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Second generation blockchain and its application in financial system

Time : 29/06/2022 Author : 530xmd Click : + -
        Distributed account books with built-in support of complex smart contracts are often referred to as the second generation blockchain. Today, such blockchains include Ethereum (buterin, 2015), Neo (Neo, 2016) and icon (iconfoundation, 2017). Generally, the second generation blockchain has decentralized applications (DAPP), which are built on the blockchain to form a service ecosystem such as prediction, voting and lending. Smart contracts and decentralized applications are the two most obvious features of the second generation blockchain, because they represent the disruptive potential of blockchain technology in changing and improving daily life.
 
        "The first generation blockchain and its application in financial payment system" discusses the concept of the first generation blockchain and its use cases in financial transactions and payments. However, due to the limited functions of the first generation blockchain Technology (i.e. bitcoin), developers and users require solutions that can perform more complex transactions on the blockchain. This is necessary to further promote the adoption of blockchain, such as supporting transactions of business contracts, future agreements and conditional agreements. Now, the introduction of the second generation blockchain makes it possible to support these complex transaction types by using a new function called smart contract. Smart contract is a set of commitments agreed in digital form, including the agreement of all parties to fulfill these commitments (Szabo, 1997).
 
        Blockchain technology allows smart contracts to be written, deployed and executed in decentralized, secure, immutable and reliable computing systems. In the second generation blockchain, the contract terms that previously could be written in legal language can now be written in computer language, then deployed in the computing network and automatically executed through the distributed ledger system. Ethereum is the first widely adopted second-generation blockchain that supports smart contracts, and has more powerful functions than bitcoin script (the predecessor of the second-generation blockchain). This is due to functional enhancements, including Turing completeness, value awareness, blockchain awareness and status (buterin, 2015).
 
        Ethereum aims to create alternative protocols for building decentralized applications and provide a series of trade-offs to create value for various use cases. The key to consider use cases involves whether rapid development is needed and the ability of different applications to interact efficiently and safely (buterin, 2015). Although the adoption of the second generation blockchain is still in its infancy, there are already concerns about scalability, which are driving further innovation and development towards the third generation blockchain in the next few years. The second generation blockchain not only builds an abstract foundation layer for decentralized applications, but also brings challenges to existing non blockchain software and application systems.
 
        Developers can easily write smart contracts, which can contain rules for ownership, transaction format and state transition. This reduces development challenges. The back-end code of decentralized applications (DAPP, DAPP, or DAPP) runs on decentralized peer-to-peer networks, which is in contrast to conventional applications running back-end code on centralized servers (whatisadapp?, 2017). Usually, the key component of dapps is functional token, which is usually used to reward users for providing computing power or other services (decentralizedapplication, "N.D).
 
        Similar to traditional web applications, the front end of DAPP uses well-known scripting languages (such as HTML, CSS and JavaScript) to render pages. The front-end code and user interface of DAPP can be written in any language, and its function is similar to calling the back-end application. Its front end can also be hosted on distributed storage solutions, such as Swarm (swarm guide, 2018) or IPFs (ipfs:distributedweb, 2018). The main difference between DAPP and app is that app uses API to connect to database, while DAPP uses smart contract to connect and interact with blockchain.
 
        Dapps will serve as a bridge between mainstream users and blockchain and play a key role in building a decentralized society. DAPP, based on the second layer of the second generation blockchain, greatly reduces the difficulty of issuing and managing digital assets. Digital assets, or commonly known as encrypted assets, are defined as programmable assets in the form of electronic data. With the help of blockchain technology, asset digitalization can now be decentralized, reliable, traceable, highly transparent and without intermediaries (Neo, 2016). The form of digital assets may be different from traditional assets, but they all have a common purpose, that is, to effectively acquire and store value.
 
        Generally, digital assets can be divided into six different categories according to the difficulty of adopting blockchain technology. These categories include cryptocurrency, digital traditional financial assets, digital fiat money, digital intangible assets, digital tangible assets and digital conventional services and products. McKinsey's data show that in 2017, the total annual income of all financial intermediaries in the world was $5trillion. It accounts for about 1.9% of the total value of US $262trillion in our global financial system (McKinsey, 2018). You may think, "is there a quality service or solution that can significantly reduce 1.9%?" The answer is yes &mdash& mdash; Automation.
 
        Automation comes from the adoption of innovative technologies such as blockchain, artificial intelligence (AI), 5g, the Internet of things (IOT) and quantum computing (to name a few). As discussed, the inherent characteristics of blockchain (transparency, accessibility, traceability, divisibility, instant settlement, security, reliability and decentralization) make it very integrated with various technologies to reshape the traditional financial system. Digital assets will become the cornerstone of the future digital intelligent economy. With the accelerated development of the digital revolution driven by emerging technologies (i.e., artificial intelligence, machine learning, Internet of things), blockchain plays a key role as a value exchange channel, thereby eliminating the need for centralized intermediaries.
 
        Digital assets are the key to simplifying, automating and accelerating the settlement process of trade in goods and services. Just as water always follows the shortest path to its destination, global funds will flow through the most suitable intermediary. We are currently in the early stage of blockchain development, and like all new innovations, it takes time. There are many important challenges that must be addressed, including network scalability, simplifying the user experience, gaining regulatory clarity, enhancing social awareness and reducing extreme price fluctuations. If we remain patient and work together, these challenges will be solved through continuous technology development and maturity, increased capital investment, a strong regulatory system and extensive adoption.
 
        
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