Crypto Impact on New Era Financial System

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"Article inspired and written based on teachings of BSC MasterClass: African Developer training conducted by Sammy Karim, Biz & Ecosystem Development Lead, Binance Chain."

Overview

  • cryptocurrencies
  • traditional financial services (TradFi)
  • Impact of crypto on financial services

Money

What gives Money its Value

  • trust in the government
  • a shared belief that it is worth something

What is Money

  • exchange value
  • object could be used as money
  • value is a shared belief

Characteristics of fiat money

  • paper money is issued by the government
  • legal tender replaced the gold & the other commodities
  • portable & easy to use
  • not scarce unless a case of inflation
  • No intrinsic value

Cryptocurrencies

What are Cryptocurrencies

It is a digital form of money protected by cryptography and can't be duplicated/destroyed, distributed on a P2P network, and it's boardless.

What is Bitcoin

  • first cryptocurrency
  • transparent
  • scarce: through mining restricted no of blocks and only 21 million bitcoin will ever be produced
  • open-source
  • censorship-resistant: node-synchronization & no central authority

    Bitcoin was created by Satoshi Nakamoto a pseudonymous computer scientist who is the creator of blockchain technology which is a brilliant solution to the double-spending problem. Satoshi launched bitcoin in 2009 and disappeared.

What is Ethereum

  • Decentralized computing platform
  • Ether is the currency that powers the Ethereum network
  • Programs can't be tampered with by external parties
  • programmable money

    Vitalik Buterin is a Russian-Canadian programmer and writer who is best known as one of the co-founders of Ethereum. Buterin became involved with cryptocurrency early in its inception, co-founding Bitcoin Magazine in 2011. In 2014, Buterin launched Ethereum.

What is Blockchain

  • distributed database
  • stores all sorts of digital data
  • multiple copies of a specific database i.e synchronized database
  • chain of linked blocks
  • special type of ledger documents(sorts of digital data)
  • tamper-proof system

    participants don't need to trust each other and everyone keeps track of balances & transactions

Bitcoin vs Blockchain

Bitcoin

  • digital currency
  • financial asset(tradeable)
  • first & most popular cryptocurrencies Blockchain
  • distributed database
  • records information
  • any kind of digital data
  • several use cases
  • various ways to build a digital ledger

    Bitcoin vs Fiat

    Bitcoin
  • decentralized
  • peer-to-peer(P2P)
  • scarce
  • controlled & limited supply
  • scarce
  • controlled & limited supply
  • irreversible transaction
  • fast & cheap
  • censorship-resistant Fiat
  • centralized
  • controlled by the government
  • not scarce(money printer for brrr)
  • unlimited supply
  • chargeable books
  • inefficient chargebacks

    Bitcoin vs Ethereum

    Bitcoin
  • first-generation blockchain
  • primary for financial transactions
  • intentionally inflexible
  • very constrained smart contract language Ethereum
  • second-generation blockchain
  • extremely diverse can be used for more than just financial transactions
  • flexible
  • high degree of programmability

    CrptoAssets

    Categories of crypto assets

1.Payment/Store of value

  • BTC: Its own blockchain holders can't use the asset to participate in Defi (BSC/ETH)used to wrap assets
  • ETH
  • LTC

2.Stable-coins

  • BUSD, USDC, TUSD: it's backed by USD
  • USDT
  • DAI(on ETH network), VAI( crypto collateralized on BSC)
  • Algo stable-coins: APML, ESD - backed to other currencies beyond many

3.Privacy: movement assets

  • Monero(XMR)
  • ZCash(ZEC)

4.Network/Infrastructure tokens

  • ETH: transaction fees on ETH Network
  • BNB: trading fees on BSC /binance.com
  • Polkadot(DOT)
  • Tezos(XTS)

5.Defi /Governance: decentralize by moving control to the community

  • Compound(COMP): governance token i.e decentralized & based on a lending protocol
  • Curve(CRV)
  • Balancer(BAL)
  • Synthetix(SNX)

6.Services

  • ChainLink(LINK)
  • FileCoin(FIL)

7.Security token 8.Central Bank Digital Currencies

  • Retail(between people)
  • commercial(interbank)

9.Non-Fungible Tokens

  • can be used for title-deeds and prove digital collectibles and scarcity for example through football cards.
  • gamers: player-owned economy
  • fan engagement: music & sport(considering more online engagement than in-person now)
  • NFTs: it's broad & just beginning

Trational(legacy) FInancial Institutions

Intermediate of Financial Assets & Liabilities

Functions

  • payments
  • credit(borrowing & lending)
  • deposits & investment
  • risk transformation
  • advisory: assets & liabilities
  • compliance

    Traditional(legacy) Financial Institutions

  • Commercial Banks & Credit Unions
  • Retail Banks
  • Investment Banks & Brokerage
  • Insurance Companies & UnderWriters
  • Collective Investment vehicles, Mutual funds, pension funds & annuities
  • Asset managers & financial advisors
  • Exchanges, Clearinghouses & settlement organization
  • Payment Service Providers

    Bank Transfer

    It takes up to 7% fees and processing time 3-4 working days.

    "Worldwide remittances made up to $689 billion in 2018. 7% could count for $48 billion"

Blockchain Transfer

It takes 0.5% fees and the processing time is within 30-90 minutes.

"January 16, 2020 someone paid $0.49 in fees to move over $1 billion in single BTC transaction"

Blockchain Use Cases

industry leading companies are hiring blockchain-related positions and investing a significant amount of resources into blockchain in research & development 1.Remittance

Remittance is the transfer of money to a distant location between individuals that live in different countries i.e immigrants workers sending money to their home country. Remittance is the largest fund of funds into developing countries surpassing foreign direct investment & official development assistance.

  • fast-growing industry(+9.6%)

blockchain remittance

  • less intermediate
  • lower fees
  • faster transactions

2.Supply Chain

network of people, & businesses involved in creating & distributing a particular product/service all the way from initial suppliers to the end users & customers. eg supply food/raw materials, manufacturers, logistics..etc

  • lacks efficiency & transparency

Blockchain supply chain

  • tamperproof
  • customizable
  • secure & transparent
  • fewer intermediaries(faster)
  • less fraud
  • reduced labor work
  • reduced costs

3.Decentralized Finance(Defi) an ecosystem of the financial application built on top of the blockchain network

Advantages of Defi

  • No intermediaries
  • No single point of failure
  • Censorship resistance
  • easy access

What can it be used for:

  • permissionless & transparent
  • financial service ecosystem
  • no central authority

Defi Challenges

  • over-collateralization
  • credit scoring
  • smart-contract risks: bugs
  • UX
  • variable APY & fixed-rate loans
  • AML & KYC
  • Front-running -custody

Financial Sector Potential Use Cases

Payment Systems:

  • cross-border
  • large interbank
  • retails

Central Bank Digital Currencies

private sector stable value token

secondary market trading

Crypto-exchange & custody venture capital

Crowd-funding through Initial Coin Offerings(ICOs)

Clearing settlement & processing: securing & derivatives

trading finance & supply chain

digital paper-based processes: Digital IDs & Data Reporting

In case you want to read more on crypto and new era financial system you can check the following Resources:-

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