Over the past two years, the blockchain and digital asset industry have shown phenomenal growth as it continues to solve the performance, scalability and security problems in the payments space.
More financial institutions have begun to adopt blockchain technology to help modernize global payments. However, not all blockchains are created equal.
Even though effective, centralized blockchains do exist, there is a case for decentralization. In a centralized model, the owner of the network reaps the benefits, when decentralization occurs the opposite is true. Royal Bank of Scotland have always been proponents of decentralization when using distributed ledger technologies and applaud Ripple’s efforts to move responsibly to a decentralized model.
If you’re still struggling with the reason why this is important, allow me to use an analogy used by the Boring Money Blog that compares the verified transactions on a blockchain to adding personalized Lego bricks to a public Lego tower. There are many advantages of having this “tower” in a decentralized business model, including:
- Resiliency — no single point of failure
- Cheaper — no middle-man or monopoly to create fees or pricing power respectively
- Agile — no need to move at the speed of the central component
- Private — data cannot be resold or mined by the central party
However, if all of the Legos are controlled by a central entity, then these benefits could be diminished. With that said, I believe that the benefits of decentralization don’t just apply to technology but also can apply to business models.
Decentralization in the business model
The Australian Stock Exchange’s (ASX) recent announcement of their intent to use blockchain provides a prime example of why a decentralized business model is necessary.
A stock exchange is a collection of disparate parties who wish to exchange stocks. This has evolved from an informal gathering at a coffee house to the parties standing up a joint entity — a stock exchange company, like the ASX. The parties become clients of this new entity, which over time gains independent shareholders and then uses its position and network effect to gain pricing power over the original parties.
This problem has grown over the years and is not just limited the exchange of stocks. It’s a material cost of doing business in the financial sector. What’s more, the cost is passed on to customers.
Distributed ledger technology (DLT) or blockchain, removes the need for the central database and significantly reduces the role of the central entity — the stock exchange company. Understandably, this wouldn’t be in the interest of the ASX.
So instead, they have simply replaced the existing database with a distributed ledger. The replacement is more akin to making an expensive technology upgrade, and has not, unfortunately, solved the challenges of centralization.
That’s not to say that the motivations behind the ASX’s decision weren’t in line with the advantages listed above. However, their business model needs to change for these benefits to be fully, if at all, realized. And, unless an entity is willing to make those changes, there’s little point in the transformation. In other words, a traditional database application will suffice if there is decentralization in either the technology or business model.
If ASX clients collectively begin building their own Lego tower, then I might be more inclined to say we have a decentralized business model and know that the benefits can be realized. As ASX and similar entities have surely discovered, there’s only so much fun you can have on your own with a blockchain.
About the Author
Richard leads a team of engineers and innovators looking at emerging technologies and their application across RBS. His current focus is on the use of distributed ledger technology including blockchain across RBS. Richard has a 20-year career in investment banking technology, specializing in the building of financial ledgers and regulatory reporting for the largest financial service institutions.
