Blockchains and cryptocurrencies have changed a lot of things, but one of them is the nature of transaction processing. But although the blockchain offers new alternatives, those aren't baked into all financial systems– as you'll see when you dig into the details.
Here's what's happening within the transaction processing world in 2022:
The Blockchain and Independent Verification
Theoretically, blockchain models can replace traditional bank verification with brand-new proof of work and proof of stake models that are fundamentally different. (Also read: 6 Ways Blockchain Is Being Used That Will Help You Understand It Better.)
If you're scratching your head about how that works, consider this analogy:
Let's say you’re at a public event where a band plays and there are 100 people there. If you want to verify that the band played the event, you would ask those 100 people. If there is a paper record of the band playing there, like a newspaper article or something like that -– great, so much the better, but you don't need that in order to establish the facts, because you have that crowd of people who witnessed it.
Blockchain theory brings this type of consensus-based verification to transaction processing. But there are some obstacles to consider, too.
Barriers to Blockchain-Powered Transaction Processing
1. ACID and BASE Consistency
Transaction resolution is an important metric of transaction analysis for many professionals.
There are two models for transaction processing and resolution:
- Atomicity Consistency Isolation Durability (ACID), which people sometimes call the “hard” model.
- Basically Available, Soft State, Eventual Consistency (BASE), which many consider being a “softer” alternative.
You would think that blockchain technology would make those models obsolete, but although blockchain can internally validate all kinds of transactions automatically, businesses still need some way to resolve these transactions in their own systems, (off-chain) and blockchain doesn't provide that at all.
Absent some way of joining the decentralized blockchain record directly to corporate accounting systems (which would have its own issues), you still have the need for certain kinds of resolution models to take that transaction data and make it permanent for everyone, for example, auditors.
2. The Payment Gateway
There are specific models for effective transaction processing that don't rely on the blockchain. In these cases, cloud gateway processing automates things for businesses such as e-commerce shops.
One of the best examples of this is authorize.net, a gateway that uses an API to port relevant data and establish transactions on a company network. Authorize.net gateways are being built into e-commerce shops left and right, with some standard extensions and tools revolutionizing how we treat merchant accounting and customer transactions. (Also read: Open API: The Future of Application Programming Interfaces.)
Attached to the authorize.net gateway model is the often-touted "staging sandbox," which experts bill as a key place for research and development. But it's confusing for this reason — in financial parlance, a sandbox often refers to a regulatory setup.
Then there's also the concept of a "testing sandbox" — that a sandbox can be an environment where you do dummy transactions to see how well they work. This is accomplished in all sorts of relevant engineering scenarios.
But in many ways, it's the third kind of sandbox that people are attributing to authorize.net or other gateway systems. They’re bringing the complexity and agility of software development to the financial transaction processing world.
If you're having trouble wrapping your head around that, boil it down to its most basic elements: We know that things like sandbox models are driving agile software development. We can conceive of people taking these same models and using them for e-commerce transactionss. The rest of it -– well, it gets a little heady. The deep dive tends to send us into what you might call a terminology spiral, but the bottom line is that transaction processing is benefiting from automation models that replace conventional processing methods.
Everywhere that blockchain isn't, people need traditional blockchain-adjacent systems. Everywhere that blockchain is, it's capable of establishing transaction processes pretty much on its own. Of course, exchanges and operators need to abide by Know Your Customer/Anti-Money-Laundering (KYC/AML) regulations, mostly so government and regulatory agencies can track transactions. But the core of transaction processing is built into the blockchain model, which is one of those great innovations people talk about when they hail Satoshi and his original Genesis block.
Many of those closest to the transaction processing industry expect it to change a lot more and faster, as the decentralized web and metaverse environments continue to evolve. Look for both of these, as well as automation and blockchains, to be more continually applied to transaction processing systems as we advance into the future. (Also read: Fintech’s Future: AI and Digital Assets in Financial Institutions.)