This is part of a blog series Can Blockchain Save Our Financial System?
In this blog post we review how blockchain technology offers much potential for creating new types of financial contracts and debt instruments that will allow an economy to grow to a much larger scale.
To learn about how Bloxable is building the most advanced debt platform using blockchain and smart contracts, visit us here.
Blockchain technology has the potential to revolutionize our financial system similar to paper money, which made it possible for economies to expand exponentially. In order to better understand how this technology could change the world, let’s examine an example from the past.
A Lesson from History
Only a couple of centuries ago, we relied on currencies made from metals like gold and silver. These currencies had intrinsic value due to the difficulty in mining the metals from the ground and shaping them into coinage.
However, financial institutions, banks and governments realized the inefficiencies in metallic currencies and paper currencies and replaced them during the eighteenth and nineteenth centuries.
Despite the usefulness of paper money, economists still felt that transactions were slow and since paper money always had to be backed by solid bars of gold held with the treasury, it limited the government’s capacity to increase the money supply. Many economists give this as the prime reason behind the great depression.
When the governments went off the gold standard, it became much easier for banks and financial lenders to extend credit to businesses. This spurred economic growth in business and commercial activity that positively affected economies around the world — helping governments move past the great depression of the late 1920s and early 1930s.
Despite the Second World War and a Cold War that lasted nearly 40 years, the collective world economies progressed positively until we hit the financial crisis of 2008.
Financial Crisis of 2007–2008
Things were slightly different this time and it would be unfair to blame just the financial exchanges system. The most recent financial crisis we faced took place largely due unhealthy lending practices in the mortgage industry, especially for subprime mortgage loans.
However, just a few years after the 2008 Financial Crisis we found ourselves once again with a new type of currency that promises to make financial transactions faster and more efficient — cryptocurrencies based on the blockchain technology.
This is no coincidence. Blockchain technology will allow economies to expand a great deal, in much the same way paper money did. It’s a technology with tremendous potential and may help us avoid future financial crises.
Blockchain and Loan Origination
Blockchain can significantly optimize and improve the loan origination process for banks and lenders. The business of lending is all about building a trust-based relationship. There are four key components that can break the trust in lending.
> That one party will not deliver the money, assets or value promised.
> That the assets or value provided will not be of the required quality.
> That attached conditions and obligations will not be fulfilled.
> That both parties will not reach a consensus on the terms of the contract, and whether these terms have been fulfilled by both sides.
A breakdown in any one of these components leads to a broken contract and loss of trust.
The Blockchain technology can be used to create smart contracts that take on the value of stocks, property titles, bonds, etc. and used for settlement.
Smart Contracts
These are digitally authenticated contracts that are created by a decentralized ledger technology which means that a single user cannot manipulate these contracts. They are verified by a P2P network which makes them completely secure.
Smart contracts can be used for automatic payments that are made when the receiving party fulfills the conditions attached to the contract.
Contracts based on blockchain technology will add new instruments into the economy at large. These will allow a greater availability of credit for businesses and borrowers while giving the lenders a higher degree of security for their outstanding loans. Smart contracts are expected to reduce the cost of doing business and spur economic growth as innovative new applications of blockchain technology come into existence.
To read our next blog post about the benefits of loan servicing on the blockchain, click here.
