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XI INTERNATIONAL CONFERENCE

“INFORMATION TECHNOLOGY AND IMPLEMENTATION” (IT&I-2024)

Model of Using Blockchain Technology to Secure Digital Financial Transactions

Volodymyr Nakonechnyi , Volodymyr Saiko, Oleksandr Pliushch and Vladyslav Lutsenko

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Introduction

A more specific description of a blockchain is as follows: a type of data in a blockchain is a data block structure linked in a way that continuously combines time series, which, to some extent, prevents non-encrypted manipulation.

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The so-called blockchain technology, which employs the construction of blockchain data to verify and save data, is a novel distributed infrastructure and computing approach, according to a broad definition. Data is generated and changed using a distributed node consistency mechanism, while security is provided via cryptography.

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The phrase "capital markets" describes the process of connecting investor capital demand with issuers that have the appropriate risk and return profiles. The process of acquiring capital can be difficult for issuers, whether they are business owners, startups, or major corporations.

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Asymmetric encryption technology

Every block is given a hash, or 256-bit number. Hashing is the cornerstone of cryptographic security; the blockchain ecosystem cannot operate without it. Hashing is performed according to a special algorithm and is a check of the integrity of numeric or alphabetic messages. In simple terms, in the blockchain, all messages are encrypted by senders.

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From the sender to the receiver, the hash code is sent along the chain and validated by blockchain network nodes. Data transfer is irreversible, after the message is sent and confirmed, it cannot be canceled, information about completed transactions is forever recorded in the blockchain.

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Blockchain implementers in the banking system

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Types of blockchain networks

Initially, public, private and hybrid types of blockchain networks were distinguished. Evolution has led to the emergence of new types of blockchains, showed in table. They differ in structure, consensus mechanism and accessibility. These differences define unique application opportunities and potential for both business and society.

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How we can get the public key

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Advantages of blockchain over the traditional financial system

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The main advantages of using blockchain technology for money transfers and payments include the following:

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• Low cost of translations. The use of blockchain technology will make it possible to confirm and carry out transactions, including international ones, between persons without the participation of a centralized intermediary.

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• High transaction speed. The nature of blockchain technology, as well as the exclusion of intermediaries from the translation process, will allow transfers to be made in near real time.

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• Financial inclusion. Findex reports that 1.7 billion adults worldwide, or one-third of the global population, have little to no access to financial services, according to a World Bank research.

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• Enhanced security. The blockchain is decentralized, and therefore it is almost impossible to hack it or rewrite transactions in the system.

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• Automation of processes. Complete payment automation will be aided by the usage of smart contracts.

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Hybrid blockchain

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Hybrid blockchain

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Functional features of blockchain technology implementation in the financial sector

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The disadvantages of using blockchain technology in the financial sector include:

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1. Limited scaling and throughput — modern blockchain technologies find it difficult to cope with large transactions, there is enough capacity at the level of an individual bank or other financial institution, but if we talk about the national or international level, then there are problems with throughput, which are still unresolved and impose certain limits on the volume of transaction transactions.

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• High cost of development — blockchain technologies are very expensive and resource-intensive projects, so only financial companies that have significant budgets for scientific and technical developments can implement them or buy ready-made solutions from startup companies.

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• High cost of use — despite significant savings on use, the use of blockchain technologies has its own high cost, as it requires a lot of computing power and storage space for an array of data. That is why many blockchain projects, despite their prospects, are not implemented or their term of use is very short.

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Functional features of blockchain technology implementation in the financial sector

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1. Uncertainty of state regulation — many issues related to the deep implementation of blockchain in the financial sector and not only require additional regulation. For example, blockchain technology is closely related to cryptocurrencies, the regulation and status of which in Ukraine is completely uncertain and devoid of legality. However, many interesting and potentially effective projects in the financial sector can be implemented by combining blockchain and cryptocurrencies. For the full-scale implementation of blockchain, it is necessary for state regulators to confirm the reliability, stability and efficiency of the latter and develop updated regulatory procedures.

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• Lack of highly qualified specialists — unfortunately, the demand for qualified specialists in the field of blockchain far outweighs their supply in the market. And it's not just the situation in Ukraine, the world's financial giants are also experiencing a significant shortage of skilled labor. McLagan, based on data from eight of the world's largest investment banks, conducted a study of the effectiveness of the implementation of blockchain technology in their work.

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Blockchain as an Infrastructure

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1. Transaction:
1. Represents individual operations or exchanges recorded in the blockchain.
2. Transactions are proposed by users or systems and processed through the blockchain infrastructure.
2. Consensus Mechanism:
• Ensures that all participants in the network agree on the validity of transactions.
• This step is critical to maintaining the integrity and security of the shared ledger.
3. Shared Ledger:
• A decentralized database where validated transactions are stored.
• Maintains transparency and immutability, allowing all network participants to access a synchronized version of the ledger.
4. Smart Contracts:
• Automated agreements or logic implemented on the blockchain.
• Triggered by predefined conditions, enabling automated processes such as financial settlements or IoT actions.
5. Certificate Authority:
• Provides authentication and identity verification services for network participants.
• Ensures only authorized entities interact within the blockchain ecosystem.
6. Asset Database:
• Stores various digital and real-world assets recorded on the blockchain.

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Ways to Use Blockchain to Improve Security

Blockchain security can be viewed in terms of the benefits it can provide to protect data and systems. The most significant examples are described below:

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1. Fraud prevention: Blockchain provides security by verifying and confirming transactions before adding them to the blockchain, ensuring that only legitimate transactions are recorded and preventing fraud.

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2. Protection of personal data: Blockchain protects personal data by encrypting and storing it in a decentralized manner. This guarantees that personal information is safe from data breaches and cyberattacks.

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3. Ensuring transparency: Blockchain provides transparency by providing a reliable record of all transactions. This means that all participants can access the same information, ensuring transparency and accountability.

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4. Prevention of cyberattacks: Blockchain prevents cyberattacks with modern encryption methods to protect data. This prevents hackers from accessing and manipulating data on the blockchain.

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Solutions to blockchain security problems

The ultimate goal of a blockchain network is wherever users interact with the blockchain: on electronic devices such as computers and mobile phones. Hackers will pick devices based on user behavior and take advantage of the user's key. This may be one of the most notable blockchain security issues.

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To prevent end vulnerabilities:

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• Don't save blockchain keys on your laptop or mobile phone as text files.

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• Transfer and install antivirus software packages for your electronic devices.

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• Check the system frequently, tracking time, location, and device access.

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A 51% assault happens when a single person or group (malicious hackers) obtains more than half of the hash rate and takes over the whole system, which might have catastrophic consequences. Transactions can be changed out of sequence and prevented from being verified by hackers. They will even go back and undo earlier transactions, which would result in double spending.

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Smart contracts

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Solutions to blockchain security problems

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Conclusions

The blockchain industry is actively developing. Startups are creating blockchain-based solutions for managing digital finances, investing, and impacting the financial system. It can definitely be argued that the financial sector is waiting for changes, but in order for cryptocurrencies and blockchain to become a familiar means of payment, it is necessary to continue to explore the technology.

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The Society for Worldwide Interbank Financial Telecommunications (SWIFT) works with banks around the world on global payment initiatives and tries to improve the quality of cross-border payments. SWIFT implements blockchain technologies by working with active vendors and allowing banks to allow customers to pay with fiat currencies and cryptocurrency.

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Conclusions

Blockchain technology is being used to significantly reduce the number of participants needed to deal with banking issues and ensure compliance, which means that we are already seeing some significant improvements.

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The growth of blockchain-based payment solutions will continue to grow, and businesses will witness large-scale adoption of this technology. Several companies are experimenting with "tokenization" to encrypt digital assets for secure transactions, although this is still in the early stages of development.

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Banks use blockchain for digital fingerprinting and universal customer identification due to its decentralized nature. They will continue to disseminate information as it is updated and reduce the information load during authentication and verification processes. The blockchain will be used to verify firmware updates and patches, as well as to prevent unauthorized access or malware installation attempts.

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Final

Thanks for attention