Blockchain technology isn’t ready to be used to support financial market infrastructure, according to De Nederlandsche Bank (DNB), Netherlands Central Bank.
This revelation was made after the Dutch central bank concluded its three-year testing of the blockchain technology. The bank commented that the technology in its current state isn’t ready to be used to support the financial market as it still has to meet some requirements. The bank made this known in a blog post on its official website.
According to the report, the blockchain technology is still lacking in some areas like capacity, while it also has some negative sides like its high energy consumption and the insufficient certainty of transaction verification.
These discoveries have led the bank concluding that the technology isn’t ready to be used to support financial markets. It can be used to improve the resilience to external attacks but that will leave the systems vulnerable in terms of efficiency and capacity.
The blockchain technology has been gaining widespread attention from virtually all sectors of the global economy, with the technology alongside artificial intelligence and internet of things (IoT), regarded as technologies of the future by the Chinese President Xi Jinping.
While acknowledging the uniqueness of the blockchain technology, President Xi stated that;
Since the 21st century began, global scientific and technological innovation has entered an unprecedented period of intensive activity. A new round of scientific and technological revolutions and industrial changes is reconstructing the global innovation map and reshaping the global economic structure. The new generation of information technology represented by artificial intelligence, quantum information, mobile communication, internet of things, and blockchain is accelerating breakthroughs in its range of applications.
The admission by President Xi is something that the world already knows and some countries and companies have started taking advantage of the blockchain to build a better infrastructure for themselves.
Four different prototypes tested
Before arriving at its current conclusion, the DNB tested four different blockchain prototypes over the past three years, with the project dubbed Dukaton. The primary aim of the study was to better understand the technology and to also determine the different purposes that it can be used to improve securities traffic and payment.
According to their report, the bitcoin software was the first prototype to be used. The network was decentralized on five computers and the operators of each computer were rewarded for creating new “Dukatons” and a transaction fee.
Recognizing the high amount of energy the bitcoin blockchain uses, the second prototype saw the researchers create Dukatons using a less energy consuming method. The tokens were created via a trusted issuing party which is completely different from the way bitcoins are created. In this second scenario, those who created the Dukatons receive all the tokens while the validators of transactions were given transaction fees only.
In the third prototype, the Bitcoin blockchain wasn’t used at all. The Dukatons were centralized and stimulated with an inbuilt wallet. For extra security, the cryptographic keys are stored. The fourth prototype was built on the foundation of the third one. It analyzes the distributed ledger transaction’s usefulness to the infrastructure of a financial market.
In order to track how it works, the researchers set up a website that displays the Dukaton tokens and the transactions on the blockchain. Several configurations were tested and different algorithms were used for approving transactions after an agreement between the different network nodes has been established.
Conclusions from the test
After the research ended, the team reported that the prototypes show that the solutions couldn’t be used to support financial market infrastructure yet as they do not meet all the requirements. Some of those requirements include efficiency, safety, reliability authorization, availability, resilience, payment finality, scalability, cost, capacity and sustainability
The current technology used for financial market infrastructure support, Target2, the Eurosystem inter-bank payment system, however, meets all the necessary requirements, the team added. Target2 provides the market structure with efficient payment systems that have the ability to handle huge transaction volumes and transaction certainty.
Blockchain technology, on the other hand, wasn’t able to handle large transaction volumes while the team wasn’t able to 100% conclude that a transaction can never be reversed once it has occurred. There are algorithms that are resistant to notorious parties and can improve cybersecurity but the algorithms failed to meet other needed requirements.
Further improvement needed on blockchain
According to the report, blockchain technology has the potential to improve payment efficiency of several currencies. The central bank added that the blockchain technology is a very promising one and with the aid of some new algorithms, it would be able to fully support the financial markets infrastructure.
In light of that, the bank has concluded that it would carry on with its research on blockchain technology.
Other central banks also experimenting with blockchain
The DNB isn’t the only central bank that is currently experimenting with blockchain technology. The Bank of Japan (BOJ) and the European Central Bank (ECB), both released reports claiming that the technology has the potential to create new securities settlement tools like cross chain atomic swaps across ledgers that aren’t even connected.
When these banks would be able to use the technology to carry out financial market duties is still unknown but one thing is certain, the blockchain technology is very exciting and everyone has now recognized that it a technology that could shape our future.