Blockchain in FinTech: A Mapping Study

September 1, 2020

 

Blockchain is currently one of the most important topics in both the academia and industry world, mainly due to the possible effects that the continuing application of this new technology could have. The adoption of this technology by FinTech companies constitutes the next step towards the expansion of blockchain and its sustainability. The paper conducts a mapping study on the research topics, limitations, gaps and future trends of blockchain in FinTech companies. A total of 49 papers from a scientific database (Web of Science Core Collection) have been analyzed. The results show a deep focus in challenges such as security, scalability, legal and regulatory, privacy or latency, with proposed solutions still to be far from being effective. A vast majority of the research is focused into finance and banking sector, obviating other industries that could play a crucial role in the further expansion of blockchain. This study can contribute to researchers as a starting point for their investigation, as well as a source for recommendations on future investigation directions regarding blockchain in the FinTech sector.

Blockchain is one of the most talked-about topics in the business and academic world. It was presented for the first time with Bitcoin in 2008, as a peer-to-peer payment system for electronic transactions which allowed different financial actors to send payments to one another without the intermediation of a central agent (for example a central bank), preventing the double-spending problem [1]. The chain of blocks, or blockchain, is a peer-to-peer network, connected by its nodes that form the chain. Its properties are that of a distributed, transactional database. Once each node in the network verifies the information, it is sent via their public keys to the rest of the nodes [2]. As shown in Figure 1, each block has a unique identification hash that makes reference to its preceding block. Any user with a public or private key can enter the network and have access to the information exchanged in the system network. 

Public and private key systems have been developed way before blockchain. In 1976, Diffie and Hellman developed asymmetric cryptography, the first milestone into the development of the key system. In a public key system, two parties are able to send information via a public network, with public techniques and establish a connection that is secure. It works when one party sends the other information enciphered in their respective public keys. In order to decipher the message, the counterparty would use its private deciphering key [3]. The public and private pair of keys are interrelated, meaning that they can only be used in combination. This is obtained through a mathematical algorithm that sets the exclusive relationship between this pair of keys. Public keys can be shared with unlimited parties, whilst private keys must be kept safe and secret [4]. One of the most important players in the blockchain technology are its miners. Miners validate the information in the network by solving cryptographic puzzles and attaining agreement. This procedure makes the chain of blocks secure [5]. Every time one of the miners deciphers the puzzle, a transaction is documented. Due to the reward approach of the blockchain and to incentivize its miners, every time a puzzle is solved Bitcoins are earned. Miners with the greatest resources will be more likely to solve the puzzle first, thus earning the reward. The decentralized environment of Bitcoin is possible due to this structure [6]. When a new miner has access for the first time to a blockchain, it has access to the whole chain, from the genesis to the ultimate validated block [7]. The genesis, also known as the first block or root of the chain, is hard-coded into the client software that supports the valid blockchain. Due to the fact that miners need to solve puzzles, also called proof-of-work (PoW), a new transaction will only be valid once a new block is created and added into the existing blockchain [8]. Blockchain is an asset-agnostic technology. It is capable of storing, record-keeping and transferring all types of assets [9]. This paper introduces a mapping study which aims at comprehending the research topics, limitations, gaps and future trends of blockchain technology in FinTech companies. It can serve researchers as a starting point for their investigation, or as a source of information on future trends regarding blockchain in the FinTech sector. The rest of the paper is organized as follows: Section 2 provides a background on FinTech and smart contracts; Section 3 presents the materials and methods used to conduct this study; Section 4 presents the results of the study; Section 5 discusses the limitations of a systematic mapping study; and Section 6 presents the conclusions and recommendations derived from this study.

FinTech Financial technology, also known as ‘FinTech’, denotes the use of computer programs or other technology to assist the financial industry. The term was used for the first time at the beginning of the 1990s [10] and what started as a word related solely to the financial industry, it soon expanded into other very diverse sectors. Since early 2014, the sector has started attracting the attention of regulators, industry members, customers, and academics [11]. Blockchain in FinTech appeared for the first time as the distributed ledgers of Bitcoin, but has recently attracted consideration from practitioners and researchers . Today, financial institutions and other market participants, mainly due to the development of the blockchain technology, are approving the nature of FinTech and the necessity for research in the academic world given the implications of this technology. Financial innovation is not something new, as it has an extensive history. The development of FinTech throughout history can be divided into three main eras.

Fintech 1.0 (1866–1967): In this early stage, finance started developing in agricultural states. The use of money, with its main advantage being the transfer of its value, started facilitating financial transactions. Developments in the 19th century of railroads and the invention of the telegraph facilitated connections across borders. After the Great War, technology started quickly developing, laying the foundations of the next FinTech era.Fintech 2.0 (1967−2008): This era is characterized by the rapid expansion of electronic payment systems. In 1968, the Inter-Bank Computer Bureau was founded in the United Kingdom, cementing what today is known as the Bankers’ Automated Clearing Services. Regulations in the FinTech world started taking place, mainly due to the collapse in 1974 of Herstatt Bank. The effects of the collapse of the stock market in 1987 (also known as Black Monday), confirmed the suspicion that global markets were technologically linked. Throughout the 1990s, technological advances were made in risk management systems and the development of online consumer banking. The creation of digital banking (back then banks were the sole authorized monetary institutions) attracted more attention by regulators as it created new risks. Fintech 3.0 (2008–present): The beginning of this era was characterized by the financial turmoil of the years 2007–2008. Trust in the banking system started to be lost, and technological firms started to operate through peer-to-peer networks outside the regulatory framework (in China alone over 2000 platforms were developed). Today, these technological firms and many start-ups are displacing banks at a pace never seen before. Flexible regulations that stimulate entrepreneurship [13] are beginning to be adopted by some countries.

Smart Contracts The introduction of smart contracts has been key in the development of FinTech. During the last decade, blockchain technology has been constantly evolving. Some of the most relevant products of this evolution are smart contracts. These are not something new, as Nick Szabo introduced the concept in 1994. Smart contracts can be defined as a computerized transaction procedure that performs the terms of a contract. This means that all the contractual clauses are embedded in the computer of the individuals performing the transactions [14]. As these contracts are automatically executed when certain conditions are met (the codes in the algorithm that conform the smart contracts specify these conditions), there is no need for a central authority or third-party support these transactions. As shown in Figure 2, the blockchain is represented on the lower part. Parties involved in the transaction (for example Party A sends units of currency Y to Party B and obtains units of currency Z) are represented in the upper part. Parties exchange this information through their keys (public and private), and consensus of this transaction is reached through mining. The transaction can only be completed with the creation of a new block.

There are many different languages in which smart contracts can be coded, Ethereum being one of the most relevant to date. Ethereum has been proven to be extremely reliable when preventing the double spending problem, although, in order to attain this, a high level of difficulty is added [15]. Currently, the platforms that support blockchain’s smart contract are Ethereum and Hyperledger [16]. Ethereum uses its own language, just as any other computer program. It has a consensus procedure that details the way in which the nodes forming the network extend the blockchain. A particularity of Ethereum is that blocks are added based on the strength of the nodes that form the network, through what is called a lottery. This means that nodes with a higher degree of computational strength have more chances of winning this lottery than the ones with less computational strength. Malicious nodes, which could access to win this lottery and add improper contract executions, are automatically removed from the blockchain.

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