Evolving language: Decentralized Financial Market Infrastructure

[Note: this was originally published at Diar.co]

Beginning in late 2014 through early 2015 a small group of startups in the US and UK independently began to lay the ground work for what is often marketed as “permissioned” distributed ledgers.  Or DLT as it became known.

I am acutely aware of their journey because I wrote the key, widely cited paper that unfortunately popularized that exact term (a term first invented by Robert Sams from Clearmatics). 

I say unfortunately because that DLT acronym – while well-intentioned – quickly became a gimmicky “marketing term” by many of the large consultancies around the world trying to capitalize – and frankly scare – clients into buying high-priced toys, none of which gained any meaningful traction.  Conjoined with images of a Candyland nirvana, there were (and are) a slew of “me too” vendors that flooded the market in late 2015 and early 2016 all searching for big pay days and funding from deep pocketed enterprises that had no clue as to what DLT as an acronym actually meant; subsequently some of these flash-in-the-pan ambulance chasing vendors have repivoted to doing things like an ICO or just fading away entirely.

How to visualize this?  If shrink-wrapped box packaging was still en vogue, we could imagine “Now with DLT!” brightly stamped in neon colors on the side of the latest version of some wares. 

For example, some finger-pointing can be done at various software companies, though not all of them.  Lured by a number of their clients who wanted to remove reconciliation but maintain the same intermediated business model, more than a few vendors deconstructed the concept of a byzantine fault-tolerant, globally shared state capable of enabling P2P transfer of value into something arguably less meaningful: bilateral states using the same old financial intermediation to solve the double-spend problem.  In some cases it was boiled down to digitally signed message passing integrated into legacy market structure.  Useful yes, but not revolutionary.  Calling it a “distributed ledger” makes boring software products sound sexy but it ultimately confuses anyone who makes the effort to figure out what it all means.

And because there’s plenty of blame to go around: various coin maximalists religiously latched onto and dutifully created umpteen strawmen arguments using contorted disingenuous views of what DLT meant to them.  The two specific cartoonish examples that stick out the most are the horse-buggy meme and the naive “sewer rat” analogy that is occasionally regurgitated on reddit.  Why are these shortsighted?  Because at the time of their genesis, they both assumed that the only type of blockchain (or distributed ledger) that can or should exist, is the Bitcoin blockchain or derivative thereof.  It is entirely self-serving, dogmatic, and void of empirical reflection.

In all instances – big consultancies, starry-eyed startups, large software companies, and ideological zealots – they eventually butchered the acronym into an indistinguishable pile of mush.  By late 2015 as this was happening, I explained that it was basically the same thing that happened during the “no gluten” marketing mania of the early-2010s.  No one could really tell you what gluten is, but every food vendor was quick to add that their products do not have it.  A bit like cloudwashing endured too.

Due to their collective inability to manage expectations, by mid-2017 nearly the entire “DLT” ecosystem found itself in the abyss of the trough of disillusionment.  A handful never fully fell in and a couple have clawed their way out, without the aid of retail coin flippers or religious troll armies.  Others attempted quick fixes or rebrand such that they were no longer classified as a DLT company hoping that definitionally they couldn’t be in the trough of disillusionment.

A good couple books could be written on the trials and tribulations of the vendors that made the headlines during these first few years.  Eventually the DLT term has fallen out of disfavor for something only slightly less abused: “enterprise chains.”  It’s only marginally better than DLT in that it is shorter when written out and hasn’t been gentrified by VCs or demonized by coin peddlers.  But it’s not really accurate because the tools that are being built, aren’t just for use by enterprises. 

|| Onwards and upwards

This brings us to: DLT is an acronym that has served its initial use and should evolve with the times. 

What then, can we use to describe the utilization of technology to re-architect organizational processes and business models?  Automating networks is generic and while accurate, is not nuanced enough.

While it would take a bit more length than this article form allows for, there are some salvageable ideas worth transplanting in the years ahead. 

For starters, there is something rather mundane but simple: automating the principles for financial market infrastructures (PFMI).  As I – and others – have described elsewhere, PFMI are decades old standards by which operators (and overseers) of financial market infrastructure ought to follow; in most jurisdictions operators are legally required to follow them.  Basically a list of do’s and don’ts for running systemically important things like payment and settlement systems.   Like, how to identify risks and hold those who touch risk accountable when something goes wrong.  This is a bundle of seemingly boring but existentially important frameworks.

Which principals can be automated or should be automated?  Unfortunately, that’s beyond the scope of this short article.

What is being briefly proposed – and built – is what can be labeled “dFMI”: decentralized financial market infrastructure.

Funnily enough, FMI today is typically distributed and not fully centralized.  In the case of the EU there is a supranational payment system, but this is an exception to the rule that each developed, and most developing, country has one or more payment, clearing, and settlement system for both cash and securities.  The majority of these systems were set up and created heavy intermediation (single point of trust) due in part to technological limitations of the 1970s.  The CSDs such as DTCC and even exchange operators exist the way they do today – as systemically important institutions – partly because of an era in which mainframes and ‘minicomputers’ were the only available options.

What if we could safely and securely disintermediate market structure, reduce single points of trust, and remove monopoly rents, all while following PFMI?

It is a bold vision, but one that does not involve standing on tables saying it is the greatest thing since the invention of the internet or preying on unsophisticated retail investors in order to flog the coin-of-the day to some other retail punter.

It’s easy to be cynical towards an ecosystem that has proportionally attracted as many snake oil salesmen as the various coin groups have the past few years.  And it is hard to fulfill the promises that are hyped at events.  For example, the Sibos “New Kids on the Blockchain” video from 2015 is illustrative of those difficulties: just a couple of the panelists still work for the same company they did at the time and all of the groups represented in the video have had uphill battles to stay afloat today.

In conclusion, instead of playing identity politics with lightning bolts in a social media handle, motivated developers genuinely looking to help transform market structure can crack open a copy of the PFMI handbook and immerse themselves with a world that keeps civilization from falling apart. 

Coupled with tools and libraries first conjured up within the ill-defined drama-filled blockchain world, real market structure changes can be made and society will be better off for it.  Best of all, it doesn’t need to involve burning mountains of coal to secure either.

It’s not sin to still use DLT as a term-of-art but dFMI is arguably a more expressive acronym, providing more context for both practioners and users alike.

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