Content of article:
- The Traditional Payment Process
- The drawbacks
- Algorand Blockchain Protocol
- Atomic Transfers on Algorand 2.0
- Take away
Today, we perform most of our business transactions through the nearest financial institutions. These institutions have all of a sudden become an integral part of our day to day financial activities. Stakeholders of all kinds rely on these intuitions to carry out their business processes.
For example, organizations make use of bank services to dispatch salaries to their employees. So do regular individuals also depend on these intuitions to remit money to their loved ones overseas. Throughout the process, the financial intuitions act as custodians of an underlying asset and make the chain of ownership much complex.
The entire ideology behind the financial sector is deemed to be inefficient. The advent of the blockchain has revealed the bottlenecks of these structures and also proven to be a competent solution.
In this report, we are going to look at how Algorand is poised to improve how we send bulk payments with its pure proof-of-stake, permissionless blockchain protocol.
The Traditional Payment Process
Transfer of financial instruments such as bonds, stocks, etc. often goes through three processes namely; execution, clearing, and settlement.
Execution is the process where two parties reach a legal agreement to transfer security from the seller to a potential buyer in exchange for money. The buyers agree to purchase a security from a seller on agreed terms which then leads to "clearing".
Clearing involves the process of calculating claims for settlement and updating the accounts of the concerned parties. This stage could be further broken down into different components such as matching and sorting of transactions, collecting and seeding relevant data, etc. There are two types of clearing namely bilateral and central clearing. In a bilateral clearing, the parties involved reach an agreement without the supervision of an intermediary. This is usually common with OTC trading. On the other hand, the central clearing involves the presence of a third-part usually clearing houses to clear trades.
The settlement process takes place when the institution of the payer disburses the money to the receiving party for the security involved. This involves collecting and checking claims, ensuring there are enough funds for settlement, settling claims, and finally keeping records of the transaction.
The drawbacks
The processes involved in the traditional payment system as discussed above, when critically reviewed will uncover some interesting risks and inefficiencies. Let take a moment to examine the structure:
Participants involved in a transaction may be exposed to risk in the course of the process. The most common is usually related to fraud. We have seen people forge signatures on cheque and successfully cashed them out. Electronic money could also be a hotspot for fraud as on the news most often.
Most financial institutions have non-working periods. This could be as a result of the institution’s policy, sometimes schedule maintenance, system failure, there is also a possibility their systems may be under attack or out of funds to fulfill large transactions. Situations like these render them non-operational.
Whatever be the case, you lose control of your assets and won’t be able to what you desire with your own money. This is common with most banks as they are not open for business during weekends and usually results in delay in settling payments.
Intermediaries involved slow down the clearing and settlement process and serve as a single point of failure or delay. Whenever a third-party is required to perform a specific function but is unable due to some reasons. It goes a long way to affect other entities in the chain. This directly affects the cost of clearing and settling payments.
Algorand Blockchain Protocol
Algorand is an open-source, permissionless, pure proof-of-stake blockchain protocol that enables organizations to build financial products to help take their businesses to the next level.
Unlike the primitive blockchain protocols that have been proven to be lagging, thanks to recent technological development, the Algorand protocol has been designed to enhance and fuel mass adoption of the blockchain in businesses.
Algorand leverages the pure proof-of-stake consensus algorithm that ensures the network is truly decentralized and not compromising scalability and security. With its immediate transaction finality attribute, you are assured of building stable applications on a blockchain that is free from forks.
Atomic Transfers on Algorand 2.0
The word "Atomic" when used in the context of technology implies sending data in its wholeness or not at all. This simply means it either a transfer occurs or it doesn't. The Algorand Atomic Transfers works similarly.
Similar to Atomic swaps that facilitate the peer-to-peer exchange of cryptocurrencies across different blockchains, Algorand blockchain allows different parties who might not know each other trade digital assets and eliminate any entity acting as a central authority.
A typical Algorand atomic transaction involves a number of distinct transactions merged together in the form of a group and represented as a single unit with unique group identification. This makes all transactions in the group have the same fate in the sense that either all of them fail or pass.
Furthermore, another interesting fact about Algorand’s solution model is the elimination of the hashed timelock contracts (These are smart contracts that are time-bounded and execute based on predefined conditions in peer-to-peer value transfer) approach which makes it unique from atomic swaps or atomic cross-chain trading. HTLC also helps in mitigating counterparty risk.
Take away
In our traditional economy today we need to entrust our funds to a financial intuition to act on our behalf. This structure has been proven to be less effective and it’s full of setbacks. Algorand leverages the blockchain technology to provide a trustless and cost-effective way of sending mass and swift payments.
Utilizing the Algorand blockchain solution comes with numerous advantages. We can talk about how cheap transaction fees are for atomic transfers. Usually, you would have to execute a transaction for each recipient leading to much money spent on fees. The Algorand protocol treats multiple transactions as one in atomic transfer and as such costs the same as a regular transaction.
Lastly, atomic transfer supports Algos – Algorand’s native coin and all other assets that conform to Algorand protocol token standards (Algorand Standard Asset). These range from fungible to non-fungible tokens. It takes less than 5 seconds to confirm atomic transfers on Algorand. Comparatively, this is very fast resulting in an instant settlement for multi-party transitions.
Algorand’s atomic transfer is also ideal for building a decentralized exchange, initiating group payments, and many more. Learn about Algorand here https://cryptofans.ru.algorand.com/
