Bloomberg: Maybe blockchain really has magical powers

Rage Review : The technical innovation of blockchain lies in the combination of encrypted signatures in a fault-tolerant distributed database, so that all participants can access information securely and ensure that each participant has the same information. Distributed databases and encrypted signatures appeared as early as 1970, but these two technologies were not combined until people wanted to create a decentralized asset ownership registration system. This system attracts large financial institutions in the financial industry because these institutions want to use blockchain technology to simplify back-end processes and save costs. At the same time, it can also solve the concerns of egoists about security. Allowing these egoists to reach an agreement that is beneficial to them may be the magic of blockchain.

Translation: Nicole

Blockchain, the underlying technology of Bitcoin and other digital currencies, is not as novel or omnipotent as advertised, but that doesn’t mean it can’t work wonders in the financial world.

The World Economic Forum recently published a report titled "How Blockchain Can Reshape Financial Services" - in other words, how to solve 80s problems with 70s technology (more on that later). Blockchain covers everything from global payments to insurance claims to proxy voting and variable convertible bonds - is there any industry in the financial industry that will not be disrupted by blockchain? Are you really going to be indifferent when blockchain comes?

The 130-page report reminded me of the old Coca-Cola ads that promised to cure everything from headaches to overwork. The ads worked because no one knew what was in the Coke bottle. Similarly, the word blockchain has been abused because no one knows what it means.

The technological innovation of blockchain lies in combining cryptographic signatures with a fault-tolerant distributed database, thus allowing participants to securely access information - such as money transfers or securities transactions - while ensuring that each participant has the same information.

Distributed databases and cryptographic signatures have been around since 1970. For decades, these two areas of computer science had very little interaction because they solved completely different problems. Now it is finally time to combine these two technologies because people want to create a registry of asset ownership but don't want to rely on an intermediary authority to certify ownership.

Why are financial institutions so interested in a shared registry of asset ownership? The WEF report includes many ridiculous applications, but here is one legitimate one:

Clearing and settling trades—ensuring that the cash and assets involved in a transaction reach their new owners—is difficult because the records need to be sent to thousands of different institutions, each with its own unique account format. Each participant must agree on who owns what and who owes whom what—a reconciliation process that takes a lot of time, money, and human effort.

The blockchain is essentially a shared ledger that is sent to every relevant participant, and each participant has an identical copy of the ledger. The cryptographic process of accessing and verifying new information automatically keeps all copies of the ledger consistent. Therefore, generally everyone knows everyone else's ledger information, and the entire process does not need to go back and check everyone's ledger records.

R3 is a blockchain banking consortium composed of large financial institutions, dedicated to developing blockchain applications in the market. The consortium soon discovered that they did not need a blockchain at all: no large bank wanted to share its own ledger, because having more information than other banks is a very important competitive advantage.

R3's solution uses a distributed ledger where each bank maintains its own private records, which they do now. They can then pick and choose the information they need, such as when they participated in a transaction - which they do now. A third-party "uniqueness" service can ensure that no one is lying.

The new feature of each transaction with attached code (smart contract) is that it includes standardized rules that provide a standard for verifying validity. Participants who download and run the code independently can verify the transaction. Blockchain is cheaper and faster than traditional reconciliation because with blockchain, each institution does not need a large number of back-end employees to reconcile transactions with unique rule sets and data fields.

The idea is so good, why didn’t they consider blockchain sooner? The answer to this question can be found in R3’s recently released white paper:

What makes this version of the blockchain system possible is that the recent interest in distributed ledgers and blockchain systems has created an environment where the vision can be openly discussed; and a collaborative alliance of financial institutions can work together to advance the development of blockchain.

In other words, the only thing holding back standardization of the reconciliation process is the unwillingness of financial institutions to cooperate. Financial institutions spend $65-80 billion a year on back-office reconciliation agencies, and back-office employees have every reason not to want to standardize the reconciliation process.

Many regional banks do not have access to the global clearing network and rely on large correspondent banks for clearing and settlement. When small banking institutions feel threatened, they begin to use blockchain as a channel to achieve global inclusive finance, and world-class large financial institutions are also ready to form alliances to defend their position.

Standardization of rules and data fields could save billions of dollars in back-office reconciliation costs. Perhaps one of the biggest impacts of all the blockchain hype is that it allows a large number of self-interested people who are worried about security issues to reach an agreement that is beneficial to them all. This may be the real magic of blockchain.