As financial market participants adopt blockchain alongside existing infrastructures, there’s a need not just for blockchain interoperability but also for existing infrastructures to work alongside these blockchain networks. While DeFi may lack regulation, it has clearly demonstrated the benefits of removing frictions and silos.
Digital Asset is pitching DAML with its interoperability features as the glue to integrate both blockchains and existing infrastructures.
And with good reason. It already has relationships with several stock exchanges, including the ASX, HKEX, Deutsche Boerse, and Boerse Malaysia. Plus, it boasts companies such as Goldman Sachs and Broadridge as both clients and investors. And it has deep pockets with a $120 million funding round late last year.
Blockchain for financial institutions offers several potential benefits, including cost and risk reduction as well as new opportunities.
- permissioned transparency reduces risk
- removing reconciliations to cuts costs
- instant settlement reduces risk, impacts liquidity
- more efficient business models.
But today’s blockchains – both enterprise and public blockchains – are just larger walled gardens. Some public blockchain interoperability solutions are simpler because they carry more limited data. In contrast, enterprise blockchains aren’t just about who owns a token. They’re also about workflow. Hence interoperability solutions are more complex. This is where Digital Asset comes in.
At a more technical level, DAML’s solution involves separating the blockchain from the smart contract language and adding a privacy solution for cross-chain execution.
Digital Asset, as have others, argues for the need for not just Open Banking, but Open Business, which involves a mindset change. The question is how much change is possible?
A stark future for banks?
In a paper on the topic written by Digital Asset and Oliver Wyman, the consultants outline three future scenarios for banks, which we’ve rephrased somewhat bluntly.
- Banks adapt and survive: they adopt open blockchain networks to radically reduce costs and develop customer-centric products
- Front-end disruption: Banks don’t adapt and lose control over client interfaces, but remain providers of regulated products such as loans
- Crypto, Defi wins.
When you spell it out like that, it’s really a matter of adapt or die.
Is DAML the only answer?
Nobody thinks there’s only going to be one blockchain. So will there only be one interoperability solution? Digital Asset’s objective here is similar to Java’s domination in business software. In some ways, having a single solution makes life easier. But in other ways, it’s also riskier – a bug in the language could impact every market infrastructure. But the issue is similar for most blockchain protocols. DAML may be open source, but Digital Asset still dominates its development.
The whole concept of the Global Economic Network reminds us of Citi’s idea of the Regulated Liability Network (RLN) – a single network that spans most financial infrastructures. Citi was one of Digital Asset’s early backers, but for its RLN vision, it’s working with SETL, which also boasts some big clients and has a very different interoperability solution, PORTL.
Several other interoperability or integration solutions all take different approaches, including Hyperledger Cactus, the Overledger Network, and those better known for public blockchains such as Cosmos and Polkadot’s Substrate.
There’s no question that Digital Asset is right. Blockchain networks and existing infrastructures have to interoperate. Eighteen months ago, neither DAML’s interoperability solution nor SETL’s PORTL existed. While institutions aren’t spoilt for choice, at least more options are now available.