The concept and practice of open financing are making room for alternatives ways to build new businesses and to improve traditional business practices by applying blockchain applications.
So what is open finance exactly? And why do you need to know about it?
Open finance includes things such as lending alternatives, decentralized prediction markets, and security tokens. I will get into each of these with a bit more detail. But suffice it to say, all of these have made access to improved business practices and new wealth a reality.
No, open finance and blockchain are not over-night remedies to all of the challenges that entrepreneurs and businesses face. But blockchain tools are improving many of the day-to-day transaction capabilities by improving security and usability.
As well as transparency and accessibility, open finance provides increased standardization and financial inclusion. This is through greater attention to Know Your Client (KYC) and anti-money laundering which provides users with more confidence that the technology will work to their benefit.
Importantly, blockchain tools foster digital asset development. These tools are most useful for companies pursuing their own blockchain projects. Microsoft’s Azure is a great example of the popularity of blockchain projects and the importance of making them user-friendly.
While the crypto ecosystem grows steadily, it still needs innovation and infrastructure to make it easy to use when competing with legacy finance.
Improving Company and Asset Reputation
Big companies like Starbucks and Walmart have applied blockchain solutions to supply chain issues and KYC (know-your-customers). Blockchain applications run on fully or partially decentralized networks that build unchangeable public ledgers.
Because the ledger is public, it gives everyone using that blockchain easy access to the transaction records. For companies such as Starbucks, it is important to follow supply-chain records, as they have high-quality standards and products coming from all over the world.
Maintaining a public record of transactions is appealing for consumers, and investors, not just for the company itself. Public records increase the transparency of their business records and practices, a concern on many millennial minds.
That means, with blockchain, customers will potentially be able to trace every step of their product’s journey, just by following a link to the blockchain ledger. Walmart has implemented blockchain practices to trace their food products and to track issues with food contamination. The ability to isolate such problems stands to save the company millions, and also reduce food wastage.
Transparency and security
However, with transparency comes the concern of security – which is where blockchain steps in. Blockchain uses tamper-proof cryptography and [partially]-decentralized networks. Both decentralization and cryptography mean that once the transaction is added to the record it cannot be changed. This innovation is invaluable from a consumer and investor standpoint and thus has a strong effect on the reputation and value of a company.
The bottom line is that investors need to know what the company and projects are all about. The transparency of blockchain is ideal for bringing credibility to new native tokens and ICOs and IEOs. Once a company builds credibility through transparency, which includes KYC and anti-money laundering, this will have positive outcomes for the company’s native token or cryptocurrency.
Secure Lending Collateral
Open finance and the use of blockchain opens up a whole new way to access loans and building start-up capital works. And, importantly, because blockchain uses irreversible transactions, cumbersome third-parties can be eliminated. That means that transactions can go straight to the recipient, without waiting on a myriad of institutions or incurring multiple transaction fees.
Presently, if we are talking about stablecoins and digital assets to build a blockchain application, then MakerDAO and EOS REX currently dominate the market. There are others on the rise such as Cred, Block Fi, Lendoit, SALT, NUO, ETHLend, and Colendi.
However, blockchain tools have improved lending for all kinds of entrepreneurs. Blockchain and open finance are creating greater accessibility for the banked and unbanked around the world, increasing financial inclusion.
Secure peer-to-peer transactions are especially important for reaching undeveloped areas of the world. This is because the distance along with suspicious third-parties makes it uncertain how long it will take for money to arrive – or if it will arrive at all.
So along with new lending opportunities for any kind of project is possible. Disberse is one such example using blockchain to increase financial inclusion. Disberse helps to improve the distribution of charitable funds for donors, governments, and NGOs.
Each year, donations to the tune of billions of dollars in aid go to underdeveloped nations. However, the funds risk misuse or wastage by transaction fees. Up to 10% of funds are lost in transaction fees or to fluctuations in exchange rates. Blockchain tools make it so the funds are easily tracked and traced.
Using blockchain to improve banking mechanisms is no small project. The number of unbanked in the world today remains in the billions. We are not just referring to people in developing nations. There are also many in the developed world who are also unbanked. This may be because they do not have the necessary collateral to open an account, or they live too remotely to benefit from access to banks and financial institutions.
Moreover, many simply do not trust banks, an increasing sentiment since 2008. Not only does blockchain improve accessibility to a wider variety of income levels, but the public record and decentralized networks are also designed to support transparency.
Decentralized Prediction Markets
Another opportunity for open finance are decentralized prediction markets. The basic idea of a decentralized prediction market is the collaboration of expertise. By sharing expertise and intel, the probability of accurate predictions increases exponentially.
However, what must be eliminated is the interruption of crap information. This is challenging with the current state of social media and social trading, as it is difficult to filter out bad information. Without any accountability, poor trading advice and negative reviews are easily removed from profiles and websites.
Decentralized prediction markets offer the potential for a more flexible and secure way to cast a wider net for valuable information. One of the benefits of such markets is bigger payoffs. The most popular projects utilizing open finance principles are Augur, Stox, Gnosis, and Bodhi.
These prediction markets focus primarily on betting and sporting event outcomes. However, other prediction projects focus on cryptocurrency trading.
Because blockchain offers the solution of a public permanent record, there are many ways to apply this to social trading. This is how HedgeTrade’s social trading platform used blockchain and decentralized prediction markets.
Security and Accessibility
Open finance is all about improving the state of finance and using the best available technology to do so. Blockchain tools and applications along with the decentralized or partially decentralized networks currently play a big role in making those changes.
Blockchain makes security, transparency, and accessibility to new markets and entrepreneurs a global reality. Collateral and loans are now possible through crowdsourcing and ICOs, while traditional institutions still control who has access and how much they can have.
Moreover, unlike Bitcoin, many cryptocurrencies do not have the main goal of being a method of payment. Instead, holding a company’s cryptocurrency functions more as akin to holding stock in the company. However, currently, Bitcoin trades far more frequently than it is used to pay for transactions or services.
One of the reasons for this is that blockchain technology is not necessarily affordable. It is very expensive to operate the energy necessary to make these transactions possible, and the volatility of cryptocurrencies do not make them ideal for small, every-day purchases.
Finally, decentralized prediction markets have made new assets of predictions, and have the potential to increase the quality of information available by sourcing from a larger, more diverse audience.
One of the major challenges that blockchain faces are usability and scalability. While there are already millions of decentralized nodes all around the world, switching to this technology can be difficult and expensive for the small start-up. That is not to say there are no many projects out there working on increasing the usability and access to open fiance.
Why open finance matters
Open finance is part of the age of digital assets, and it has tapped into the values of blockchain technology and the utility of cryptocurrencies. And what’s more, open finance improves the inclusivity of wealth, and offers more potential for more people.
There are many reasons to be optimistic about blockchain and open finance. Every day we’re seeing new projects and partnerships using these new tools that improve the day-to-day operations of businesses.
And as we enter an age of digital distrust, it is also increasingly important to develop secure methods of digital transactions. Security and transparency are the cornerstones of blockchain tech. There is no limit to the projects possible by using decentralized networks and cryptocurrencies.