Rapid evolution and the spread of new technologies are drastically transforming the financial sector. The confluence of finance and technology has prompted a new term, “Fintech.” This typically refers to companies or businesses that employ technological innovations to improve their financial services. Today, fintech software development is a lucrative field. A fintech software development company will leverage the latest technological advancements to improve its offerings.
Currently, the emergence of DLT or distributed ledger technology is opening up new possibilities in the financial sector. It is a game-changer capable of improving financial sector transparency and reducing the risk of fraud. Let us explore this new trend to understand its relevance in securing financial transactions.
Defining Distributed Ledger Technology With Relation To Fintech Software Development
Effectively, DLT is a fast-evolving, decentralized system. It records and shares data across different ledgers. Nodes present within this technology collectively maintain and control these ledgers, or multiple data stores, as they are also called. Essentially, nodes refer to a distributed network of computer servers.
Unlike the traditional centralized systems, in DLT, these nodes collaborate to maintain a shared record of all transactions. The control and validation of these transactions are distributed across the network. This further reduces the need for intermediaries and enhances system transparency. The current increase in Distributed Ledger Technology usage by software development companies in USA is primarily because of this transparency. It offers a real-time, tamper-proof data storage system within a decentralized, cryptographically secure ledger.
Appending the DLT database
A member node can initiate new additions to the database by creating a new data block. Data blocks are bundles of transactional data. Information about this new block gets shared throughout the network. Here, each data block is encrypted. This ensures that the details can never become public. All the participant nodes then verify the block’s validity using the consensus mechanism before adding the block to their respective ledgers. In this way, each change made to the network gets replicated across the entire network. Consequently, a complete, identical copy of the ledger is always available to each network member at any time.
Consensus mechanism: a short note
Consensus refers to a complete agreement among multiple participants within a group or nodes within the distributed network. Hence, the consensus mechanisms refer to an approach where diverse participants converge on a collective fact or data. This is despite the innumerable challenges they might face on the way, like flawed nodes, intentional attacks, etc. This consensus must be paramount, for it determines how secure and reliable the distributed system will be.
How To Leverage DLT In Fintech Software Development To Secure Transactions
DLT application across the fintech industry is no longer an upcoming concept. It has already established a strong presence. There are no more debates about its applicability. It has impacted almost all verticals of the financial sector. However, securing payments is perhaps the most appropriate application of DLT in finance for a fintech software development company. It helps reduce costs and speed up cross-border payments.
Let us look at the different ways developers use Distributed Ledger Technology to secure transactions in the financial sector.
Cross-border payment
This is probably the most common use of the DLT. Cross-border payments are costly and involve lengthy processes. They also require several intermediaries. This further compromises its security. Both the receiver and the payer stay worried till the entire transaction gets completed. However, a fintech software development company can leverage DLT to make these payments in real time without involving intermediaries. This reduces the overall cost and makes the transaction more secure and verifiable. All members involved can track the transaction as it happens, thereby increasing its transparency.
Smart contracts
Also known as programmable money, they are programs written based on the underlying distributed ledger. The nodes present on the network execute these programs automatically. Theoretically, a smart contract can execute all instructions that a computer can execute. Hence, the distributed ledger records all transactions taking place using the DLT. Codes that create transactional blocks power these Smart Contracts. Thus, a transaction is triggered only when it fulfills a set of specific obligations. Additionally, the code must also detect it.
Smart contracts are thus self-executing contracts. People can leverage to exchange anything of value, like money. However, this exchange is more secure, transparent, and conflict-free manner. The total elimination of intermediaries makes smart contracts revolutionary in their own way.
Here, after a fintech software development company writes the code for these Smart Contracts, there is no human intervention. Thus, along with making the system very secure and free from fraud, it also saves money and time.
Decentralized finance or DeFi
DLT has significantly influenced this landscape. In this relatively nascent process, Smart contracts and other blockchain-based technologies carry out different financial transactions. There is a complete elimination of the role of centralized institutions like banks. Hence, users can directly interact within themselves for loans, investments, etc.
Decentralized Finance has the potential to make the financial sector more inclusive and accessible. It will also allow users more control over how their data gets used.
Digital Assets
All assets created and stored digitally fall under this category. A digital asset is identifiable, discoverable, with an established ownership, and either provides value or is of value. They can include cryptocurrency and convertible virtual currency but are not limited to it. Financial institutions capitalize on these digital assets to gain different benefits. They can:
- Optimize the status of their current liquidity
- Gain wider access to a broader investor base
- Expand the products in their financial portfolios
- Improve how they use their capital base etc.
Further, digital assets can also automate payment execution and settlement, accelerate transaction speed, and enhance transaction transparency. Thus, it presents significant opportunities for finance-based institutions to improve the quality of their services.
Conclusion
Distributed ledger technology is already revolutionizing fintech software development. Many companies leverage DLT to integrate enhanced security, transparency, and efficiency in their fintech solutions. With innovations in the anvil, a fintech software development company will surely use it in more ways to make payments and financial transactions absolutely secure and hassle-free. DLT is still an unexplored technology. The future will see a complete change in how the financial sector operates.
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