The R3 consortium of financial institutions working on a blockchain-based solution to improve the financial services infrastructure has released an update on its initiative, which it calls "Corda."
Since the R3 consortium has continuously drawn more members among major institutions since it began six months ago, it has naturally attracted attention from the fintech and financial communities. The recently-released update gives insight into how Corda plans to serve the financial industry and what makes it different from other financial blockchain initiatives.
R3’s overriding mission, shared by other initiatives, is to save money, decrease transactional errors and significantly increase settlement speeds.
What Is Corda?
Corda’s names comes from two sources, Richard Brown, R3’s chief technology officer, told Bloomberg. The first part of the name sounds like “accord.” The second part is from the definition of a chord, the shortest straight line between two points on a circle. The circle represents the banks that make up the R3 network.
Brown, in an R3 blog, summarized Corda’s key features as follows:
• No unnecessary global sharing of data: only parties with a legitimate need to know can see the data within an agreement
• Corda choreographs workflow between firms without a central controller
• Corda achieves consensus at the level of individual deals between firms, not at the level of the system
• The design directly enables supervisory and regulatory observer nodes
• Transactions are validated by the parties to the transaction rather than a broader pool of unrelated validators
• It supports a variety of consensus mechanisms
• It records an explicit link between smart contract code and human-language legal documents
• It is built on industry-standard tools
• There is has no native cryptocurrency
When the code has further matured, Corda will be open sourced.
Blockchain Reality Versus Hype
Brown noted that in joining R2 in September 2015 from IBM, he wanted to make sure he did not fall into the trap of believing all the hype about blockchain. He realized it was important not to suspend critical faculties or omit any important engineering. Solutions have to be based on the requirements of a customer’s needs, not on some “cool piece of technology.”
The financial industries collectively “decided” in early 2015 that blockchain was the future. But the reason for this, according to Brown, is a subtlety that most people have missed.
The cleverest aspect of bitcoin is the way it articulates a business problem. The problem is to create a system where nobody can stop a user from spending their own money. Once this problem is identified, the design becomes secondary. If you want to be able to spend your own money, you can’t have central control, and you can’t have a collection of validators.
You realize you need something akin to a proof of work to allow voting to work. “You work the logic through and pretty much the whole design (the blockchain, the need for mining, block rewards, maybe even the UTXO transaction model, etc.) drops out.”
What Blockchain Really Does
Blockchain, according to Brown, is a tool invented to solve a real problem.
He realized that while many in the financial industry recognized that the “bitcoin package” was not acceptable for several reasons, including the fact that proof of work is not necessary for private deployments, they accepted everything else about blockchain. He saw companies supporting solutions that made little sense for the types of problems he was trying to solve.
Blockchains Distinct Services
Brown looked at the collection of services blockchains provide. The blockchain services underlying private variations like bitcoin and Ethereum include five distinct services: consensus, validity, uniqueness, immutability and authentication.
The most important blockchain feature is consensus. With bitcoin, the shared facts include what bitcoin outputs have not been spent and what has to happen for them to be spent validly. The facts are shared among all full node users.
Validity is a feature linked to consensus. It enables one to know if a proposed update is valid. Validity defines the rules.
Uniqueness is the service in the blockchain that allows users to know which of two valid updates to a shared fact should be selected in a given situation. The “anti-double-spend” feature in blockchains provides this service.
Immutability is a feature that means once data is committed, it cannot change. Brown noted this feature is a bit misleading because data can be changed. What is really meant is that once committed, no one else can accept a transaction by trying to build a modified version of the data that has been accepted by other stakeholders. Blockchains provide this by making transactions commit to outputs of prior transactions and make blocks commit to previous blocks’ content.
Authentication is the last feature. A private key designates every action in the system. This differs from traditional enterprise systems with “super-user” accounts.
What’s new with distributed ledgers is the emergence of platforms that are shared across the Internet among distrusting actors that enable them to achieve a consensus on facts they share.
What Banks Need
Shared facts among financial institutions include the following type of agreement:
• Bank A and Bank B agree that Bank A owes a certain amount to Bank B, repayable via RTGS on demand
• It is a cash demand deposit
• Bank A and Bank B agree that they are parties to a credit default swap with certain characteristics
• This is a derivative contract
• Bank A and Bank B agree that Bank A has to deliver X number of units of a certain common stock to Bank B in three days’ time in exchange for a specific cash payment
• This is a delivery-versus-payment agreement
The financial industry is defined by agreements among firms that share a common problem. Both parties record the agreement in different systems. The need to fix things when the different systems end up believing different things incurs large costs. Tens of billions of dollars are spent on this problem annually.
The systems usually communicate by exchanging messages. A lot of resources are spent on reconciliation to make sure the parties reached the same conclusions.
What Makes Corda Different
Brown sees the need for a system to record and manage financial agreements shared across firms, such an agreement that is visible to the necessary regulators and built on industry-standard tools.
The system would focus on interoperability and incremental deployment that does not release confidential information to third parties. One firm would be able to review a set of agreements with a counterpart and be sure that what the firm sees is what the other party sees and is reported to the regulator.
Corda contains the features of consensus, validity, uniqueness, immutability and authentication.
Corda is not building a blockchain, Brown noted. The starting point is individual agreements among firms.
We reject the notion that all data should be copied to all participants, even if it is encrypted.
The focus is on agreements. There is a need to link to legal language, which Corda considers at the outset. Because there will always be disputes, the system for resolving this should be established at the outset.
Corda also considers the reality of managing financial agreements. The system has to make it easy to write business logic and integrate with existing code. There is also a need to support choreography among firms entering into agreements.
Corda is not a solution to all problems, Brown noted. The model is intended for certain use cases. Corda continues to engage with partners working on complementary platforms. There are still research and design questions to resolve.
Brown noted Corda is not competing with or duplicating what other companies are doing.
Has R3 Made Its Case?
The update on the R3 initiative may dispel some of the doubts that some have raised about what they saw as a secretive initiative.
Overstock.com CEO Patrick Byrne warned that the R3 consortium is looking to outlaw competition, CCN reported. He alleged that Wall Street is coming together to ensure that their version of the blockchain is the only one that will matter, in a regulatory way, in the future.
The way in which Wall Street moves ahead at this point could have a profound influence of whether blockchain takes hold in finance.
The question for financial firms is whether they should work together on a standardized consensus model that everyone agrees on or work independently on different versions and let the market decide, noted Mark Smith, chief executive officer of Symbiont, a blockchain startup focused on building smart contracts, according to Bloomberg.
Picking the right consensus model “is important because if there’s a desire for standardization” the industry “needs to be focused on that immediately,” Smith said. On the other hand, he said, the competitive process in itself could deliver the right model. “All the different ideas should be allowed to blossom, and the market will decide,” he noted.
Other Initiatives Continue
Similar blockchain initiatives exist among financial institutions.
One is the Hyperledger Project, made up of a wide range of companies including IBM, JPMorgan Chase & Co., Cisco Systems Inc., Digital Asset Holdings and others. It’s pursuing a variety of open-source software approaches including one where all details of a trade are cryptographically secured and shared with all members of the network.
Recently, R3 also announced new appointments including a former Barclays chief engineer, James Carlyle and a bitcoin core developer, Mike Hearn, CCN previously reported.
Most recently, Microsoft joined the R3 consortium, which has more than 40 members.
Featured image from R3 CEV.
Last modified (UTC): April 6, 2016 7:57 PM