How Layer-1 Blockchains Are Changing the Nature of Traditional Finance

Summary:
• Unlike centralized systems,platforms built on blockchain networks do not rely on a middleman to facilitate communication or transactions.

Blockchain technology has improved a lot in existing industries, including Finance, logistics, healthcare and gaming. So, what are the fundamentals behind this nascent technology? At the core, blockchain introduces a distributed ledger where users can record and verify data based on historical entries. This is possible because of the technology’s immutable (tamper-proof) nature and decentralized architecture. 

Unlike centralized systems, platforms built on blockchain networks do not rely on a middleman to facilitate communication or approve transactions. Instead, the blockchain is automatically programmed to serve as the intermediary, enabling peer-to-peer interactions. That said, Layer-1 blockchain networks such as Bitcoin and Ethereum are among the decentralized pioneer infrastructure to debut in the crypto ecosystem. 

Since their inception, these Layer-1 chains have significantly influenced a paradigm shift from traditional Finance in favour of digital assets. However, before jumping into their value proposition, it is noteworthy that not all Layer-1 chains follow the same building design. Popular Layer-1 infrastructure blocks include the consensus protocol (PoW & PoS) and the sharding approach. 

1. Consensus Protocol 

The consensus protocol is the most common infrastructure used by existing blockchain platforms. Bitcoin and Ethereum leverage the Proof-of-Work (PoW) consensus, which requires miners to solve complex algorithms to introduce new blocks and secure the network. However, this consensus suffers from scalability shortcomings. 

On the other hand, the Proof-of-Stake (PoS) consensus is based on a staking approach. Network participants on PoS ecosystems can generate new blocks by staking their tokens on a particular network. Though less energy-intensive, PoS comprises network security while focusing more on scalability. 

2. Sharding 

Sharding is another approach used by Layer-1 chains to increase the transaction throughput. Basically, this method entails the division of a blockchain network into smaller database blocks ‘shards’. In doing so, the blockchain workload is distributed to multiple parallel shards instead of relying on all nodes to approve or add blocks on the network. Polkadot is one of the prominent blockchain ecosystems whose fundamentals are based on sharding. 

Layer-1 Chains in Enterprise and Retail Finance 

As mentioned in the introduction, Finance is among the industries that have been positively impacted by blockchain technology. Bitcoin, for instance, has made it possible for individuals and institutions to transfer funds without going through an intermediary. The trend is visible in emerging countries such as Nigeria, which leads to Bitcoin adoption. 

In addition to funds transfer, Layer-1 chains such as Qtum are building enterprise-compatible blockchains. This open-sourced public blockchain follows Bitcoin’s UTXO security model, featuring several virtual machines. However, unlike Bitcoin, Qtum leverages a scalable PoS model complemented by the platform’s Decentralized Governance Protocol (DGP). 

Enterprises can deploy business-friendly smart contract platforms on Qtum, leveraging the underlying smart contracts to modify the ecosystem according to their needs. In addition, the blockchain also provides tailored blockchain services for corporations looking to seamlessly integrate distributed systems. 

There’s no avoiding death and taxes, and blockchain fees🤑. See a full year review of #Qtum transaction fees, from the smallest to the largest https://t.co/5MHMQHPjtt#blockchainfees #DeFi pic.twitter.com/9m2hJZ7Zdf— Qtum (@qtum) February 1, 2022

Coming down to retail Finance, the emergence of DeFi has opened up access to services that are offered in the traditional markets. Today, one can use lending and borrowing platforms such as Aave and Compound to access or provide a loan. A process that would have been cumbersome in the traditional finance setting. 

What Does the Future Hold? 

While blockchain technology has proven to be a game-changer, most of the development is still in the early stages. The scalability trilemma (security, decentralization & scalability) is a big challenge for most ecosystems. Ideally, most blockchain networks have to forego one of the factors, which is the case for both Bitcoin and Ethereum. The two ecosystems are decentralized and secure but face scalability limitations.  

However, this will not be the case for long, given the ongoing developments in Bitcoin’s lightning network and the much-awaited Ethereum 2.0 launch. Hopefully, the latter will initiate Ethereum’s shift from a PoW to PoS consensus, solving the current scalability issues. Meanwhile, it has also become evident that alternative blockchain ecosystems like Qtum could offer solutions to the prevailing challenges. This realization will set the stage for the adoption of other blockchains as more individuals and enterprises integrate blockchain solutions.