Distributed Ledger Technology (DLT) fit for financial services

The financial services industry has been seeking a DLT that can meet the arduous demands of high volumes, complex, global transactions, ledger recordings, data transfers, monetary exchanges, whilst delivering the most secure and risk-free method of doing so and maintaining an immutable record of activity.

Now, at QPQ we believe a true enterprise-level DLT has arrived and has been proved through rigorous market-specific testing, to be an effective solution for financial services applications.

Hedera Hashgraph

This DLT has been created to fix the issues related to Blockchain and make it work at an enterprise level; retaining all the benefits of Blockchain whilst addressing the disadvantages.

Speed

One metric for DLT comparisons is transactions per second, or tps, but on its own it’s a crude measure of performance, and even a misleading one.  To complete a transaction requires consensus to be achieved on each deal, and that takes longer. 

Hedera Hashgraph showed they could reach 1 million tps in testing, and at less than 2.5 seconds per completed transaction, demonstrated in rigorous testing across multiple continents.  These are world-leading results.

Security

Security is also key, and Hedera Hashgraph uses the highest level of security currently available; asynchronized Byzantine Fault Tolerance.

Efficiency

The level of computing power and capacity required to run the Hedera Hashgraph is very low compared to the electricity demands required in many Blockchains where the so-called mining process is done huge arrays of linked computers.

What’s wrong with Blockchain?

Variants of Blockchain have already delivered credible steps towards enterprise grade DLTs ever since the first seismic shift which was to introduce a Proof of Stake approach to validate transactions on the Blockchain, as an alternative to the original Proof of Work approach.

Proof of Work Blockchain:

 

The Proof of Work Blockchain runs across the whole world-wide network of “miners” who operate farms of expensive, highly tuned, mining computers. These miners race to solve the complex algorithms that are sent out across the network as each transaction or transfer is executed. The first mining computer to solve the algorithm gets a financial reward in the form of cryptocurrency, once the rest of the community provides a consensus that the algorithm has been correctly solved.

 

Every time an algorithm is solved, it is secured in a new block of data and that new is put in place in the same time order across the open network of all ledgers across the globe. In this way a ledger record is created, and it is sealed as soon as the next block is written on top.  At that point it can never be reversed. This provides an immutable record across all ledger systems worldwide.

However, Proof of Work Blockchains cannot scale any further and in according to many, they have already scaled too far. This is true on many levels.

1.      There are now 713 Proof of Work crypto coins in existence. Power consumed worldwide through the Bitcoin Proof of Work Blockchain has increased 520% in the last twelve months.  The total power consumed in Bitcoin’s Blockchain is the equivalent to 159 countries’ entire power supply, including all of Africa!  It has been shown that the amount of electricity required to power 1 Bitcoin transaction would power 610,000 VISA card transactions instead.
 

2.      Proof of Work transactions are never validated by all the nodes on the Blockchain, so it can and does happen that what was deemed to be a consensus is subsequently “challenged” and the solution provided I shown to be incorrect. In this case, the transaction that had been “solved” is scrapped and the race for a solution is started again. This entire process takes much longer than other payment transfers technology and is not fast enough to scale.
 

3.      The reward offered to those who solve algorithms first increases with the size of the transaction, so mining groups will seek to win the race to solve the large transactions and leave the smaller ones in the queue. This can lead to even greater transaction delays for some.
 

Vitalk Buterin, one of the founders of Ethereum, (the second largest cryptocurrency in the world) has just laid out an entire plan for the migration of Ethereum from Proof of Work to a different mode known as Proof of Stake.

He recently posted these and many other questions to the Distributed Ledger Technology World and the answers to each question confirm the absolute restrictions of Proof of Work Blockchain.

1.      Bitmain* and affiliate pools now have 53% of all bitcoin hashpower. Isn’t this a really big problem?  *(Bitmain and affiliate pools are large cryptocurrency mining farms that have grown to enormous proportions)  

2.      Proof of Work is burning billions of dollars per year, even more than all scams and thefts combined. Isn’t this a big tragedy? 

3.      What are the centralisation risks in Proof of Stake? **(This is an important question as it is regularly an argument of Proof of Work Blockchain enthusiasts that “other applications” or blockchains involve centralising. This ignores the fact that Proof of Work Blockchain remuneration to miners has meant the rich get richer and more powerful, allowing them to monopolise the  Proof of Work Blockchain, which is actually not the case in other Blockchain solutions).

 Proof of Stake (PoS) Blockchain:

POS involves trusted hash data handlers, known as nodes, placing a stake of some of their own digital assets (a cryptocurrency stake) as security to the network.

In a PoS model, consensus is provided by the node holders. These node holders receive a smaller sum of cryptocurrency than a miner would, however they do not have the overheads of a mining machine or any power costs to pay out, so the net reward matches or betters the PoW process.

The nodes are held accountable by large fines for any attempt to manipulate the strict process of verifying and providing consensus.

The possibility of losing income and of losing their stake or even more, serves as a deterrent for any node attempting to go rogue.  The actions of one rogue node in isolation would be immediately picked up by the others.

As Proof of Stake has developed, so too have alternative approaches to provide greater efficiencies, greater speeds and lower transaction latency. Most solutions involve a centralised governance board of nodes known as Master Nodes which undertake complete governance of the Blockchain and maintaining the integrity of its protocol.

QPQ

As stated at the outset of this article, the DLT that stands out for us at QPQ is Hedera Hashgraph.  Hedera Hashgraph has already been tested by large scale businesses such as the American Credit Union, without hitch, supporting with real data, their previous test-based results.

We are very much looking forward to rolling out our technology platform at QPQ on this advanced DLT allowing us to disrupt trade flow settlement and trade finance liquidity provision, globally.  To find out more, contact us