Blockchain Development in Fintech 🏦

Fintech — Financial technology is the technology and innovation that aims to compete with traditional financial methods in the delivery of financial services. It is an emerging industry that uses technology to improve activities in finance.

Traditional technology

The global banking and financial system play a huge role in the life of the modern human being. It moves more than a trillion dollars around the world in a day, and more than a billion people are directly or indirectly served by it every day. It is the backbone of global trade finance, and it enables enterprises, from start-ups to conglomerates, to run their businesses smoothly in any part of the world. The technology that makes this ecosystem tick has evolved in leaps and bounds in the last two decades, especially with the advent of the internet.

However, owing to compliance restrictions, reliance on legacy systems, and a conservative outlook on technology, most banking IT systems today are yet to adapt to advancements in technology and are unable to keep up with the nefarious means employed by malicious individuals. As a result, close to half of the banking customers have been exposed to fraud and cyber crimes while dealing with payment gateways, stock exchanges, money transfer agencies, and so on.

Add to this the fact that the system has added layer after layer of middlemen and intermediaries owing to the limitations of conventional IT systems. This, in turn, has resulted in high fees and delays for the customers, not to mention a massive amount of paperwork arising from complex workflows. It also exposes the customer to the possibility of financial fraud and corruption. Lastly, the system, in many cases, is highly exclusive and denies basic access to financial products and services to a number of people around the world.

Blockchain technology has numerous features and advantages that enable us to rethink and re-engineer how modern financial services operate and serve the end customer. It enables us to design modern workflows minimizing intermediaries, maximizing security, enabling transparency, and promoting high levels of interoperability between different players of the financial ecosystem.

Blockchain and Its Uses in Fintech

Decentralized Blocks

There are many advantages offered by blockchain technology that make it suitable for application in financial services. The technology can help us overcome numerous shortcomings and inefficiencies of present-day Banking and Financial systems. The following are some of these areas:

1. Reconciliation
2. Information sharing
3. Automated workflows
4. Secure document sharing
5. Decentralized systems
6. Inclusive finance

The following is a list of potential banking and finance use cases where blockchain can have a sizeable impact:

• Cross-border remittance
• Domestic payments
• Back office reconciliation
• Inter- and intra-organizational information sharing
• Trade finance
• KYC/AML
• Secure IPOs(Initial Public Offer)
• Asset tracking

The following is a list of discussion points and activities that IT practitioners should consider and carry out before implementing blockchain technology within their organization:

• Identify business requirements that require provenance, audit ability, or distributed workflows.
• Recognize whether potential use cases can be executed with centralized databases or digital signatures without relying on a blockchain. (One example of a use case that requires blockchain could be an inter-organizational use case where no central organization or regulator exists to take ownership of the database.)
• Envisage the end benefits of implementing blockchain technology.
• Identify legacy workflows and modules that will need to be replaced or augmented.
• Analyze whether the end benefits from replacing the legacy workflow outweigh the costs.
• Identify new workflows and modules that will need to be built for use cases.
• Analyze whether the end benefits from implementing the solution outweigh the total cost of executing and implementing the project.
• Identify stakeholders and participants of the blockchain system.
• Agree on a governance framework for operating the network and build in accountability from the participants.
• Agree on an implementation strategy and identify integration with legacy systems, if any.
• Choose a blockchain platform based on your requirements.
• Identify essential enterprise tools that need to be built to successfully operate the blockchain solution. These include modules such as an identity service, security and access control policies, network directory, and so on.

Organizations should only proceed once they have successfully considered all the preceding points and have the answers to all of them.

There are different implementation strategies that organizations can look at to implement a blockchain network. These are as follows:

• All stakeholders own and maintain a node on the blockchain network. This node can be on-premises or on a cloud platform.
• A cloud-hosted blockchain network is operated by a trusted service provider. Organizations can view data and information and submit transactions based on access control. This is known as Blockchain as a Service (BaaS).
• Accessing a public permissionless blockchain to record data so that it cannot be tampered with. A good example is storing the hash signature of a document to the public Bitcoin or Ethereum network. The transaction ID and the document is then shared with other stakeholders who need to validate the authenticity of the document in the future.

Organizations can choose to put either complete data and information on the blockchain or can just the hash of the data, document, or information on the blockchain.

The first case is applicable when the stakeholders need to share data in real-time between different stakeholders and ensure that the information shared is immutable and cannot be modified once it has been published to the shared ledger.

The second case is applicable when the stakeholders only need a blockchain to establish the provenance of documents, data, files, or any other assets. The actual data or asset is not shared through a blockchain. In such a case, we only publish a unique attribute of the asset to the blockchain. For documents, files, and information, this can be a hash of the file or document content. For assets such as gold, it could be the carat value.

Biometric Security

The blockchain industry today is inundated with distributed ledger frameworks and platforms that can be used to implement solutions. For this book, I’ve selected three popular platforms that are being used by developers and architects to implement financial solutions. These platforms are as follows:

• Ethereum
• Hyperledger Fabric
• Stellar

These platforms have been used extensively for implementing blockchain projects globally. As with any framework, there are trade-offs when you settle on one for designing your solution. Let’s look at these platforms.

Ethereum

Ethereum is probably the second most popular blockchain platform in the world. It was conceptualized by Vitalik Buterin. The technology stack is open source and is maintained by the Ethereum Foundation. Its native asset is ether. Users can also issue their own assets on the network. These assets are popularly known as tokens.

Ethereum was the first blockchain platform to implement smart contracts. Smart contracts are written using the Solidity language. Contracts are compiled and deployed to the blockchain in bytecode format. This bytecode is then broadcast to all the nodes in the network. Each node implements the Ethereum Virtual Machine (EVM), which is a runtime environment for Ethereum smart contracts. The popularity of Solidity has led other blockchain platforms to include it as an optional framework for writing and deploying smart contracts.

Ethereum implements a world state that keeps track of all user accounts and smart contract accounts. It uses the EthHash Proof-of-Work consensus mechanism to maintain ledger integrity. Owing to its popularity, its open-source nature, the flexibility of the Solidity language, and how old the platform is, Ethereum has developed a huge online community that constantly contributes to the project and the ecosystem. This has helped the platform mature and add new features over time. One of the best examples is probably the Ethereum Request for Comment (ERC) initiative, which proposes standards for contract development. Two of the most popular ERC standards are ERC20 and ERC721, which propose standards for creating fungible and non-fungible tokens respectively.

There is also an entire ecosystem of applications, tools, and utilities that can be used with the Ethereum platform. These are called DApps, short for Distributed Apps. One of the most popular DApps is Metamask. Metamask is an Ethereum wallet that can be used to submit and receive transactions to and from an Ethereum blockchain network. We’ll be using it extensively in our projects.

Hyperledger Fabric

Hyperledger Fabric is a project incubated by the Linux Foundation under the Hyperledger umbrella of projects. Hyperledger is used to refer to a collection of open-source enterprise blockchain projects, tools, and utilities. The Hyperledger initiative’s main purpose is to enable the collaborative development of enterprise blockchain. It has seen major contributions from IBM, Intel, SAP Ariba, and other global enterprises.

Fabric is one of the oldest and most mature projects under Hyperledger. It is intended to be a platform for developing blockchain solutions with a modular architecture. It allows different platform features such as consensus mechanisms, certificate authorities, and identity services to be available as plug-and-play features. To achieve this, it implements containerization, making it suitable for modern enterprise IT systems. Unlike other blockchain platforms, it does not implement native assets, accounts, or an unspent transaction model, making it suitable for a plethora of applications.

Hyperledger Fabric implements chain codes, which are similar to smart contracts. One of the most important features it implements is a concept called channels, which are essentially private ledgers with a fixed number of participant nodes. Only authorized nodes and organizations can access a channel. Nodes can be members of multiple channels, and chain codes, policies, and certificate authorities can be used across multiple channels.

Hyperledger Fabric takes a unique approach to consensus. It runs a stand-alone orderer peer. The orderer peer gathers transactions and transmits new blocks of transactions to the network peers. The orderer leverages an ordering mechanism based on Kafka or Raft to order transactions and create blocks.

To submit transactions, peers first send a proposed transaction to a select few peers in the network, known as endorsement peers. These peers are determined during channel creation. If the transaction does not violate the endorsement peer’s internal state, it “endorses” the transaction and sends it back to the node that sent the proposal. The initiating node then gathers these responses and broadcasts these with the endorsements to the orderer. It also sends a read and writes set that has the initial and final values of the state after the transaction has been executed.

The orderer will collect these transactions and generate a new block. The fabric allows users to modify block size and block generation time. The newly created blocks are then sent back to the peer nodes by the orderer. The peer nodes will first add the block to their private copy of the ledger. Next, they will check the transactions inside the block to ensure that the read and write set is in line with the value in their local state database. After this check, they will update their local state database with the new values resulting from the transaction.

Stellar

The Stellar platform is a decentralized protocol that was primarily designed for enabling fast, low-cost, cross-border payments. It is an open source project developed and maintained by the Stellar Foundation. The platform was conceived by Jed McCaleb, who is also the co-founder of Ripple.

Stellar implements transaction-level consensus using FBA, the modified version of PBFT, mentioned earlier. Its native asset is called the lumen (XLM). Owing to its focus on payments, the Stellar platform provides additional modules that work in conjunction with the core software to enable users to build customer-friendly apps that meet compliance and regulatory norms for payments.

Stellar’s most interesting feature is probably that it implements a decentralized order book as part of its core technology stack. This feature allows you to carry out cross-asset transactions. This way, a customer can initiate a transaction in USD and terminate it in GBP. Since Stellar allows you to issue your own assets, the possible use cases where this feature can be used are endless. You can also use the order book to build a trading exchange by submitting buy and sell offers using the Stellar SDK. You can virtually build an entire application around this feature. Many decentralized exchanges have actually done this.

Globally, Stellar has been used by IBM to build the World Wire network to enable cross-border payments. It has also been used by a number of remittance providers across the world who have found the technology stack suitable for building payment applications.

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