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> Modern settlement and clearing is efficient. It's perhaps the most efficient part of the financial system; it is certainly the easiest to upgrade. This isn't

> Modern settlement and clearing is efficient. It's perhaps the most efficient part of the financial system; it is certainly the easiest to upgrade. This isn't really right. Pre-trade (price discovery and trade matching) are about the most efficient parts around today - in equities in no small measure due to HFT. Post-trade (clearing & settlement) is pretty messy and error prone. Something like $50bn a year is spent on reconciliation processes, mostly in manual operations work. It's certainly reliable, but it isn't especially efficient. It's also far from being the easiest to upgrade. See the incredible pain most markets go through when they face a mandatory move from T+3 to T+2 settlement. Making changes to post-trade procedures pretty much means a wholesale, industry wide change. (As an aside, a shared database actually goes quite a long way towards alleviating some of the problems in clearing & settlement - the author makes it clear they see quite a bit of potential in private blockchains, just not public ones. And clearing & settlement is an area well served by private blockchains.)

ambicapter 9y ago
What is the point of a private blockchain? I thought the appeal of the blockchain was its validity in spite of malicious actors? If your use case is private why is it so hard to have an accurate ledger?
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- scrumper 9y ago
  'Private' just means 'limited'. We are still talking about multiple distinct counterparties transacting with each other. Public blockchains replace the need for trust with, essentially, energy usage. That's what gets you your validity, despite operating in a hostile environment. They give you a shared, single source of truth about the state of whatever system you've embodied on that blockchain. The problem they are solving is the undesirability (or impossibility) of trusting an intermediary. Private blockchains replace the need for reconciliation between parties who minimally trust* one another with a method for provably ensuring everybody has and will get the same information. They also give you a shared, single source of truth about the state of your particular market, but you get that in an environment where parties on the network are assumed to be behaving well. The problem these solve is the cost and complexity in establishing a trusted third party. It isn't hard technically to have a reliable ledger, but it is hard structurally and operationally. The point of a private blockchain is to mutualize the infrastructure required to form that single source of truth. You could do it with a trusted intermediary operating a big shared database, but you'd have to set one up in a market where that doesn't exist and assign to them complete responsibility for your record keeping. Private blockchains are a way for parties with a shared problem - the cost of reconciling their independent books - to construct a solution that doesn't require forming and staffing some new industry utility, or abrogating control over their own records (so they can maintain secrecy of trade data, for example.) *I mean by this, they have stronger economic and legal incentives to cooperate in doing business with each other than they do in ripping off the other guy. Put another way, their horizon for trusting a counterparty extends beyond the immediate transaction on the table at any given moment. This isn't the case in anonymous individual peer-to-peer transactions.
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ambicapter 9y ago

What is the point of a private blockchain? I thought the appeal of the blockchain was its validity in spite of malicious actors? If your use case is private why is it so hard to have an accurate ledger?

deleted 9y ago
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scrumper 9y ago
'Private' just means 'limited'. We are still talking about multiple distinct counterparties transacting with each other. Public blockchains replace the need for trust with, essentially, energy usage. That's what gets you your validity, despite operating in a hostile environment. They give you a shared, single source of truth about the state of whatever system you've embodied on that blockchain. The problem they are solving is the undesirability (or impossibility) of trusting an intermediary. Private blockchains replace the need for reconciliation between parties who minimally trust* one another with a method for provably ensuring everybody has and will get the same information. They also give you a shared, single source of truth about the state of your particular market, but you get that in an environment where parties on the network are assumed to be behaving well. The problem these solve is the cost and complexity in establishing a trusted third party. It isn't hard technically to have a reliable ledger, but it is hard structurally and operationally. The point of a private blockchain is to mutualize the infrastructure required to form that single source of truth. You could do it with a trusted intermediary operating a big shared database, but you'd have to set one up in a market where that doesn't exist and assign to them complete responsibility for your record keeping. Private blockchains are a way for parties with a shared problem - the cost of reconciling their independent books - to construct a solution that doesn't require forming and staffing some new industry utility, or abrogating control over their own records (so they can maintain secrecy of trade data, for example.) *I mean by this, they have stronger economic and legal incentives to cooperate in doing business with each other than they do in ripping off the other guy. Put another way, their horizon for trusting a counterparty extends beyond the immediate transaction on the table at any given moment. This isn't the case in anonymous individual peer-to-peer transactions.

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