Blockchain, Blockchain, Blockchain

This week on the blog, Origin’s Co-founder and CTO Robert Taylor shares his thoughts on Blockchain and its (lack of) application to the capital markets.

Once touted as the spotlight DLT project, the ASX have now firmly killed their blockchain ambitions, having reduced the scope significantly last year.

I wrote a blog post in 2018 entitled “Blockchain: A Reality Check”, in which I questioned the relevance of this technology within debt capital markets, so I thought it would be fun to revisit 5 years later. 

First of all, let me start by saying we would love for the bond market to rapidly go full DLT, powered by smart contracts and stablecoins. I’ve been passionate about crypto for nearly 10 years now and very much a hobbyist. I’ve written smart contracts, developed automated arbitrage strategies, and generally just find the space fascinating.  

We’ve always stated that we’re “DLT-ready”, a term which some in the space have recently latched onto. What this means in practice is that to achieve any type of automation you first need structured data. This is why we developed Airbrush over 2 years ago. We first solved the structured data problem for ourselves then subsequently open-sourced it for the benefit of the market, with a number of major financial institutions using it.

But while we continue to focus on and make progress on the structured data problem, it’s worth looking at why DLT is difficult to implement as the underlying architecture for capital markets. I wrote this, back in 2018

“We build technology. That's our day job. So we know how hard it is to build best-in-class tech. Blockchain exponentially increases the complexity and build times required. Building systems from scratch doesn’t happen in financial services. There is a legacy infrastructure inside banks and between banks. Our job is to develop products that integrate with what’s there. This is where blockchain falls down. New proof-of-concept systems must integrate with legacy tech, which is exceptionally challenging.”

Unfortunately, the rapid transition that many predicted had always seemed a bit far-fetched from our vantage point. It’s often hard to convey just how challenging it is to get our technology into the hands of very willing clients. I spend my days working on lengthy procurement processes and technology risk assessments for our clients, things which are all incredibly important for obvious reasons. Yet these are for technologies that are widely adopted by our clients (Public Cloud, Python, Javascript etc.). I can’t even begin to imagine the hoops we’d need to jump through for bleeding-edge technologies. 

Secondly, building anything on a distributed ledger takes much longer, and the complexity increases exponentially versus building the same thing using a centralized database. In order for that investment to pay off, the benefits of implementing the DLT need to outweigh those costs. But most of the benefits (immutability, risk of compromise of a trusted third party, etc), don’t apply to capital markets. Nobody has ever told us that they don’t trust the major CSDs (Euroclear, Clearstream, DTC, etc) sitting in the middle of the bond market, nor are they worried about them being compromised. It’s just not a problem in our industry. 

The hype cycle

Investment in technology is driven by hype. The Gartner hype cycle infamously charts maturity of emerging technologies through 5 phases:

1. Technology Trigger – a potential technology breakthrough kicks things off. 

2. Peak of Inflated Expectations – early publicity produces a number of success stories (often accompanied by scores of failures).

3. Trough of Disillusionment – interest wanes as experiments and implementations fail to deliver.

4. Slope of Enlightenment – more instances of how the technology can benefit the enterprise start to crystallize and become more widely understood. 

5. Plateau of Productivity – mainstream adoption starts to take off

Out of the more than 200 unique technologies identified by Gartner, only a handful – including Cloud Computing, 3D Printing, Natural Language Search, Electronic Ink – have been identified early and traveled predictably through a Hype Cycle from start to finish.

Now, it’s worth mentioning that we have seen some interesting DLT applications being deployed in some corners of the capital markets, such as the Repo markets (HQLAx, Broadridge, Canton) so we’re excited to see where they go. However, in the primary debt capital markets, for now it feels like blockchain is stuck in the Trough of Disillusionment when it comes to implementation, with serious questions being asked as to whether it will ever climb the Slope of Enlightenment (even by customers who have done digital issuances and POCs).

I think the market is starting to appreciate the huge gap between putting out a press release about a single blockchain issuance, and getting to scalable, repeatable, mass adoption.

The real world 

There is consensus that if we were building the bond market and its infrastructure from scratch it would potentially be DLT and smart contract powered. However the significant migration costs/risks and the behavioural change required is likely too much of a barrier to overcome.

5 years ago, I closed my blog post by saying:

“We believe that meaningful change within the capital markets will come from working within the confines of the existing setup, and we’re convinced that the correct approach is to work closely with market participants to optimise existing processes as opposed to starting from scratch with blockchain. 

If we've learned anything since starting Origin, it's that anything that requires large scale behavioural change from end users most likely won't work. It's all about making incremental improvements.”

We’ve seen tremendous success ‘working within the confines of the existing setup’ with our trusted clients and partners, and I’m looking forward to revisiting this post with you in 5 years time!