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Causal Capital ~ The Knowledge Capital Specialists

DLT adds risk to settlement processes

Friday, December 2, 2016

Udo Mikau, Frank Neumann and Jürgen Bott have recently published a fascinating paper on the Distributed Ledger Technology through the Capco Journal.

 

As it happens, not only is the Distributed Ledger showing itself to be a concept that is little more than a solution looking for a problem, early assessments of the DLT are also demonstrating that the protocol appears to increase settlement risk rather than reduce it.

 

Distributed Ledger Technology is the dominant ideology underpinning the communicative data structure of Bitcoin's Blockchain Framework, and it has attracted a lot of attention from bankers across the planet. Many people are hailing the Distributed Ledger Technology as the most useful element of the Bitcoin crypto-currency domain, but as it turns out, this technology is looking like it may end up being just another red herring on the evolution of transaction settlement process improvement.

 

It only takes one significant anomaly to claim a system is not without exception and for DLT, "The DAO Hack" was just that. In June 2016 a hacker was able to commit fraud to the tune of 40 million dollars by exploiting vulnerabilities in the Decentralised Autonomous Organisation structure of the DLT and recurse smart contract codes that represent relationships between nodes in the system.

 

 Byzantine Faults Drive Race Condition Risk in Smart Contracts and the DLT

 

For Blockchain fanatics, this nightmare has become a reality. What's worse is that investigation into this cyber breach has technologists at a loss as to whether the crime was an outcome of an unexpected Race Condition in the DLT system, which surmounts to a huge bug at the end of the day or an implicitly intended feature of the very system directly. What we do know is that such confusion casts the entire reliability and repeatability of the DLT into doubt and given its intended purpose, such unpredictability renders the Blockchain as not always entirely fit for purpose.

 

It scrutinises the sociological aspects of new technology, where an entire community wants to believe in the benefit of a new technology without considering its theoretical limitations and without applying the common standards of operational risk management.

 

Capco Journal Of Financial Transformation #44

 

None of this is new to banking or settlement, and the similarities between SWIFT versus the Blockchain in respects to traceable transactions and risk management would leave SWIFT as the winner on stability. Not only does SWIFT share the distributed network structure that Blockchain provides, it also includes referential accountability.

 

This is a fascinating paper and I recommend taking a look at the following [LINK].

More information on the Ethereum Project can be found here [LINK].

How developers are responding to Ethereum's Unexpected Fork [LINK].

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