The evolution of distributed ledgers

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The banking industry has turned the collection, movement and management of money into a goal of its own. But money, fundamentally, is an artificial construct. By itself, it is of no utility. It is a representation of value, against which items of use can be measured.

The evolution of distributed ledgers and the future of financial services

Banks perform very few functions, which at a high level are fairly straightforward. Retail banking holds deposits, provides loans, facilitates payments and facilitates transfers to others. Investment banking moves money, raises money and manages risk. Each of these areas is slowly being eroded by FinTech companies. Perhaps more significant, however, is how some companies are creating new ways to transfer value, which the banks are adopting.

What technology is likely leading toward is clear: whereas to this point banks have held the entire management of funds from collection to redistribution, technology is changing how this can be done without such centralized intermediaries. Distributed ledger technologies, or distributed infrastructure technologies that incorporate autonomous execution capabilities, are transitioning through a series of phases that may lead to the distribution of intelligent infrastructure away from centralized entities.

  1. Phase one
    Bitcoin’s development in 2008 and release in 2009 showed enormous promise: a decentralized currency with near-frictionless transactions, allowing for effectively digital cash to be sent around the world without any controlling party. Bitcoin was, however, limited in a number of ways. But, the potential of the underlying blockchain was not lost on some. If this could be used to transfer tokens considered financially valuable, it could be used to transfer data and computer code in the same decentralized manner.
  2. Phase two
    In this phase, incumbents are investing to identify and implement opportunities that leverage blockchain technology, as well as recognizing that there are many more flavors of the technology, leading to the more broad definition of distributed ledger technology. People are saying that they like the blockchain, but not bitcoin. Consortiums are forming to leverage the technology and implement single distributed ledgers, in theory more efficiently managing utilities that currently require cumbersome, nonstandard processes.
  3. Phase three
    In this phase, the previously identified new revenue opportunities will begin to roll out. Additionally, institutions will start looking to moving toward interoperability of private distributed ledgers. While distributed ledgers have practical use cases through the setting and enforcement of standards, and decentralization of certain back-office functions, such as regulatory reporting, the real strength will come when these are connected and interoperable in an open, publicly authenticated network.
  4. The final phase
    With this interoperability and development of standard global ledgers will come new business models, and their development and full deployment will be the final phase. With the market now having built the scaffolding needed to stand up these new business models, the full potential of distributed infrastructure may be realized.
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