Why distributed ledgers aren’t working (yet)

I spent a day facilitating a series of roundtable discussions focused upon distributed ledger technologies (DLT). I realised that there’s a lot of confusion around the subject. Hell, even I’m confused most of the time even after dedicating hours to the subject. When is a distributed ledger needed? What’s the difference between a distributed and a shared ledger? Does a distributed ledger need a blockchain? What is the difference between a distributed ledger and blockchain? Does the distributed ledger need a token currency to work? Which currency should you choose? And so on and so forth.

Maybe it’s for these reasons that the people participating in the discussions were confused too. When asked what questions they wanted to answer, the list and comments grew long quite fast:

• How, what, why should we be using this technology and what are the costs, where are the savings and who can do the implementation?
• Been hearing that blockchain will change the world for a few years now, but it hasn’t happened yet. Will it ever and what will make that happen?
• How do distributed ledgers relate to cryptocurrencies: do you have to have a currency to run a ledger?
• How secure is this technology as I don’t like the idea of open and transparent systems?
• With so many blockchain platforms and distributed ledger developments, start-up companies and changes, it is hard to know where to focus and which one(s) will win.
• How can we get all the players to agree on standards and, if there are so many blockchain systems, how will we create interoperability?
• The tangible development of distributed ledgers seems a way off and Open Banking is far more tangible because it has a regulatory mandate behind it.
• We have had a proof of concept, but cannot find any compelling use case.

It was quite wearying in some ways, as there seemed to be a lot of negativity. Maybe it is all that hype that led to great expectations and few expectations are being delivered. I was joined by a subject matter expert to answer all of their concerns and questions, and the dialogue went along the lines of:

“This will be a transformational technology, but we have to solve issues of trust and structure first, before we apply such technology. For example, clearing and settlement needs central banks, counterparty clearing and custodians to agree the way forward, before it can be applied to that area of operation. Digital identity needs government authorities to agree what is acceptable as an identification before it would be legally accepted in court. This is true of many of the big ticket items that will be resolved by shared databases of trust.”

We talked a lot about when you need a distributed ledger and the fact that it’s only relevant where you have multiple parties who need access to a database, and where you don’t trust those different players. The immutability of distributed ledgers, and the fact that they are stored on multiple decentralised systems, not just one centralised database, makes them work.

• If you trust the third parties, you don’t need a distributed ledger.
• If a central authority can run the database on behalf of all, you don’t need a distributed ledger.
• The fact that it is immutable and tamperproof, makes DLT trustworthy. That is its core benefit. The fact it is distributed, makes it resilient and reliable.  The fact that it can be shared with trust by all over the internet, makes it cheaper and limitlessly scalable.

This did not alleviate all the issues however, as there is a lot of confusion. In particular, I wrote down bitcoin, bitcash, Ethereum, Ethereum classic, Stellar, Ripple, zCash, Litecoin and more, and thought yes, it is hard to work out where to place your bets. But then this is the core of where we are right now: blockchains and distributed ledgers are an experiment. There is no certainty with this technology right now. We may see more forks and disagreements of direction, and we may see some cryptocurrencies and platforms implode.

This is why, when the Bank of England and Bank of Canada and other authorities trialled and tested distributed ledgers for real-time gross settlement, they took the view that this technology is too immature. It’s too early days for prime time. It's a Proof of Concept or a Proof of Work which, in reality, means it's an experiment. It is intriguing, but too early to be robust and reliable.

However, as the authorities agree their future directions and solve the barriers to implementation, and as the technologies themselves mature and become more reliable, we will see DLT transform complex structures through shared ledgers of trust.

For me, it still comes back to the basic issue of any new technology: we overestimate the speed and underestimate the impact of change.