Mutual distributed ledger: at the speed of need

Professor Michael Mainelli, Z/Yen Group

Professor Michael Mainelli, executive chairman of Z/Yen Group, and Vinay Gupta, founder of venture capital firm hexayurt.capital, discuss mutual distributed ledger economics.

Is speeding unfair?

Global electronic communications have brought us closer together than ever before, but we are not yet in the same room. A tiny person-to-person communication time delay does not matter much. We may have to restart a few sentences on a video call. But a lot can happen in a few fractions of a second in a trading system. Visa processes 24,000 credit card payments in one second during peak demand. In the delay that a message takes to get to San Francisco and back from London, Visa has processed thousands of orders.

Scientists enjoy creating new measurement units, such as furlongs-per-fortnight, “a snail’s pace”. Another way of looking at transaction distance and time is that light travels just 12.5 kilometres in the time it takes Visa to process a single transaction.

With timing comes sequencing. Contemporary stock exchanges process orders as they arrive. The closer you are to the exchange, the faster your orders clear. This has produced the high frequency trading crush, as traders cram more and more computers as close as possible to exchanges around the world. Proximity gives the closest players an unfair advantage.

Mutual distributed ledgers (MDLs, aka blockchains) are a technology for fair play in a globalised world. Three characteristics enhance fairness. First, most MDLs have no centre. There are no central ledgers to move computers closer to. Transactions clear in the same amount of time regardless of where in the world they were issued. This means fair play for everybody regardless of their location.

Second, a permanent record protects transactions. The records are distributed and permanent. A benefit of decentralisation is strong cybersecurity and physical robustness. The process which lets many computers all over the world process transactions together also means that if a machine is compromised it does not affect the rest of the computers holding the MDL.

Third, “mutual” means held in common or owned by no one. Nobody has to be in charge of a MDL; they operate by consensus. Local MDLs can be run by a sovereign entity or a company, and they can choose who can participate, similar to an existing corporate network but more secure. Global MDLs so far work more like the internet itself: anybody can participate, but without compromising the inherent security of the MDL.

Think how simplicity (for users), reliability, and cost-efficiency led to the dominance of technologies such as shipping containers or mobile phones. MDL technologies stand poised to repeat this revolution for the slowest and most difficult parts running an organisation: compliance, regulation and paperwork.

Vinay Gupta, hexayurt.capital

Yet another prediction about the death of paperwork

Because the ledgers can contain computer code, the revolution goes beyond just sharing data. So-called “smart contracts” or “sprites” are ways of automating deals or portions of deals, locking in the details, using the fairness and security of the MDL. These agreements can be simple things like a bond payment calculation, or more complex transactions such as smart contracts handling insurance claims. The financial industry already uses a lot of software to represent financial instruments, so this is an extension of existing practices.

A smart contract can also interact with the real world. For example, imagine a self-driving car which needs to recharge. Both the charging station and the car can access MDLs using wireless internet. The smart contract says it will pay for electricity at a pre-agreed price. The charging station checks that the car is the car listed on the contract, and the smart contract automatically pays as the electricity is delivered. In a world with enormous numbers of smart devices cooperating to produce high quality services, MDLs are likely to be essential infrastructure to hold a shared view of the world for all participants.

When technology provides machine-to-machine handling of agreements to a high enough standard, it will revolutionise business and international cooperation. MDLs are the most likely platform to give rise to that future. The parallels to shipping containers and mobile phones are clear: if all the small steps are reliable, big transformations happen much, much more easily. Contracts between organisations today are hard to understand, difficult to read for both humans and computers, and hard to combine together to create new services, or delegate to third parties to carry out on our behalf…
This is an excerpt. The full article is available in the March 2017 edition of Banking Technology.