Make no mistake: Blockchain technology stands as a promising disruptor for dozens of current industries, and an enabler of change that will bring forth new opportunities and revenue streams for financial institutions, realtors, retailers and more. Unlike anything that’s come before it, blockchain enables trusted digital relationships without a centralized administration. (And in the case of cryptocurrencies, a central bank.)
But because blockchain remains in its nascent stages, many organizations are stuck trying to understand how to launch its applications and apply the technology to solve challenges in the real world.
And in the world of banking and transacting, several key barriers get in the way of broad blockchain enablement and consumer adoption.
Because blockchain systems cannot interact with the external, off-chain world, users find it difficult to leverage blockchain vis-a-vis the ways they regularly move and share money. The current disconnect between on-chain and off-chain processes also creates security concerns: that if a user’s private key is leaked, lost or stolen, fraudsters can use it to sign transactions as the owner … and steal cryptocurrency from a digital wallet.
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 the location of a transaction request.
To overcome these barriers, blockchain-based solutions must find a way to integrate blockchain systems with off-chain applications—and maintain strong security and the breadth of features users expect. One way to do this is to leverage smart contracts to access existing solutions in the real world.
Recent attempts at integrating two-factor authentication (2FA) smart contracts into a blockchain-based banking system have proven to work. This process works like this:
- 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.
- This hash contains the OTP that it received via the application program interface (API) for the off-chain 2FA.
What’s more, the smart contract would validate the OTP and confirm the identity of the user, which then allows the transaction to take place.
Introducing multi-factor authentication on the blockchain offers a new level of functionality and security to blockchain transactions. It does this by preventing malicious actors from using a stolen private keys, and allowing users to verify transactions even when their keys are compromised. For example, if a person became incapacitated and needed to provide a family member with access to their digital wallet, they could use this process to trigger a verification code to the family member’s phone number, giving them access to make a blockchain transaction without the private key.
For blockchain to work in the mainstream, systems must offer mechanisms that provide alternative verification methods. The ability to execute multifactor authentication in this new digital frontier will foster stronger trust—and enable functionality to broaden the adoption of innovative applications in areas 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 in complex supply chains can use blockchain applications to track the flow of goods and execute payments as conditions of payment are met.
And ultimately, bank customers can gain peace of mind that their digital funds are accessible and usable, even if their private key is leaked. Blockchain, which began strictly as a system for transacting cryptocurrency, will finally achieve ubiquity in the larger financial system: an outcome of incalculable worth.
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Marco Lafrentz is the vice president of ICMS and the CPaaS Business Line at Tyntec.