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Digital transformation: 3 real world blockchain-based financial use cases

We already paved the way for understanding what’s blockchain technology and what are some of the benefits associated with it in our previous blog post. We will now cover what’re some of the real world financial applications we can build with the technology and what we can expect in the near future beyond bitcoin and cryptocurrencies.
 

It’s not only us looking into Finance
 

In 2018, PricewaterhouseCoopers (PwC) conducted a global survey of 600 executives from 15 countries to learn what was the state of blockchain technology. Results showed that 84% say their organisations have at least some involvement with blockchain technology according to the following industry distribution.


Source: https://www.businessinsider.com/blockchain-technology-applications-use-cases
 

Use cases
 

We can think of many applications where this brand new disruptive technology makes sense, whether it adds incremental or exponential value, but where the actors involved could definitely use a real-time digital asset settlement record of ownership, removing the necessity of a trusted third party.
 

Trade Finance
 

Even in today’s disruptive digital world, many trade finance activities still involve lots of manual paperwork, such as invoices, letters of credit, etc. Of course many order management systems allow people to carry out all this paperwork online, but still, it consumes lots of time where each interaction involves the submission of information in data fields.

A review of the end-to-end trade finance process carried out by the Boston Consulting Group (BCG), reveals that a single transaction can involve approximately 5,000 data field interactions (Yeah, you got it right the first time, 5,000 interactions! You can see a very detailed and funny chart here).

The global trade finance revenue market was valued at $39.7 Bn in 2018 and is expected to reach $56,06 Bn by 2026, registering a CAGR of 3.79% from 2019 to 2026 (have in mind we’re talking about revenue here, not trade flows that are in the USD Trillions a year).

Blockchain technology has the potential to streamline trade finance deals and simplify the process across borders, both with the paperwork and the payment settlements. Smart contracts could help with the tokenization of existing documents, letters of credit, and more, improving the interaction between all supply chain actors through the automation of agreements, specific events, and other manually intensive processes.
 

Global payments

Cross-border payments usually happen via SWIFT, a messaging network used by banks and other financial institutions to quickly, and securely send and receive information, such as money transfer instructions. Put another way, SWIFT system is used to transfer money from Bank A to Bank B through a series of intermediary banks, where each of these banks charges a fee of their own, which bloats up the overall transaction fees and takes up to 3 business days on average.

The current global payments revenue market size reached USD 1.9 trillion in 2018, reflecting 6 percent growth from the year before, and is expected to rise by a compound annual growth
rate (CAGR) of 5.9% by 2023 (McKinsey: Global Payments Report 2019).

As blockchain technology solves multiple problems in the remittance industry, including high fees, settlement times and the abundance of intermediaries, that’s maybe the reason we've seen 40+ blockchain remittance projects being created in the last 9 years.

The good part is that this technology breakthrough is going far beyond the private sector, and that’s why it comes as no shock that around 15 Central Banks are looking into their own digital currencies leveraging blockchain technology. Even the International Monetary Fund (IMF) described the potential significant cost savings for banks as one of the main drivers in a publication from November 2018.

According to BlockData: Remittance Market & Blockchain Technology report, blockchain-based transactions are on average 388 times faster and 127 times cheaper.

Sources: World Bank Data; bitinfocharts
Notes: The data is based on transactions from the United States to foreign countries. Excluding cash, debit/credit card transfer.
 

Decentralized Finance (DeFi)

Decentralized finance (DeFi) is the 2020 blockchain trend, an ecosystem of decentralized applications - built on smart contracts - that allows participants to offer and access financial services in a peer-to-peer fashion, without any traditional financial institution intermediary. It all definitely started with Bitcoin (decentralized money) and Ethereum (decentralized programmable money) but then the global blockchain community started building different financial primitives allowing users to borrow and lend cryptocurrencies on top of these and other blockchain protocols.

MakerDAO, for instance, is a decentralized lending protocol and one of the most popular DeFi components that was launched in early 2015 under a blog post named “Introducing eDollar, the ultimate stablecoin built on Ethereum“ from their co-founder. It allows users to use Ether (ETH) as collateral to borrow DAI - a digital token pegged to the US dollar - and either spend it, save it avoiding the volatility of cryptocurrencies, or go long on ETH by even buying more ETH with the borrowed DAI.

But the magic of this open source decentralized finance ecosystem doesn’t end there: the composability of both Ethereum blockchain and open source protocols helps to create a “network effect“, a powerful phenomenon that lets users borrow crypto against collateral on Compound; share the risk of a smart contract or protocol failure without the need for an insurance company with Nexus Mutual; swap tokens or provide liquidity and earn fees in an automated fashion (Automated Market Maker) on Uniswap; and trade synthetic assets like crypto, forex or indexes on Synthetix.

The DeFi space has been growing rapidly seeing a 15x increase in the total value locked since the beginning of 2020 (we had to update the TVL 3 times in the last 10 days!), surpassing $6B in mid August 2020, according to DeFi Pulse, and is definitely setting the foundations for the next generation financial system.

Sources: https://www.pwc.com/gx/en/industries/technology/blockchain/blockchain-in-business.html
https://www2.deloitte.com/content/dam/Deloitte/global/Documents/grid/trade-finance-placemat.pdf