In Capital Markets, Blockchain's Evolution Has Left the Bitcoin Model Behind

The original blockchain was a distributed ledger used to trade the cryptocurrency bitcoin. Bitcoin transactions would be pooled into blocks to lower the cost of validation for each individual transaction.

But according to a new report published by consultancy Opimas, the so-called “blockchain” initiatives beginning to populate the capital markets have little resemblance to the original bitcoin-blockchain model. Most initiatives today do not require transactions to be “blocked” together. Additionally, according to Opimas, a number of blockchain technology providers—such as R3 and Digital Asset Holdings—have implemented a shared-ledger model rather than a distributed-ledger model. As a result, blockchain has become a catch-all term used to incorporate both distributed and shared ledgers; block and non-block chains.

The report—“Blockchain in the Capital Markets: More Evolution than Revolution”—in some ways contradicts a previous report published by Opimas, where it called blockchain for the capital markets “a pipe dream.” But this break from the original bitcoin-blockchain model has answered several key questions around scalability, speed, anonymity and information leakage. Even with that, the consultancy is wary about just how revolutionary today’s technology will be, says Axel Pierron, co-founder and managing director at Opimas.

“The question that remains for me is that in certain markets it makes sense, on other markets I’m still very doubtful about the benefit of having a distributed or even shared environment,” he says. “Take, for example, the equity market and what happened to the Australian Securities Exchange (ASX), and its users in Australia—a lot of the users complained that implementing a shared-ledger environment doesn’t answer their current needs; it’s a technology shift that doesn’t bring any upgrade at this point.”

The ASX is considering replacing its legacy Clearing House Electronic Subregister System (Chess) platform with a shared-ledger blockchain system provided by Digital Asset Holdings (see box: “Initiatives to Watch”).

“[The project between the] ASX and Digital Asset Holdings, I think, is very important to watch it because if it’s successful in the equity market it would be a major breakthrough of that technology in one of the major asset classes,” Pierron says. “To be frank, it’s the one I want to watch because it would prove me wrong. I think it will be very tough to do.”

Where he sees room for success is in the foreign-exchange (FX) market, which isn’t standardized and where there is an existing peer-to-peer network already in place. For example, Cobalt DL is looking to leverage a shared-ledger blockchain, called BlueSky, to create a single source of truth for FX post-trade processing.

“The Cobalt one is very interesting because I think the FX market is the one that is most suited for blockchain adoption,” Pierron says. “That initiative has gathered sufficient participants within the FX ecosystem to have a very strong value proposition once it’s launched.”

Shared versus Distributed

This evolution of a shared ledger from a distributed ledger is a key advancement in the capital markets, Pierron says. With a distributed ledger there’s a concern over information leakage, as everyone is on the same blockchain.

With a shared-ledger model, everyone has a ledger, but that ledger doesn’t record all the transactions that have happened on the market; they only keep track of the transactions that the market participants are a counterparty to.  They upload that information from a central ledger—think R3 or Digital Asset Holdings—that keeps a record of all transactions. With this approach, participants cannot query data in which they are not a stakeholder, Pierron says.

“The idea of the original blockchain was that everyone keeps a record of all the transactions on the ledger and, hence, if one ledger is destroyed by a regulator or [another actor], it’s censorship free and everyone has a record of it and it cannot be destroyed,” he says. “A shared ledger is different. If the central ledger disappeared, you could recreate that central ledger because all of us have it together, but individually we don’t…But the risk of information leakage is improved.”

Another big technological advancement has been the addition of permissioned environments, which removes the need to use the proof-of-work-consensus mechanism used in the bitcoin blockchain, which dramatically slows down transaction processing times.

“The overall permissioned environment removed the necessity of proof-of-work,” he says. “That has a profound effect on the number of transactions you’re able to process per second. If you don’t have to do the proof-of-work, you can add transactions at much great speed than before.”

Additionally, blockchain platform providers are leveraging open-source tools, such as Hyperledger Fabric, R3 Corda and Ethereum, which provides a better environment for testing and upgrade rollouts. Finally, according to Pierron, the majority of solutions in production use APIs allowing permitted third-party providers to access relevant data so that services can be provided on top of the ledgers’ record of transactions.