Blockchain. It was supposed to change everything.And yet…Two years of dabbling and experimentation and it’s mostly just been changing itself (so as to become even barely usable in capital markets).On that note, some observations from Axel Pierron at Opimas in his latest update on capital market blockchain projects (our emphasis):
If systems end up being updated, better maintained or improved, we should all be happy with results.
The question then becomes: will it have been worth it economically?With so much of the “change” being a form of revisionism back to older ways of doing things, or in the best-case scenario, the creation of eat-cake-and-have-it-too centralised/decentralised hybrid solutions, it will be interesting to see to what degree these changes really affect the bottom line from 2018 onwards.
To that end, says Pierron, the biggest returns are likely to be observed in industries and sectors that have thus far failed to harmonise or digitise their systems due to ongoing dependency on bilateral communications and relations.
Though even here, we’d argue, there may be good reason why such industries have proven tardy in digitising themselves in an overly standardised way. For example, when it comes to commodities or physical supply chains, it’s often not the paper work that’s the problem, but the unpredictability of the real world.
Digitisation may help smooth some transaction processes, but by and large the chaos of the real world can’t be avoided.These markets have to routinely deal with missing shipments, weather-related events, corruption-related anomalies and/or basic input mistakes.
Whether blockchain — a notoriously rigid system — is flexible able to cope with such unexpected gremlins in the system is the key question at hand. In the crypto world, for example, it’s done very little to eliminate the scourge of hacking or problems emanating form human error and gullibility.
Which is why, according to Pierron, “it has become apparent that in capital markets, the further away you are from the original Blockchain DNA, the more likely you are to succeed.
”Even in markets where “blockchain” hype may help to implement standardised operating systems, such as FX, it’s worth asking just how disruptive it will be in the long term, especially on the cost savings front.If it’s more update than paradigm shift, the blockchain investor market could be disappointed.
To wit, Pierron believes predictions that blockchain will reduce IT and infrastructure spending by up to 30 per cent may be overdone. For the most part, these estimates assume blockchain will see current back-office systems replaced with ledger-based alternatives. Whether this actually reduces costs, however, will depend on the interoperability of the systems at large...continue reading on Financial Times here: https://ftalphaville.ft.com/2017/11/22/2196054/taking-the-block-out-of-blockchain/
From distributed to shared ledgerTo answer the concerns around scalability and information leakage, a number of blockchain technology providers such as Digital Asset Holdings and R3 have implemented a shared ledger model, rather than a distributed ledger.Plus, somewhat ironically, there’s not all that much focus on blocks anymore:
In this infrastructure, market participants’ nodes only keep a record of the transactions to which they are a counterparty, and that they upload from a central ledger that keeps a record of all transactions.
With this approach, participants cannot query data for which they are not a stakeholder. This is quite an evolution from the initial blockchain model, as the infrastructure becomes a semi-distributed environment in which a partial ledger co-exists with a central ledger.
With this development, the infrastructure is becoming closer to a traditional utility model that holds a golden copy of information.
In Bitcoin, transactions must be pooled into blocks for economic reasons. The system was used for retail payments, hence the processing cost of validating individual transactions might have surpassed its notional value.Pierron adds:
Aggregating the transactions into blocks to be validated was a clever method to lower the cost of validation for each individual transaction. However, in the context of capital market operations, aggregating transactions into blocks is less relevant. Hence, most initiatives today have more to do with a chain of transactions than a blockchain.
The adaptation of blockchain technology to the needs and requirements of capital markets has pared down a number of attributes from its original solution. Now, the technology has evolved into a chain without blocks, operating in a permissioned environment without “proof of work” and, while the distributed nature can remain, it can also be implemented in a shared ledger environment with a centralized golden copy of data.Bloomberg’s Matt Levine, of course, likes to stress that the best thing about blockchain FOMO is how it has encouraged banks and capital market institutions to take a cold hard look at the state of their digital systems. This is no bad thing.
Therefore, apart from a small set of initiatives launched by new entrants like Nivaura, the vast majority of initiatives that are being implemented in capital markets bear very little resemblance to the original blockchain.
If systems end up being updated, better maintained or improved, we should all be happy with results.
The question then becomes: will it have been worth it economically?With so much of the “change” being a form of revisionism back to older ways of doing things, or in the best-case scenario, the creation of eat-cake-and-have-it-too centralised/decentralised hybrid solutions, it will be interesting to see to what degree these changes really affect the bottom line from 2018 onwards.
To that end, says Pierron, the biggest returns are likely to be observed in industries and sectors that have thus far failed to harmonise or digitise their systems due to ongoing dependency on bilateral communications and relations.
Though even here, we’d argue, there may be good reason why such industries have proven tardy in digitising themselves in an overly standardised way. For example, when it comes to commodities or physical supply chains, it’s often not the paper work that’s the problem, but the unpredictability of the real world.
Digitisation may help smooth some transaction processes, but by and large the chaos of the real world can’t be avoided.These markets have to routinely deal with missing shipments, weather-related events, corruption-related anomalies and/or basic input mistakes.
Whether blockchain — a notoriously rigid system — is flexible able to cope with such unexpected gremlins in the system is the key question at hand. In the crypto world, for example, it’s done very little to eliminate the scourge of hacking or problems emanating form human error and gullibility.
Which is why, according to Pierron, “it has become apparent that in capital markets, the further away you are from the original Blockchain DNA, the more likely you are to succeed.
”Even in markets where “blockchain” hype may help to implement standardised operating systems, such as FX, it’s worth asking just how disruptive it will be in the long term, especially on the cost savings front.If it’s more update than paradigm shift, the blockchain investor market could be disappointed.
To wit, Pierron believes predictions that blockchain will reduce IT and infrastructure spending by up to 30 per cent may be overdone. For the most part, these estimates assume blockchain will see current back-office systems replaced with ledger-based alternatives. Whether this actually reduces costs, however, will depend on the interoperability of the systems at large...continue reading on Financial Times here: https://ftalphaville.ft.com/2017/11/22/2196054/taking-the-block-out-of-blockchain/