Roman Holiday With Oliver Wyman
Roman Holiday With Oliver Wyman
Oliver Wyman’s latest blockchain report highlights critical technical aspects often overlooked in traditional banking, emphasizing their vital role as distribution channels in a digital economy.
Oliver Wyman (together with a company called Matter Labs) recently published a report about blockchain: All roads lead to Rome. The theme of historic empires and their marvelous achievements, this is the kind of wordplay I like to use for my blog articles. But is the title good considering the topic it deals with, such as the technological evolution within the blockchain ecosystem?
All roads lead to Rome. Is the future described in the report inevitable because it’s such a good idea? That is one possible interpretation. I would take a more cautionary interpretation and see it as a risk. There is no silver bullet, and all advanced technology in the world will not give us a structural efficiency advantage over present arrangements unless we learn to use blockchain technology effectively. But Rome is always worth a visit, especially if Audrey Hepburn decides to strut along for a Roman Holiday.
The Report Raised Strategically Important Questions
The report’s content is relevant, and the authors don’t shy away from making even, to some extent, controversial statements such as that ‘both public and private blockchains [..] have their distinct roles in the evolving structure and [will] continue to co-exist.” It's controversial insofar as crypto remains a controversially discussed topic. Regardless, I think the authors are absolutely correct in their assessment. I personally would go further and say that tokenization needs crypto in order to be effective.
The technical aspects described in the report receive too little attention in traditional finance circles, yet these are the distribution channels and processing models of a digital economy. The regulated market needs to develop its own thinking about which models are suitable and may come to very different preferences. And I think this document is a good attempt at trying to explain this to a broader audience. It’s a great paper, and I enjoyed reading it. Yup, miracles do happen.
There is a ‘but,’ of course.
Although I found the critical but objective view of permissioned networks refreshing, and it's important that this message gets out, the paper also has some significant shortcomings. This is because the authors don’t follow through and start to ask themselves what the long-term implications are of what they describe as the technological evolution. Take, for example, the discussion about roll-up solutions presented as ‘fait accompli’ resolving historical scalability and privacy constraints. Success! Job finished.
But risk in banking is a funny thing. You can never fully eliminate it; you can only transform it. One could say risk is subject to the ‘Energieerhaltungssatz’ (Law of Conservation of Energy). These roll-up solutions could negatively impact the composability, which is in many ways driving the hopes for automation benefits. And I want to be clear, I am not saying such a negative scenario is a fait accompli either. But surely it warrants a discussion. And that’s completely missing. Who knows, the fact that the report’s co-author is a “core contributor to zkSync” may have shaped their views. Now, this was fun. I also have a few other small questions or comments, for what it's worth.
Laundry List of Debatable Items
“By unifying the multiple ledgers that each entity in a transaction owns, the shared ledger that blockchain provides acts as a single source of truth.”
For a given transaction at a given time, there is more than just one ledger that could be concerned, not to mention numerous other applications to enrich a transaction or feed billing, etc. With all the goodwill I can muster, I cannot imagine a scenario where all financial institutions would manage their client accounts and internal account structure on a shared platform. So a single source of truth is indeed the nirvana, but the scope of what that truth covers is very important when it comes to generating cost savings or any other client benefit.
Re smart contracts: “Not just within a single entity, but across multiple entities, leveraging a single source of data that all participants can trust.”
I love this sentence. Spot on. Question: how do we make sure this is the case? (Hmm, Digital Asset Creator anyone?)
“Another profound feature of blockchain is data immutability, as entities can be certain that data cannot be erased or tampered with.”
This falls into the category of digital fiction. Blockchain records are not immutable; they are highly tamper-resistant and tamper-evident. We may be discussing semantics because erasing an entry is indeed complicated, but falsely invalidating or adding ones is less so.
“Presently, incorrect information can halt the settlement of financial instruments, a significant industry pain point.”
Significant? Hm. Depends on the asset class; generally speaking, equity markets are highly STP. Fails that come purely from incorrectly formatted settlement transactions are a thing, hence why SSI utilities are increasingly being adopted, but there is nothing really blockchain can do; in fact, it makes this problem worse. Securities markets mostly require a matching delivery and receipt message to move the funds. Gosh, what was the broker's account number at custodian x for this fund again? Try this. Fail! Oh no. Come blockchain, same scenario, try this. Success! Quick call to broker to confirm receipt? We got nothing. But I can see you sent all the retirement money to...who is this …. OMG!
“Asset digitalization: Accelerate and enable settlements with tokenized assets to enhance liquidity.”
Lower transaction cost and better, faster processing are, of course, good things, but this direct correlation idea between settlement efficiency and trading volume is also digital fiction. But this is something the technology cannot deliver right now, and more importantly, it doesn’t have to. The benefit as a disruptive technology, at least initially, is not better and cheaper but different.
“Capital markets. Reduced cost of intermediation.”
I’d say Oliver Wyman you have a bit of double counting going on in the table. Why would intermediation costs go down? Higher efficiency leads to cost savings, and they get passed on to clients. That argument is also made in the previous box. Any other reason? No additional info provided. When we are dealing with financial instruments, it will be very difficult because it's inefficient to reduce intermediation because, and I love that expression, we need to staple the token with a bundle of rights, which is what the security represents. And you don't have this problem in crypto because there is nothing to staple. And whoever does that is an intermediary.
“Accessibility - Anybody can join a public blockchain and [..] validate transactions.”
And the box continues that there are admission criteria for permissioned. It may sound odd, but I think this is wrong, or at least formulated in a very misleading way. Anyone can join? No, you need hardware, and you need to cater for software updates; you may need to buy staking assets. What is this? Sounds like admission criteria to me. The difference is not that one type of blockchain has them and the other doesn’t; the difference is who decides what the criteria should be and interprets whether the conditions are met. This imprecise language that is often used clouds our collective understanding. Just saying.
“Within this context, the zk technology stack has emerged as a leading option.”
That’s what everyone says these days, but does it make it true? zk-Rollups are more complex to implement than Optimistic Rollups, and who knows, maybe that becomes a bigger issue down the line. My point is, I think this section lacks some balance and critical challenge. Just because Vitalik says it's good doesn't ensure it will happen. But as stated at the beginning, solving what this technology does very well comes at the cost of creating new problems elsewhere, particularly affecting composability. And when Vitalik is referenced to have acknowledged the complexities involved in zk technology, I am adding this to my reading list: do Vitalik’s concerns echo mine or not? The reason I am saying this is: achieving a single source of data that all participants can trust (quoting Oliver Wyman) is primarily a scaling issue: it is somewhat non-existent for native crypto assets but a huge challenge for non-native security tokens.