Enterprise Blockchain is back in the news with the recent completion of the first world blockchain bond from the World Bank and the Commonwealth Bank of Australia. If you’re feeling a bit of Déjà vu now, it’s probably because numerous blockchain bonds have already been introduced. A commercial bond from Russia’s Sberbank and from a handful of small municipalities. Though I guess we can clap for the World Bank because it’s the first world blockchain bond. Good job PR. The tech is being rolled out in a hurry it seems, as we only just heard about the mandate progress earlier this month.
Separate But Useful
There is a persistent view among many prominent bitcoin maximalists that these solutions are “useless”, and are “not real blockchains” in a very dogmatic, defensive stance. Respected people in the community, such as Saifedean Ammous, author of The Bitcoin Standard. Tone Vays, arguably the best technical analyst in the space. Who has resisted the tendency of others to tell their audience what they desperately want to hear, rather than what the indicators say. Despite being very knowledgeable about Bitcoin, these Bitcoin OG’s seem to have a blind spot to anything positive in other systems. Their sentiment regarding enterprise blockchain solutions is resounding across the bitcoin sphere: Any corporate or enterprise created DLT is just a ploy to create hype and detract from Bitcoin. Even though, the new tech is not competing with Bitcoin, as they are not direct currencies or stores of value. And, even though there is very real, valuable innovation happening in enterprise blockchain settlement systems. To illustrate, we can look at how bonds and other securities are handled today in contrast to these new blockchain based solutions.
The Problem
Currently security settlements are made through a complex process that results in a record at a central securities depository (CSD). There, the ultimate owner is named on a given security. Or, the owners brokerage can be named as a representative. In the U.S. this system was implemented in the late 60’s due to overwhelming amounts of paperwork in doing so with paper and ink. The CSD in America is the The Depository Trust & Clearing Corporation (DTCC) which handles…wait for it—2 Quadrillion in value each year. Talk about centralization.
Here we have a familiar trade off: The old system, where a bearer instrument could be issued directly to the owner, was more decentralized and the counter-party risk was reduced. On the other hand, the CSD system is very centralized but has a much higher throughput. Aside from the faster speed, the current system has failed us many times. Dole Food Co. at one time had 49.2 million facially-eligible shares but only 36.8 million outstanding. The various accounts and IT systems of the brokers did not synchronize properly. It ended with a mess of lawsuits. Clearly not much has changed since, as a Volitility ETF recently ran into a similar situation just this year. Other times, the DTCC itself is the weak link, it has lost critical information in floods and outages previously.
The Solution
Clearly, there is something left wanting in existing databases for establishing a common, immutable, fault tolerant ledger. This is where the World Bank’s and other enterprise blockchain solutions come in. The World Bank’s software uses a private Ethereum blockchain, citing the “development community and functionality required” for making the choice. These permissioned blockchains restrict changes to data within an agreement to only those explicitly entitled to it. Other audit and regulatory access can be customized to fit the specific need. The crux of discontent and confusion about calling some permissioned DLT systems “blockchains” are in the following arguments:
- They aren’t “decentralized” enough
- Many permissioned blockchains don’t use PoW
- Other distributed solutions such as Apache Kafka can do what Enterprise Blockchains do.
Even though private blockchains are not as decentralized as BTC, it doesn’t need to be because all the actors are known. If you have a custom chain with only two parties signing to create blocks, there is no such thing as a 51% attack. 3rd parties can still validate with their own node software from the sidelines. Addressing the third point about other distributed systems is pretty simple as people who claim this offer no specific comparison of the two. Even if we go out on a limb and assume both enterprise blockchains and distributed databases have identical results brought about through different mechanisms(which I’m sure there are performance differences) claiming only the result of the tool defines it, is a logical fallacy. It’s like saying a wind turbine and a hydroelectric damn are the same because they are both in a broad category of energy-producers. Blockchains should not only be defined by their utility but also by their structure. Because blockchains can solve more than just censorship-resistant money, which is what bitcoin is specifically designed to do. (And does very well!)
This brings us to the literal definition of a blockchain—that which employs “blocks” to batch information and a “hash” to link them together in an immutable way. Together, we have the two main components of a blockchain. No matter how much Bitcoiners might dislike Ethereum, you would be hard pressed to claim that a platform using the protocol is not a blockchain.It’s still early days and much of this is still being tested. But despite the detractors, enterprise blockchain has already made great progress in creating a better securities record system. One that combines the throughput of existing CSD systems and personal control of the old bearer-bond system. Then make it easily audited and synchronized. There is no law on the books that forces a person to be registered at the DTCC in the US, it’s more of an industry standard. Ultimately the power still lies in the collective decision of the users as to where they want to trade, record and build.
For more info on the legal implications of blockchain and smartcontracts, vist smartcontracts.legal
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