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Private 'Distributed Ledgers' Miss the Point of a Blockchain

From: Melvin Carvalho <melvincarvalho@gmail.com>
Date: Thu, 29 Oct 2015 01:11:26 +0100
Message-ID: <CAKaEYhLqEd27UAa_72H=GvH6AtENEfr-Qv961YhtySYxe6oVZA@mail.gmail.com>
To: Interledger Community Group <public-interledger@w3.org>
Bitcoin may have had the most successful marketing campaign of any web
technology in recent years. But now there’s a new buzzword making waves
throughout the financial industry: “distributed ledger.”

As with many buzzwords, distributed ledger technology has come to mean many
things. Some say it's a tool to enable transparency by ensuring that all
members of a group receive cryptographically secured messages about
participants’ activities. Others suggest that these ledgers will notarize
communications. Some are even bold enough to predict that distributed
ledgers will end the madness of managing multiple database and
reconciliation structures.

While the industry is still working out the details of just what
distributed ledgers actually are, the major options seem to have a few
things in common.

Distributed ledgers have primarily claimed to supplant the need for
Bitcoin's mining <https://en.bitcoin.it/wiki/Mining> process by introducing
trust requirements among participants. These ledgers also promise users the
immutability of Bitcoin without the need for expensive mining operations.
Unfortunately, most of these claims demonstrate a significant lack of
understanding about the efficiencies of a blockchain

One immediate red flag that should jump out at any fan of market efficiency
is that the technology powering distributed ledgers predates blockchains by
well over 20 years.

The consensus algorithm "Paxos" was one such implementation created in
1989, followed shortly thereafter by "Raft.” It’s hard to believe that such
innovations would take 25 years to be discovered in the hyper-efficient
world of database design.

Moreover, the inefficiency of interbank settlement services has little to
do with technology. The primary reason inter-bank settlement takes days to
clear comes down to regulations.

These regulations exist for a number of reasons. Most of them are designed
to reduce risk via lengthy, often manual processes. These delays allow
banks to reverse transactions if needed.

Proponents of distributed ledgers argue that they can displace centralized
providers such as SWIFT, ACH and CHIPS by moving money faster. But
distributed ledgers are only more efficient insofar as they are able to
circumvent the overhead of regulatory requirements.

There’s no doubt that blockchain technology will facilitate disruptive
innovations in finance, much as the Internet facilitated easy public access
to information. But a world of private ledgers sounds eerily similar to a
range of “private Internets.”

In addition, many of the features offered by distributed ledgers are
already available on other systems.

Encrypted e-mail, for example, is a system in which cryptographic receipts
are time-stamped and logged by all participating parties. The SWIFT network
itself facilitates the exchange of identity-verified and auditable
messages. Participating institutions have thus appeared largely satisfied
with the reliability of SWIFT’s notarization and auditability. And no
institutions have been clamoring to share logs of their activity on this
network with direct competitors.

Blockchain technology is useful not because it offers efficiency in a world
of message-passing but because it uses a complex process to settle value
between untrusted parties. But distributed ledgers do not offer users the
ability to easily convert their tokens and messages into fungible units of
value. Nor do distributed ledgers escrow value between parties that don't
trust each other.

If a ledger is not a public resource, it will have the pressures incumbent
to existing settlement systems plus the overhead of maintaining a shared
database among competitors. What efficiency will remain thereafter remains

If distributed ledgers do offer the ability for banks to improve efficiency
in their processes, it will likely be because they've afforded banks
permission to innovate—not because they’re able to provide settlement to
underserved notarization clients.


Interesting (tho perhaps controversial) article, maybe relevant to
discussions here.
Received on Thursday, 29 October 2015 00:11:55 UTC

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