Bitcoin: More than a Currency



When most people think of Bitcoin, they might see a risky financial investment or, for the more cynical among us, a corrupt medium for laundering money.  However for many, the real story is not Bitcoin the currency, but rather the underlying blockchain technology that enables all cryptocurrencies.

A blockchain is a transaction database shared by all nodes participating in a Bitcoin protocol system – a public ledger that prevents duplicate transactions, and is nearly indestructible.  Every new block of transactions contains a hash of the previous block, creating a chain of blocks from the ‘genesis’ block to the current block.  A full copy of a blockchain contains every transaction ever executed, much like an email chain where you can see the entire record of the conversation.

So what’s the big deal? There are several theories on how blockchain technology will develop as a disruptor.

ethereum’s Stephan Tual raises an interesting angle which could go some way in challenging the nascent cloud paradigm. There is emerging tension between the centralised cloud and the decentralised alt-currency blockchain model. Where the cloud is based on a centralised sharing of resources, the cryptocurrency blockchain is a completely decentralised, peer to peer system validated by the entire network of its miners. Mining of ethereum’s blockchain is made through decentralized dedicated CPU instances at full capacity. What remains to be seen is how this will impact the current public cloud platforms whose model essentially relies on allocating spare CPU/resources across a pool of customers.

For the financial services industry, there are many predictions on how blockchain applications will emerge as disruptors, ranging from trade reporting and clearing to fraud protection and multi-entity contracting. The volatility of alt-currencies in the market would suggest much uncertainty about their future; but Michael Mainelli, co-founder of Z/Yen, suggests the technology has already survived several eradication attempts and earned its place as a viable operating system for cryptocurrencies, “Working since 2009, forged in a global furnace of libertarian money, trade, avarice, criminality, espionage, and law enforcement, Bitcoin and other cryptocurrency experiments provide increasing confidence that blockchains are robust in harsh environments and have a bright future.”

In the past 30 years, vested interests and inertia have prevented the whole financial services post-trade industry from exploiting technology and bringing efficiencies to the market, so we are allowed some skepticism on that front. However there might just be more than meets the eye; and, as the industry struggles with transparency and security concerns, many are starting to see blockchain technology as the David that will bring down the industry Goliaths.

On the real-time, pre trade front, latency inherent to the crypto algorithm will never make blockchain viable for HFT applications. It is, however, very tempting to start pondering how its decentralized, transparent, and secure nature might go some way in addressing the more ethical issues brought up by Michael Lewis around the explosive Buy-Side – Sell Side – HFT relationship. One could imagine blockchain being used for TCA type of applications providing a clear audit trail of the broker’s execution against an aggregated, microsecond time-stamped record of the market.

Blockchain technology is here to stay. The challenge will be how to enter that blockchain. We’ll be watching closely.