Blockchain vs. Traditional Databases: Why Banks Are Making the Shift

For banks around the world, security is paramount. To ensure that their customers assets are safe at all times, they rely on cutting-edge technology. Although once approached with caution, the benefits of blockchains have been proven time and time again, which is why banks are now beginning to pay attention.

In this article, we will provide an overview of blockchain technology and traditional database systems. We will also talk about why major financial institutions are switching to blockchains to enhance their security and improve their offerings.

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What Are Blockchains?

If youre a crypto enthusiast, youve probably heard of the term blockchain technology before, but what exactly is it?

Simply put, blockchains are revolutionary digital record systems or ledgers that are most well-known in the cryptocurrency arena. They are secure because once a transaction is added, it can never be erased.

Blockchains are also decentralized, which means that they are not regulated by any political or financial entity. They are essentially databases that are distributed across multiple computers and support transparent and immutable recordkeeping.

A Closer Look at How Blockchains Work

When they are made, records of transactions are sent to a global network of peer-to-peer computers.

To ensure the validity of the transaction, this vast network of computers solves difficult mathematical puzzles. The transaction is grouped into blocks after confirmation, and these blocks are connected to create a permanent record.

Its important to note that network participants must agree in order for transactions to be added to a blockchain. This is accomplished via a process that is known as mining, in which miners work to solve challenging mathematical problems using powerful computers. The first one to solve the equation will reserve the right to add the block of transactions to the chain.

Others will then verify the block, and the miner who solved the problem first will be rewarded with virtual currency.

Blockchain Security

The security of a blockchain lies in what is known as cryptographic hashing. This process involves transforming a piece of data into a fixed string of characters, rendering it next to impossible to reverse.

Whats more, every block in the blockchain has its own unique hash and also contains the hash of the previous block, creating a permanent link. This adds to the security and transparency of the blockchain because if someone tries to alter one block, it changes its hash.

In turn, this breaks the link with the next block, and the mismatch is a clear sign of tampering, which makes it incredibly easy to see where unauthorized changes have been made.

How Blockchains Differ from Traditional Databases

Traditional databases are centralized, which means that they are controlled by one authority, making them vulnerable to cyberattacks. On the other hand, blockchains are decentralized, and as described above, it is just about impossible to alter or tamper with records.

Moreover, traditional systems can be altered or deleted, while blockchains create permanent, immutable records. Conventional databases also rely on servers, which means that if these servers are down, there will be outages.

A blockchain network remains operational, even if some of its nodes are down, making it more tolerant to fault. The truth is that traditional systems are designed for efficiency and are able to handle millions of transactions per second. This enhances the user experience, which is beneficial for financial institutions.

Blockchains do not offer this kind of performance because each transaction must be verified by multiple nodes. This is one of the reasons why banks tend to go for a combination of these two technologies.

Why Are Banks Switching to Blockchain Technology?

We have already touched on some of the reasons why many financial institutions are turning to blockchain technology. Greater security is undoubtedly one of the major driving factors, but there are others that you may not have heard about.

1. Cost Reduction and Faster Transactions

Traditional databases rely on extensive infrastructure, and switching to blockchain technology can save them millions of dollars. Moreover, blockchains offer banks the opportunity to execute transactions faster, improving the overall user experience.

2. Integration of Digital Currencies

Cryptocurrencies, such as Bitcoin, are here to stay. By taking advantage of blockchain technology, banks will be able to integrate these currencies. This will ensure faster and more secure trade settlement.

3. More Efficient Regulation

Although blockchains are decentralized, its not hard for the government and other authorities to oversee them. By allowing officials access to the blockchain, they can see transactions being completed in real time. This contributes to greater transparency and streamlines the auditing process.

4. Error Reduction

Because this technology is so transparent and efficient, there is less room for errors. Moreover, conducting reconciliation is much easier. Financial institutions can identify and eliminate errors with greater efficiency before they have had the chance to cause any problems.

Where Blockchains Are Being Used

The reality is that many banks are opting for a hybrid system so that they can enjoy the best of both traditional and blockchain-based systems. As such, blockchains are being used for the following:

Cross-border payments. Blockchain technology streamlines these payments, eliminating the middleman. It also reduces fees and ensures that money can be paid almost instantaneously.
Digital asset management. The truth is that blockchains are also being explored for the management of assets such as stocks and bonds. They will ensure more secure, efficient, and transparent management of such assets.
Smart contracts. Moreover, blockchains allow the use of smart contracts. These self-executing agreements are coded directly into the blockchain and are able to automate transactions to reduce operational costs.

The Bottom Line

As we have seen in this article, blockchain technology offers much promise for financial institutions far and wide. As more banks open their eyes to the many benefits that blockchains offer, theres no doubt that we will see more widespread applications of this technology in the coming years.

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Text source: TronWeekly

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