If 2017 was all about proof of concept for blockchain, in 2018, it looks set to go to production.
In this technical review, we take a look at the ecosystem of organisations driving blockchain projects, those most likely to deliver over the next 12 months, and the ways in which Gresham and other technology providers are solving the many challenges and embracing the possibilities presented by DLT.
The promise of blockchain
The DTCC’s 2016 white paper provided a great summary:
- A common shared version of the truth – every trusted member has a copy of the same history of all transactions in an asset.
- All data is encrypted in a common manner according to modern standards and can only be decrypted and inspected by the owner of the required keys to the data.
- The shared ledger, used by every trusted party in trading a particular asset, establishes a network and data standard that can be integrated with tools, workflows and asset management systems in a simplified, consistent manner.
- The transaction distribution model defines a paradigm for always-on, active:active processing, which is more resilient to local database corruption than existing hardware replication models.
Ethereum and smart contracts
The first evolution of blockchain is undoubtedly Ethereum and the EVM. Offering a number of features beyond the original Bitcoin blockchain, Ethereum’s built-in programming language provide the technical ability to drive business-critical capabilities.
Ethereum introduces Solidity, the turing-complete scripting language that enables the creation of smart contracts - a code executed as part of a transaction.
Almost live use cases include the recent announcement of UBS’s new project with Barclays, Credit Suisse, KBC, SIC and Thomson Reuters. The use of non-sensitive public reference is seen as the final test before taking the technology to production.
Under the project, smart contracts are being used to resolve the real-time reporting challenges of MiFID II; simplifying compliance by mutualising checks between the parties.
It’s not all plain sailing for smart contracts however - the complexities are numerous and significant failures have already been recorded, such as that of the DAO, which forced the hard fork of Etherium, and the Parity, which was caused by a smart contract code flaw.
Of course, Ethereum isn’t just a set of tools, it offers a single shared standard. And because it’s a single shared standard, it negates the issue of proprietary APIs, because every new application is written on the same virtual machine (Ethereum Virtual Machine or EVM), using the same underlying language (EVM code).
The potential presented by enabling the interoperability of multiple applications is very exciting - while the opportunity to create common views of accounts, transactions and so on, could make future development even more efficient.
What blockchain projects are underway?
The ecosystem is growing - as demonstrated in this excellent write up by Josh Nussbam.
As he suggests, ‘...it’s easy to miss the forest for the trees without a comprehensive view of what the proverbial forest looks like.’
As Deloitte noted in its recent white paper, replacing existing financial infrastructure with Distributed Ledger Technology (DLT) presents a massive undertaking, and as such, larger implementations are unlikely to materialize for some time.
Instead, as with UBS’s Ethereum project, smaller ecosystems are joining forces to use blockchain to resolve individual business processes.
Here’s a round-up of just some of them:
- Global payments: International money transfers through DLT offer lower fees, real-time settlement and new models of regulatory oversight. SWIFT is currently working with six global banks to reconcile nostro databases.
- Commercial property and casualty claims processing: Automated claims processing through blockchain has the potential to reduce fraud and improve assessment via access to historical claims information. AIG, Standard Chartered and IBM have already executed a successful pilot in this regard to create a smart contract across four countries.
- Syndicated loans: In March 2017, Synaps Loans LLC (a JV between Ipreo and Symbiont) announced the successful demonstration of the first working blockchain solution for syndicated loan servicing.
- Trade finance and AML: The UBS platform, Batavia, uses Hyperledger Fabric to replicate the entire lifecycle of an international transaction. Designed to holistically combine payment transactions into a single smart contracts, it has the potential to change many transaction related functions.
- CDS: DTCC and R3 are working on a project to deliver clearing for CDS. With a daily value of $11trillion, it’s a significant test of blockchain’s capabilities. An early proof-of-concept completed in April 2016.
Blockchain consortia in financial services
To realise the dream of blockchain in the financial services space, there are many private enterprise blockchains and four main consortia, representing most of the major financial firms.
There is overlap with a number of current projects; for example, the DTCC are part of the Enterprise Ethereum Alliance, and the software is being provided to Hyperledger. These ongoing contributions to Hyperledger suggest there will continue to be sharing between public blockchains, private blockchains and consortia.
So who are the consortia?
Hyperledger is run by the Linux Foundation. The five products supported are not tied to specific use cases, while there’s a claim that the Fabric blockchain is production ready. This one seems to be the best hope for maintaining interoperability with other blockchains, in particular, Ethereum.
- Enterprise Ethereum Alliance
This is Microsoft and JP Morgan’s foundation. Based on Ethereum, it’s the largest open-source alliance, based on ETH (over 150 organisations and counting).
Initially created to look into the R&D of blockchain database, the recent release of Corda is a clear statement that it is a distributed ledger and not a blockchain.
Goldman Sachs, Morgan Stanley, JP Morgan Chase and Banco Santander have left the consortium recently, suggesting a troubled future. Contrasting this with the number of successful POCs using this technology, doesn’t make it clear where R3 is heading.
Ripple is a self-funding consortium, seen as a potential SWIFT competitor. It has its own currency; XRP. XRP is currently processing transactions significantly faster than the Ethereum.
Is everything in the blockchain garden rosy?
Of course, with new innovation, comes new challenges – and various issues are yet to be resolved. Scalability, rising transaction fees and structure as the industry grows are all serious concerns.
The DTCC’s view is that there is a requirement for a Central Authority to ensure effective standards and governance (despite decentralisation being one of the features that makes blockchain so appealing.)
Certainly, it’s this contradiction between blockchain’s collaborative ambition vs its potential to create further siloing that is proving one of its biggest challenges
This, and the need to operate concurrently alongside existing financial infrastructure for the foreseeable future.
Projects like the Coco framework promise a new level of interoperability and reconciliation between blockchains and legacy systems.
But technologies like CTC from Gresham will also be critical in bridging the DLT/ legacy infrastructure gap and maintaining data integrity between multiple sources of truth.
Built to accept, match and validate multiple data types from multiple sources (including older banking systems), CTC delivers the flexibility that blockchain demands.
Currently prototyping a reconciliation with an Ethereum blockchain on one side and a legacy SQL source on the other. For smart contracts, CTC can offer the ability to validate ahead of time before details are sent to regulators.
And with experience in the commercial loan servicing space, it is also well aligned with the Syndicated Loans work underway in the market.
For more on Gresham’s work in blockchain, see the Gresham Tech blog.