit balance is 2.2 trillion yuan, and the scale of third-party payment comprehensive payment transactions is 154.9 trillion yuan, and it is still growing rapidly every year.

2. Understanding the Essence of Finance

The essence of finance is to mobilize so much social wealth, which is actually to build a credit mechanism. Only with credit can funds be circulated and allocated between different participants at different times and places. Therefore, there are a large number of such intermediary institutions in the financial industry, including banks, third-party payment institutions, asset management institutions, etc.

Although the financial system has developed to a stable scale and structure, there are still some problems that need to be improved in the actual operation process.

2.1 Limitations of Centralized Finance

In particular, the centralized model means that the cost of communication between centers is high, communication is time-consuming and labor-intensive, and the operation efficiency is low. In addition, centralized nodes are easy to find attacks and tampering, and the data is not safe.

2.2 Introduction of Blockchain

At this time, blockchain, as a new type of decentralized protocol, can safely store various types of transaction data. Information cannot be forged or tampered with. It can automatically execute smart contracts without the review of any centralized organization. These characteristics point out a new direction for the next upgrade and transformation of the financial industry. In China, not only emerging blockchain startups, but also traditional banking institutions such as China UnionPay, China Merchants Bank, and China Minsheng Bank, as well as financial technology giants including Ant Financial, Baidu Finance, and ZhongAn Technology have begun to deploy and implement corresponding platforms and projects.

3. How Blockchain Can Transform Finance

We can try to understand the technological transformation of blockchain to finance through a small example.

3.1 Example of Blockchain Application

Suppose there is a very small island country in the Pacific Ocean with only one central bank and no traditional currency. Citizens all use electronic payment and transactions are mainly carried out through bank transfers. At the beginning, the banking system runs smoothly and everyone lives a happy and fulfilling life.

But reality is not a fairy tale after all. More and more people came to this island country to pursue poetry and distant places. The population surge caused a surge in transaction volume. At this time, banks could not cope with it. During peak hours, they could not effectively handle transfer and payment applications. Transaction delays and system crashes occurred from time to time. This was just like a traffic jam. Just bear with it and complain.

But the story is not over yet. One day, a computer hacker came to the island. I don’t know who provoked him. In a fit of rage, he hacked into the bank system. The citizens’ deposits and transaction records disappeared in an instant, and the trading order fell into chaos.

Later, the bad guys must have been caught, and the citizens held a meeting to discuss how to establish a new national account and rebuild credit. If even the bank is unreliable, what else can be trusted?

3.2 Introduction of Blockchain Solution

At this time, a computer hacker proposed a plan, which we will call "blockchain" for the time being. The specific approach is: citizens still settle transactions by accounting, but not through the big ledger of the banking system, but in the form of small ledger.

When Xiao A is ready to exchange his motorboat with Xiao B for 10,000 gold coins, Blockchain offers a certain amount of reward for everyone to help check and record. The person who can verify the fastest and best that "Xiao A does have 10,000 gold coins and has indeed given it to Xiao B will be awarded the title of miner and receive a certain reward.

The miner needs to record this transaction on the bill numbered 1. The next day, when Xiao B is ready to exchange 10,000 gold coins for Xiao C's car, citizens can look through the previous bill numbered 1. The person who can verify that Xiao B does have 10,000 gold coins and has given them to Xiao C is awarded the title of "miner" and receives a certain reward. The "miner" needs to record this transaction on the bill numbered 2.

Before each transaction, citizens can look through the previous transaction records, and so on. At the same time, when Xiao A tries to inflate his assets and privately changes the number of gold coins he holds, the changes in his account will be propagated to the entire "big ledger" system through the blockchain network. Only after being recognized by other participants in the network, such as Xiao B, Xiao C, etc., with a total of more than 51%, can Xiao A's changes be successful.


4. Advantages of Blockchain in Financial Applications

Don’t underestimate this small accounting process. It completely subverts the underlying logic of existing centralized finance and has many advantages:

4.1 Establishment of Peer-to-Peer Trust

It establishes peer-to-peer trust, removes the involvement of third-party institutions, improves efficiency, reduces the frequency of errors, and simplifies the process.

4.2 Application of Smart Contracts

By applying smart contract technology, the agreement is automatically executed, which can also reduce transaction disputes and improve transaction efficiency.

4.3 All-Weather Service

It can achieve all-weather service and reduce the idle time of funds.

4.4 Improved Network Security

It improves network security performance, ensures the integrity and accuracy of customer information, simplifies the credit granting process and improves credit granting capacity.

4.5 Transparency and Public Supervision

It greatly improves the transparency of asset value, forms a form of public supervision, and facilitates the optimization of financial markets.

4.6 Improved Audit Efficiency

Since transaction records are complete and cannot be tampered with, it will greatly improve audit efficiency and reduce audit costs.

Read more : Blockchain: The Technology Transforming Industries

 Conclusion

In short, as the underlying technology of the future financial industry, although the technology is not yet very perfect, it has huge advantages in deepening financial reform, promoting financial innovation, enhancing financial credit, preventing financial risks, and allowing more people to enjoy and participate in financial services.