Sep 17, 2021
The structure of the world’s financial system affects almost every aspect of our lives, from the food we eat to the clothes we wear and the jobs we work. However, a technological breakthrough that will completely transform the structure of finance (and our lives) has already happened — the world just hasn’t caught up with it yet. That breakthrough is blockchain.
The essence of blockchain’s innovation is simple: the ability to securely store and transmit data openly. Though this capability may seem simple, it’s impact will be massive and wide-ranging.
Read on to learn more about how blockchain will usher in a new era of open finance.
Open finance first and foremost describes a new financial system that is accessible to anyone with an internet connection.
More specifically, as a subcategory of FutureFi, open finance refers to autonomous financial protocols operating on open blockchain networks that provide inclusive, Internet-native financial products and services at a global scale.
In the past, it was necessary to have a physical bank nearby in order to access financial services. Even then, additional supporting documents were required, which could easily exclude marginalized individuals and communities, especially in emerging markets.
Now, anyone with a simple smartphone and an internet connection can access world-class financial services that would once only have been available in global hubs like New York, Hong Kong, or London. Non-traditional data can be used to create digital identities and credit profiles for anyone, anywhere.
Open finance also means transparency and clarity in the management of funds. It’s no longer necessary to trust financial institutions. Instead, it’s possible to verify what is happening with your funds at every step of an investment or contract.
This can also lead to a higher degree of ownership over your own data. With the value of data on the rise, open finance could also bring about more opportunities for consumers to choose who they share their data with and to profit from it too.
Open finance has more benefits than just increased financial stability and prosperity, however. It also opens the door to affordable, accessible, and effective financial services for hundreds of millions of people around the world who are currently shut out of the financial system.
The rise of blockchain technology makes it possible for anyone to make contracts with anyone else directly without a trusted third party to guarantee the transaction.
For example, in the case of traditional loans, a bank verifies the creditworthiness of the borrower, but the funds that the bank lends to the borrower is backed by the deposits of the bank's other customers.
With open finance, a borrower can put up collateral for a loan into a smart contract stored on a blockchain. Lenders from anywhere in the world can then verify the presence of the collateral on an open and public blockchain and know with certainty that their loan is secured.
This also means that large groups of people can pool funds into large investments in a way that was once only possible for big firms on Wall Street or in other financial hubs. In other words, open finance represents a leveling of the playing field for the financial sector.
This is due mainly to the cryptographic security properties of blockchains. Digital assets can be securely transferred using private keys, which allow the owner of an asset to prove to a network that they are the owner of their funds without having to reveal their private key to the network. Likewise, autonomous contracts can be programmed to transfer funds or other assets when certain conditions are filled.
For example, a loan contract can be instructed to distribute payments on a loan to lenders. If the loan is not paid within a certain period, it can be programmed instead to release collateral to the lenders. If the loan is paid in full, it releases the collateral to the borrower instead.
Open finance minimizes the need for trust. Instead, information is public and can be directly verified by anyone.
Algorand is built from the ground up to embody the ideals of an open finance network. It’s fast and very affordable to use while still remaining decentralized and highly secure.
Algorand is also designed for ease of use— creating new digital assets is a capability native to the Algorand platform. Even inexperienced developers can execute simple operations like asset creation in a matter of hours.
Algorand is working in partnership with a range of public and private institutions around the world to bring diverse financial applications onto the Algorand blockchain. Once these assets and services are present on the blockchain, it means that they become immediately available to many of the more than two billion people who currently have no access to formal financial services.
Getting this many users connected to a blockchain network is a huge challenge— scaling blockchain networks up to handle increased throughput has been a major impediment to mass adoption. Algorand is designed expressly to overcome this challenge.
By virtue of its network structure, Algorand is theoretically able to scale up to billions of users while still maintaining low costs and high security and performance. The dawn of the age of open finance may be closer than we expect.