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DNB: DLT substantively inferior to current market infrastructure tech

08 June 2018  |  11319 views  |  2 Server farm

Following three years of experimentation, the Dutch Central Bank has concluded that blockchain technology fundamentally fails to pass muster as a realistic replacement for current financial market infrastructures.

For evaluation purposes, De Nederlandsche Bank (DNB) created a series of four prototypes named Dukaton, that gradually scaled from a simple Bitcoin-style mining operation all the way through to a fully-functioning payments processing infrastructure operating across multiple nodes on a distributed ledger.

The Bank found definitive limitations in capacity, efficiency and certainty of payment, that compared unfavourably against current systems such as the Eurosystem's interbank settlement network Target2.

"Today's payment systems are highly efficient, can handle large volumes and offer the legal certainty that a payment is completed," states the Bank. "The blockchain solutions we tested proved to be inefficient - in terms of both costs and energy consumption - and unable to handle large numbers of transactions.

"Furthermore, several consensus algorithms we used will never achieve the full certainty of a transaction, so that it cannot be undone, which the central banks' Target2 system offers."

DNB does, however, believe that blockchain technology could ultimately improve a financial market infrastructure's resilience to external attacks, at the expense of its capacity and efficiency.

"Other algorithms are able to withstand parties with malicious intent and have the potential of raising the FMIs' cyber resilience, but they currently fail to meet other FMI requirements," states the Bank. "DLT may well offer enhanced efficiency in payments that involve multiple currencies, however."

The Dutch Bank's conclusions are slightly at odds with those of the South African Reserve Bank, which has just released details of 'Project Khokha', a proof of concept designed to simulate a ‘real-world’ trial of a distributed ledger technology (DLT)-based wholesale payment system.

The results show that the typical daily volume of the South African payments system could be processed in less than two hours with full confidentiality of transactions and settlement finality. Transactions were processed within two seconds, across a network of geographically distributed nodes, with distributed consensus providing the requisite resilience. The SARB was able to view the detail of all the transactions to allow for regulatory oversight.

The project was built on Quorum, using Istanbul Byzantine Fault Tolerance (IBFT), Pedersen commitments and range proofs to deliver on the combination of scalability, resilience, confidentiality and finality.

Despite the positives, the report notes that "there are many issues to consider before the decision to take a DLT-based system into production can be taken. Some of these issues relate to the practicalities of implementation, but also to legal and regulatory factors and to the broader economic impact. "

Comments: (2)

Patrick Millar
Patrick Millar - The Institutes RiskBlock Alliance - Malvern 08 June, 2018, 15:06

The Dutch Central Bank's blog post is very short on detail. The only specific technology they mention is the Bitcoin blockchain, so it's not clear what they were testing (business process) or on what they were testing (ledger technology) or what their success criteria were for making the pass/fail judgment. Hopefully they will reveal more - but for now, it's inconclusive without the additional information.

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Milos Dunjic
Milos Dunjic - TD Bank Group - Toronto 09 June, 2018, 07:36

I did not understand that they actually used Bitcoin. Article lacks details, I agree, but it clearly states that DNB experimented with different consesnsus algorithms, starting from Bitcoin-like mining and many non-Bitcoin-like consensus algorithms. If they in fact used Bitcoin blockchain, they may not be able to experiment with different types of consensus.

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