Blockchain technology is a promising disruptor for dozens of current industries for a simple reason: It enables trusted digital relationships without centralized administration. As a result, it will bring forth new opportunities and revenue streams for financial institutions, realtors, retailers and more.
Still, blockchain remains in its nascent stages, and there’s some question as to what’s next for the financial services industry. As a result, many organizations are stuck trying to understand how to launch blockchain applications and apply the technology to solve challenges in the real world.
First, let’s address the roadblocks.
In the world of banking and transacting today, a few key barriers get in the way of broad blockchain enablement and consumer adoption. For starters, blockchain systems cannot interact with the external, off-chain world; thus, users find it hard to leverage blockchain in the same ways they commonly spend, move and share money.
The current disconnect between on-chain and off-chain processes also means that if a user’s private key is leaked, lost or stolen, fraudsters can use it to sign transactions as the owner. That amounts to a huge security concern.
Finally, additional issues arise when users want to authorize a trusted third party to execute a funds transfer via power of attorney or add additional security measures—such as limitations based on where a transaction request originates.
To overcome these barriers, blockchain-based solutions must find a way to integrate blockchain systems with off-chain applications. Just as important—if not more so—is maintaining the strong security and breadth of features users expect. One way of doing this is to leverage smart contracts to access existing solutions in the real world.
But in terms of those concerns, there is good news.
In a recent integration of two-factor authentication (2FA) smart contracts into a blockchain-based banking system, this process has proven to work. Here’s how this starts: The smart contract “calls” a third-party authentication service provider via the Internet.
Since blockchain cannot call the internet directly, when the 2FA user (who is on-chain) asks to validate a one-time passcode (OTP), the 2FA smart contract (acting as an agent) provides the hash that contains the passcode received via the off-chain 2FA API. From here, the smart contract would validate the OTP and confirm the identity of the user, allowing the transaction to take place.
Introducing multifactor authentication on the blockchain offers a new level of functionality and security to blockchain transactions; it prevents malicious actors from using a stolen private key and allows users to verify transactions even when their keys are compromised.
For blockchain to work in the mainstream, systems must offer mechanisms that provide alternative verification methods. In a word, this boils down to trust. That is, the ability to execute multifactor authentication in this new digital frontier will foster stronger trust. But there is more. It also enables functionality to broaden the adoption of innovative applications in areas that are currently slowed by the need for human intervention.
Smart contracts are important for executing multi-step business transactions, and as blockchain adoption and solutions evolve, it will be critical in allowing on-chain applications to connect with off-chain solutions. This will improve security and usability so that blockchain applications can meet mainstream expectations and requirements.
And the possibilities are endless.
Insurance companies can integrate their underwriting systems with blockchain-based systems that track the provenance of high valued personal property. Companies with complex supply chains can use blockchain applications to track the flow of goods and execute payments as conditions of payment are met. Bank customers can gain peace of mind that their funds are accessible and usable, even when their private key is leaked.
And where blockchain keys are kept secure—and their ubiquity and ease of use enhanced—we will have in our hands a key to open many doors.
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Marco Lafrentz in the vice president of ICMS and the CPaaS Business Line at tyntec.