Distributed ledgers: “Confirm-as-you-go”

Following on from the “Blockchain is a solution looking for a problem” narrative of 2016, distributed ledger technology has evolved.

Distributed ledgers – databases with shared control over what and how data is added – can be seen a strategic solution to the “reconciliation” workaround that we have had to put up with until now. This strategic solution is applicable to all industries, not just financial services.

How not to build infrastructure

Imagine you had to design a system where it was absolutely critical that data under your organisation’s control matched data under another organisation’s control. And this data reflected your commitments and obligations to the value of millions or billions of pounds and dollars. Your organisation lives and dies by the accuracy of this data: mistakes are expensive.  And the data is always changing.

Would you design it in silos, where you store your own view of the world in your own databases, calculating changes based on your own logic, occasionally handshaking with the outside world to check that what you thought is what the other organisations thought?

Would you write your calculation engines independently, leaving the other organisations to manage their own calculations, hoping that their logic matches your logic, hoping that both your calculations match the terms of the business deal you both understand?

Would you leave responsibility to the other organisations to have their systems in order, knowing that any failure on their part is going to cost you time, energy, and money when you try to figure out if it is them or you who has made an error?

I would think the answer is no. Yet this is how we have been building our financial infrastructure: independently, with occasional handshakes to check “what I see is what you see“.

The problems

The key problems are:

• We are recording facts before checking. We write down what we think happened before checking with the other party if it is also what they think.
• We are also calculating independently. We agree the business logic in written prose, and then independently attempt to replicate the logic in computer code, instead of agreeing and running the computer code together.

Surely we would want to check and confirm the facts before recording them?  Surely we would want to agree on the calculation logic rather than just the results?

Distributed ledgers: The strategic solution

What do distributed ledgers do?

The reconciliation comes as part of the fact recording; not after. Organisations can “confirm as they go“, rather than recording something, then checking externally afterwards. How? Distributed ledgers build in connectivity and validation criteria. If the relevant parties do not agree on a fact, it doesn’t get recorded for either party.

The logic behind how commitments contractually evolve is also agreed in code and confirmed up front, so that as the word changes, calculations will necessarily agree. These bundles of logic are sometimes called smart contracts.

Conclusion

Until now, we have had to make do with recording and calculating independently in silos, then confirming with our counterparts after the fact. Distributed ledgers are the strategic solution that industry needs to confirm-as-you-go.