Blockchain technology is not just a platform, it’s a solution. And for institutional investors, the number of problems blockchain technology can solve cannot be overstated. For starters, it can mean faster settlement, cheaper banking costs, and better corporate governance.
A blockchain is an architectural pattern for building globally consistent decentralized systems, and for running smart contracts---stateful, decentralized applications. There are two primary categories of blockchains: public blockchains and permissioned (sometimes “private”) blockchains. In public blockchains, anyone on the Internet can connect to a node, download a copy of the transaction history and start participating in transactions. In permissioned blockchains, only particular identities may even establish network connections and participate in the consensus protocol (ordering and approving transactions). Indeed, the difference is within the consensus protocol, and it’s generally possible to take other parts of a blockchain (for instance a virtual machine) and migrate them between consensus systems.
Trustless tokens are still the best use for a public blockchain.
Ten years after the anniversary of the publication of the Bitcoin whitepaper---inarguably one of the most significant technical achievements in recent history---the community that it created, and that has rallied around its grand vision, is in a crisis. Having worked for the past decade to produce protocols that go far beyond Satoshi’s original efforts in scale and ambition, we are still struggling to answer fundamental questions about the nature of the technology and the role it should play in our society---fundamental questions such as “What is a blockchain?” and “What is a blockchain good for?” We struggle to understand the relationship between Bitcoin and blockchain technology, between token systems and smart contracts, and between public blockchains and permissioned ones.
There is one camp that sees blockchain technology as being best suited for creating digital currencies (“tokens”) like Bitcoin itself, and there is another that sees the technology as promising for creating new kinds of decentralized computer applications (“smart contracts”). Simultaneously, another fight is going on about the value of different types of blockchain networks---specifically, whether blockchains should be “public”, so that anyone can join the networks, or “permissioned”, where the membership of the network is more or less fixed. In fact, these two arguments are tightly linked: it turns out that token systems are more useful than smart contracts when layered on a public blockchain consensus protocol.
Looking back to the Bitcoin whitepaper today, it is striking that Satoshi was exactly right about the best use for a public blockchain: a digital currency and payment system. The white paper only talks about token systems and public blockchains, so we are left on our own to figure out how best to take his seminal invention and extend it to additional use cases in new domains. And many have tried to do just that. For my part, I’ve spent a lot of time thinking about these issues, having had the rare experience of working closely with both sides of both debates. First, as one of the creators of the cryptocurrency Counterparty, and then as one of the founders of Symbiont. Counterparty is a public blockchain smart contracts platform, albeit one focused on token issuance and trading, while Symbiont is a fintech company that develops and licenses its permissioned blockchain-based smart contracts system to improve the infrastructure of traditional financial markets.
What I noticed in my time working on Counterparty, and in watching Ethereum closely since its inception, was that even though both systems were built primarily to support powerful smart contracts applications, their primary uses have been in the creation and transfer of the simplest possible digital instruments---tokens. With Counterparty, our vision was to create a trustless network for decentralized finance with no middlemen. We implemented smart contracts for token balances, the world’s first decentralized and trustless asset exchange, a platform for prediction markets using contracts for difference, a protocol for transparent elections, and a system for provably fair gaming. And we did it all as an extension of the Bitcoin blockchain itself, rather than as a separate network. Nevertheless, Counterparty’s adoption was always centered around its token issuance and trading functionality, rather than on the more advanced and more exciting applications that it enabled.
Similarly, it’s been three years since Ethereum launched and pretty much the only thing anyone is using it for could be easily managed by colored coins (another way of adding support for simple tokens on top of Bitcoin). Ethereum has received a lot of attention and produced a lot of excitement for its theoretically limitless capabilities, but to date people are actually using it only for the simplest possible decentralized applications. Part of the reason that Ethereum’s adoption has been lackluster is that it’s quite hard to build real applications safely in their smart contract language, Solidity. Still, it’s surprising that the most advanced Ethereum smart contract with any adoption is a cat-themed trading card game, not dissimilar to Spells of Genesis or Rare Pepes, which were launched on Counterparty long before. Ethereum, like Counterparty before it, has been used almost exclusively for tracking tokens despite its potential for doing much more.
The reason, I think, is that a smart contract system for the general public isn’t actually such a great idea. The value in taking a given application and putting it on a blockchain platform is chiefly found in making that application more broadly accessible and trustless. This is of enormous value for a simple instrument like digital cash, which benefits directly from wider adoption and purity of form. That is, Bitcoin, as a payment system and store of value without (easy) confiscation, debasement, etc., is a better currency than fiat insofar as it lacks the central points of control and interference. But for more complicated interactions among end users, where efficiency is more important than universality, it’s not too difficult or painful to rely on a “higher authority” to act in the role of a trusted intermediary. The interactions of individuals are not complex enough to justify being turned into decentralized computer programs, not yet.
In the realm of permissioned blockchains, on the other hand, smart contracts hold more promise. The target users aren’t individuals, they are large institutions, e.g. governments and corporations. The greatest benefit of permissioned blockchains is not more inclusiveness or transparency, but rather greater consistency and correctness than existing infrastructure, which is incapable of a providing single source of truth for multiple parties in a decentralized fashion. “Enterprise DLT” aims to take existing business logic managed by faxes and phones, then codify that logic as a shared computer application which automates workflows and reduces operational overhead. Large institutions tend to engage with their peers in intricate and complex ways, and, insofar as they are large institutions, there’s no natural third-party qua “higher authority” that they could rely on for global coordination. Ideally, this coordination would be managed by a blockchain and smart contract acting as a shared system of record and single source of truth, without giving a single party ‘superuser’ access to a central, canonical repository for mission-critical market data.
A blockchain is a way for multiple parties in a decentralized computer network to see a consistent view of the world, so blockchain technology can primarily be valuable either when replacing a consistent centralized system with a consistent decentralized one (the way Bitcoin replaces fiat currency), or when turning an inconsistent decentralized system into a consistent decentralized system (the way a smart contract would replace fragmented financial markets infrastructure). In the former case, the value created is in disintermediation of a central party; in the latter, it’s in the increased efficiency of a coherent, authoritative source of truth in a decentralized system. It’s fitting, then, that token systems---the simplest possible smart contracts---should be as widely accessible as possible, whereas smart contracts are most useful in permissioned settings, where they are faster, cheaper, and easier to use, and where they can solve a particular business problem in a deliberate and controlled manner.
The conclusion that I’ve come to is that, just as was originally envisioned by Satoshi Nakamoto, the greatest use of a public blockchain is in fact as a digital currency and payment system. Generalizations of Satoshi’s innovations in the time since he launched Bitcoin, manifest partly in the growing enterprise DLT space, are not competitive with Bitcoin itself. Instead of replacing fiat currency with digital gold, they may be used to build new kinds of databases that can support workflows that are completely un-amenable to management within the context of a traditional client-server framework. Efforts to build complex smart contracts on public blockchain networks aren’t tackling problems inherent in the design of existing decentralized systems (the way Bitcoin did); but rather are striving to become more usable versions of centralized systems. They are, of course, anything but.
This piece was also featured on Coindesk as a part of their "Bitcoin at 10: The Satoshi White Paper" series.
Symbiont Assembly™ is a blockchain platform designed for enterprise finance. Today it is being used by some of the world’s largest financial institutions to not only create efficiencies in their existing workflows but also to help them completely reimagine their business models. In particular, Symbiont has partnered with large institutions within Index Data (Vanguard), Mortgages (Ranieri Solutions), and Syndicated Loans (Ipreo) to name a few.
Although each of our clients across different verticals have unique business logic and workflows, they all are using the same underlying blockchain software, Symbiont Assembly. Assembly is a proprietary blockchain platform that has been designed and developed by expert engineers in cryptography, distributed systems, financial engineering, and programming language design with direction from experienced leaders in capital markets and enterprise finance.
The adoption of blockchain technology within institutional finance promises to massively improve speed, efficiency, transparency and correctness of critical financial market infrastructure. For too long, technological innovation in this industry has been largely limited to the front office, while the back office has been ignored and neglected. This is like building a second story on a house with a rotting foundation. Smart contracts are the applications of the next generation of financial market infrastructure, providing the means for finally abandoning antiquated systems which cannot keep up with the pace of innovation in the modern world.
With interest in blockchain technology gripping the institutional financial sector today, there is a great deal of confusion about the true nature of the technology, and specifically how it is different from what has come before. The promise to dramatically improve financial infrastructure is well established, but it’s often not clear why the benefits associated with blockchain technology cannot be had with traditional technology.
I recently made a career pivot from a global investment bank with over 200k+ employees, to a 38 person (and counting) blockchain startup.
Before I can elaborate on my experience at Symbiont, I will briefly guide you through my path to get here. I am the ultimate generalist and tend to have way too many interests for my own good. This made it incredibly difficult decipher on what industry, type of company, size of company, and role would be next for me. Additionally, my security, compensation, and fear of the unknown daunted on me. As you can imagine this led to a long process...In the 2–3 year course, many of my friends and family became dizzy with the cyclical conversations I’d have about leaving my job. After countless hackathons, meetup groups, courses, workshops, and speaking to literally anyone that would agree to have coffee with me — I finally clarified the types of jobs and workplace culture I wanted to move into. After several interactions with the team at Symbiont, I mustered the courage to take a leap of faith. I am excited to share that I work in the hot and super sexy blockchain space, and have not looked back!
This blog post was published by MarketsMedia on July 31, 2017 and is available here.
July 21 was a momentous day not just for the world of blockchain, but also for the world of corporate finance. The Delaware “blockchain amendments,” which Symbiont and its legal team assisted in crafting, were signed into law by Governor Carney to recognize blockchain as an acceptable form of corporate recordkeeping beginning August 1. The full benefit of the law takes effect when the Delaware Division of Corporations announces completion of its integration with Symbiont’s blockchain, thereby enabling end-to-end automation of corporate securities administration–in digital form–from inception until maturity.
That Delaware is the first state to recognize blockchain for corporate finance is no coincidence. Delaware boasts more registered corporations than residents, and the First State prides itself on being the corporate registry of choice in corporate finance. Recognizing the promise of blockchain to improve the accuracy of corporate and securities industry recordkeeping, Delaware instituted the Delaware Blockchain Initiative in early 2016.
Now that the legislative process is complete and the bill has become law, Delaware corporations will have the ability to issue shares and manage ownership records using blockchain technology as of August 1. This applies to both public and private entities.
So what does this mean for companies registered in Delaware? First, cost savings should be substantial, and this is true for securities issuers and investors alike. So-called “back office” functions can now be straight-through processed during the entire lifecycle of a security, assuming the security is recorded on the Delaware Division of Corporation’s blockchain instead of using non-blockchain methods such as pieces of paper.
Second, blockchain also provides for greater accuracy of ownership records. Enter Symbiont “Smart Securities®,” fully digitized ownership records continuously maintained and updated via a blockchain. This benefit is especially useful at a time when secondary markets for corporate securities are remarkably complex and fragmented since nearly all publicly traded securities are owned indirectly in “street name” rather than directly by owners. As a consequence, blockchain can prevent situations such as that of Dole Food from February of this year, in which 36.7 million shares were outstanding but investors presented brokerage statements to prove they owned 49.2 million shares.
Another area where distributed ledger technology holds particular promise is in the automation of administrative tasks like filing, documentation, reporting and other communications between issuers, regulators and investors. As routine as these procedures are, they can be time-consuming and vulnerable to human error. Mistakes can pose costly disruptions to the registration and/or capital raising process. Blockchain makes such tasks more manageable in a number of ways. Delaware’s Division of Corporations, for example, is working with Symbiont on an integrated blockchain to automate the annual report and franchise tax filing processes.
Delaware’s historic blockchain legislation may have gone unnoticed by some, but it opens the door to revolutionize the way company shares are created, administered and exchanged.
This article appeared in the July/August issue of Practical Compliance and Risk Management, a journal published by Wolters Kluwer. It is printed here with permission.
New technology exists that provides a shared, immutable record of who owns which asset, and exactly when they bought or sold it. It provides a perfect audit trail. It can automate business processes that today are duplicated by many parties, and are slow, manual and error prone. It can enable real-time, desktop monitoring by both external regulators and internal compliance and risk management professionals alike. Distributed Ledger or “blockchain” technology is capable of all of this and more.
This article first explains what blockchain technology is, as well as related concepts such as distributed ledgers and smart contracts. It then addresses six common questions about blockchain technology and how it can help the financial services sector. Lastly, it discusses blockchain uses for solving real-world problems and the promise of blockchain for more efficient and effective regulation.
Delaware companies that register issuance and transfer of shares in blockchain form will likely experience (1) cost savings, (2) accurate ownership records and (3) automation of administrative tasks. In this post, which is endorsed by many parties involved with the business of incorporation in Delaware, we share additional benefits for different types of users.
Thank you to the National Association of Insurance Commissioners (NAIC) for your invitation to speak at your Fall meeting about how blockchain technology can fix a low-probability, but high-severity threat to insurer solvency: lack of beneficial ownership tracking of securities by the securities industry.
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