04 05 2016

Consensus 2016: Raising capital using 'blockchain' and the DLT centralisation paradox

One highly practical reason for using a blockchain-type solution was voiced by IBM's Jerry Cuomo during a Consensus 2016 panel about how companies are embracing the technology.

Cuomo, who is IBM's VP of blockchains, said there have been times when he has analysed a client's needs and after pause for thought, returned with the verdict that a blockchain may not be the best solution to their problem.

He said: "When this happens the client replies: 'But Jerry, if I call this project a blockchain, we'll get funding for it."'

Similar sentiment was aired about an hour later by Scott Manuel of Reuters at William Mougayar's panel on internal uses of blockchains. Manuel was talking about finding blockchain engineers – something of a premium skill set these days. He said if you included the word "blockchain" on your resume it earns you 2x premium. "It's a good idea to add it to your LinkedIn – quickly!"

This is all fine and well; it's a burgeoning space and where capital is naturally flowing. But a warning was issued by Blockstream's Austin Hill who pointed to a precedent of dangers the industry potentially faces.

"If we look at the beginning of any major enterprise software hype cycle, ERP, CRM, there was this huge expectation and the gap between the promise of the technology and people's understanding or ability to deploy it and promise was quite high.

"Some of you may remember there was a period where if a CIO announced a major ERP project back in the late 80s, you could measure the half-life of the CIO by about 20-22 months; they would be leaving the company and they would announce a re-implementation of the ERP project.

"Because the of expectation and the gap it wasn't there. A lot people – we certainly see it – come in and say they want a blockchain. They don't know why they want it. They don't know exactly what it does.

"There is a real danger if you look at blockchains as just an IT modernisation project that in a couple of years it really could have some blow back, both on the industry and affect people's experience of the value they create. We tend to look for use cases that don't just use a small part of the blockchain; if you are looking for an audit trail, there are other ways to do an audit trail, especially in a single enterprise."

Elsewhere, post-trade infrastructure incumbents and startups meditated on the possibility that distributed ledgers might prevent the next Lehman's collapse. This proposition, moderated by Consult Hyperion's Salome Parulava, seems sane enough. It was a couple of days after Lehman that banks froze and were unable to lend or bank with each other because nobody knew who owned what any more.

Greg Schvey, CEO of Axoni, which has built a blockchain-like system for ICAP and its partners, said that as far as fabled golden records are concerned, there are workable trade information warehouses, but this means a scattering of data and a need for continual reconciliation.

Taking the side of incumbents, Jennifer Peve of the DTCC said the best way to retain a semblance of governance would be through a careful and gradual process of integration, "plugging into infrastructure".

Schvey said things varied depending on which architecture one selected, "whether or not to have a logic layer baked in". He mentioned Bitcoin in the capacity and also the messaging system used by Ethereum and said Axoni had seen better results with the latter.

Parulava lamented that Clearmatics CEO Robert Sams, who was billed on the panel, had not made it to the event. This is definitely true, because Sams offers less quarter to automated intermediation than anyone on that panel and most people looking at this space.

In fact he suggests a "centralisation paradox" can befall blockchain design, depending on where the distributed ledger is located in the post-trade lifecycle.

If the distributed ledger technology (DLT) comes only at the end of the post-trade life cycle, then some other technology or technologies are automating the post trade processes up until that point. Then the DLT could end up turning a distributed, industry-wide golden record into an intermediary technology service, even if the DLT is itself a technology commons and open source.

This could have the rather paradoxical consequence of actually concentrating rather than decentralising post-trade intermediation. It's a process that needs to be automated and if the automation of that process isn't based on a model of distributed automation, but some other type of technology, it doesn't matter that the distributed ledger is distributed, Sams points out.

It's interesting to see the industry wrestle with the concept of shared ledger technology and how much intermediation and centralisation might accompany that. But it would be remiss to say this sort of difficulty only befalls the herd of banking and finance blockchain builders and marketers out there.

At a panel session on reaching consensus on open blockchains, Ethereum's Vitalik Buterin pointed out the same sort of internal centralisation risks blight Bitcoin, "because if the spec is an implementation then the developers of that implementation become the new point of centralisation."