Sunday, March 12, 2017

Fintech: When Is A Blockchain Not A Blockchain?

Pretty much any time the term is used in relation to finance.
From FinExtra:

Considering a Pragmatic Approach to Blockchain Implementation
There is an increasing amount of conversation related to the emerging technology called by the now over-used name of Blockchain.  It seems an ironic use of that name since much of the actual news these days concerning solutions under development is likely not be a Blockchain solution at all, but a different form of Distributed Ledger Technology (DLT).  If we can put semantics aside, the basis for the excitement is based on the Blockchain concept which underpins the Bitcoin platform for a distributed and immutable ledger facilitating the exchange of the virtual currency.

There are several DLT platforms that are receiving interest from the financial services community that leverage some aspects of Blockchain.  Among them is Corda, which is being developed by R3, a fintech focused on DLT.  A visit to the Corda website finds that they do not call their platform Blockchain as that word does not seem to even exist on their website.  The message is clear that the platform is designed for financial services, not surprising as R3 has been heavily funded by several large banks and others.  The platform is designed to not share all transaction data across the network as the access to transactions is restricted to only those needing to view or validate them on a case-by-case basis.  This access is limited to the parties to the transaction and potentially regulators or central authorities.  This form of private ledger does not share the vision of Bitcoin, the public network where the transactional history is shared by all nodes.  Corda supports multiple consensus algorithms which provides flexibility to comply with different regulators but also differs from the use of miners found in the Bitcoin world.

Another example are the tools being offered by Digital Asset Holdings.  Digital Asset utilizes a form of private DLT, Hyperledger, which is not a true Blockchain.  Like Corda, Digital Asset exists to support banking and capital markets and central authorities such as exchanges and CCPs.  Like the Corda platform not all the transaction data stored on the Digital Asset platform is replicated across all the nodes.  This data is shared only by those involved in the transaction.  Digital Asset differs from other platforms as it employs a form of XML called DAML (Digital Asset Modeling Language) utilized to develop Smart Contracts, which automate the execution of contract terms related to the exchange of assets which interacts with the Hyperledger.  However, a common thread among these platforms and Blockchain, is the use of cryptography and some form of consensus algorithm such as Practical Byzantine Fault Tolerance, (PBFT).  PBFT is effective in asynchronous environments such as the Internet where the need to maintain high availability and provide the capability to recover from bugs, errors, and malicious cyber-attacks is critical.

There is some debate about the development of these private networks as the focus moves away from Bitcoin to a continuous stream of new ventures, alliances and projects on different platforms.  It seems these days that everything, even technology, can be prone to hyperbole.  The groundswell of excitement for a technology such as Blockchain has created an unsurprisingly opposite reaction as well from skeptics who are beginning to line up to rain on the parade.  However, both arguments seem to suffer from the same hype.  The issue is that they are both looking at Blockchain as something being either black or white.  Some supporters of this emerging technology believe unequivocally, that we are on the cusp of a disruption that will change the world as we know it.  On the other hand, there are the skeptics.  While I would not want to lump them all together, there are certainly some skeptics that are threatened by the new technology.  This includes those who may have some vested interest, professional or financial, in alternative or legacy tools and technology, as well as those who fear the focus is moving away from what they believe is the promise that a true public Blockchain can provide.  Legitimately there is reason to be skeptical from a technology perspective.  After all, science is built on healthy skepticism and experimentation.

In the discussions, how the implementation of these private networks, such as Corda and Digital Asset are moving the focus away from the true value of Blockchain, one very important point can be missed.  Currently there are several serious challenges that create headwinds for the large-scale implementation of a true public Blockchain.  There are issues with scalability and latency with the Blockchain model that utilizes cryptographic algorithms and shares the entire transaction history across every node in the network.  Currently, there is no solution to this problem as Blockchain does not provide the speed that is available using current technology.  Use cases involving equity trading execution or card processing require execution cycles that DLT cannot currently provide.  This explains why the current focus has been on creating post-trade processing solutions such as for securities or derivatives settlement....MORE
If interested see also:

"The Financial Sector's Enthusiasm for Blockchain Technology Might be Misplaced, According to a Pair of Australian Distributed Computing Experts"
Fintech: "Blockchain's Numbers Don't Add Up"
The FT's Izabella Kaminska Gives An Overview Of The State Of Blockchain And Reveals A Troubling Personal Detail
...By-the-bye I first saw Credit Suisse's point 2 done up decision tree style back in December in an article entitled "Why Blockchain must die in 2016":

The tree was based on an article at MultiChain's blog, "Avoiding the pointless blockchain project" which included the sentence: "If your requirements are fulfilled by today’s relational databases, you’d be insane to use a blockchain."
Sounds good to me.
Blythe Masters' Digital Asset Holdings Raids Finance Sector For New Hires