The Role of Blockchain in Online Payments: Increasing Security, Trust, and Efficiency

Online banking is getting less efficient and less secure, but it is also losing trust in some areas. Despite the technology around payments and security improving, breaches are becoming more common. The number of malware attacks rose by 358% from 2019 to 2020, and the number of cyber attacks by 125% in 2021.

Consequently, businesses increasingly seek safer and more efficient online banking methods. Blockchain technology is the leading contender, especially considering it can reduce as much as 30% of bank infrastructure costs.

Moreover, blockchain technology can improve online security and make every transaction much safer than traditional banking, no matter its size. We already see its benefits on gambling sites, like those listed by CryptoGambling.tv. Payments there are more efficient, faster, cheaper, and, most importantly, a lot more secure due to the very nature of the technology.

Blockchain Is One of the Safest Options for Online Banking

We must explain how blockchain works to understand what makes it highly secure. A blockchain is a decentralised online database or a distributed ledger stored on many devices called nodes, forming a peer-to-peer network. We mostly find this technology within cryptocurrencies. However, even though experts can’t agree on whether crypto is a good alternative to online banking, most agree that the underlying technology has a lot of potential.

That’s because blockchains can be used to make any data in any industry immutable. Once information is written into a block on the blockchain, it cannot be changed because of how this technology is built.

The blockchain is much like a regular database or a simple spreadsheet. Information is entered and kept in it, but the main difference is that the blockchain is distributed throughout the network and stored on various devices. These copies are interdependent and must match each other for the system to continue working.

The way this works is complex, and the gist is that the information the blockchain collects is placed into blocks. Once a block is filled, the data is cryptographically encrypted and locked, creating a mathematical function called a hash — a hexadecimal number. The size of the information used is irrelevant, as the hash always keeps the same length. More importantly, it cannot be reverse-engineered as it’s a one-way operation.

Once a hash is made, it’s placed into the following block and encrypted with the information from that new block through cryptography. The process is continued for all new data, creating a chain, or better said, a blockchain.

The blockchain is thus unbreakable because if one block is altered, the connected block “notices” that the new information doesn’t match its records. The system automatically eliminates the incorrect block and keeps the old one instead.

The principle applies to any information which can be used in many industries, as this PwC article explains. Still, it’s primarily used in cryptocurrencies and crypto payments. It increases security, makes transactions more transparent, increases their speed, and lowers costs for everyone involved.

With the blockchain, the need for a third party to process payments is eliminated, so the technology is decentralised and doesn’t need banks or other centralised institutions to function.

All Revolutionary Ideas Have to Prove Themselves

Even though the benefits of blockchain are clear, and although it can be applied in our current online banking system and make it more efficient and safe, it still needs to be mainstream in business and finance.

The main issue is the lack of trust in this new technology. Most businesses and governments are still determining its benefits as it has problems, like all tech. Basically, the immutability of the blockchain lies in its coding, so if the coding has holes in it, the whole system can be breached, which would be catastrophic if the entire online banking world depended on it.

Another critical issue is the need for proper scalability. Most leading cryptocurrencies using blockchains are unable to handle a large number of transactions at once. Bitcoin is the best example here, as it can manage only three transactions per second, while Visa, for instance, can process more than 65,000. The numbers are simply incomparable.

Many blockchain projects have tried to fix this issue over the years as it hinders growth. The leader here is Ethereum, which recently updated network is predicted to be able to address as many as 100,000 transactions per second.

However, all of that is untested, so the scalability issue remains. As explained by Forbes, there are other drawbacks, mainly high energy consumption and the lack of interoperability between blockchains.

Outside of the tech itself, the main problems lie in the potential users. More collaboration between major industry players and adequate government regulation is necessary for this technology to reach the mainstream.

The Future Favors Blockchain But Only Time Will Tell

Blockchain has much potential to alter the $8 trillion banking industry completely. The decentralised ledger can make transactions faster and fees lower. With a single system, operational costs could be drastically lowered, and we could enter a world of seamless transactions between different banks.

Payments could become less prone to tampering, increasing the overall security. The need for constant verification would be eliminated, significantly lowering bank transfer processing times.

More than anything, the need for third parties would be almost eliminated, so traditional financial institutions could drastically lower their costs and move toward a new business model.

Banks already know this, which is why many of them, like J.P. Morgan and Goldman Sachs, are experimenting with the technology and looking for ways to implement it into their systems. Besides them, major companies, like IBM, are also working with blockchain to benefit their niches.

With banks and companies leading the charge, governments are sure to follow, which is why we believe that the blockchain's future is bright. So, it’s not a question of if but when it will reach the mainstream and make online payments safer and more efficient.

(Devdiscourse's journalists were not involved in the production of this article. The facts and opinions appearing in the article do not reflect the views of Devdiscourse and Devdiscourse does not claim any responsibility for the same.)