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Smart Contracts and Institutional Finance

By Adam Krellenstein and Ben Spiegelman

The adoption of blockchain technology within institutional finance promises to massively improve speed, efficiency, transparency and correctness of critical financial market infrastructure. For too long, technological innovation in this industry has been largely limited to the front office, while the back office has been ignored and neglected. This is like building a second story on a house with a rotting foundation. Smart contracts are the applications of the next generation of financial market infrastructure, providing the means for finally abandoning antiquated systems which cannot keep up with the pace of innovation in the modern world. 

A smart contract is a “contract” that governs the behavior of computers instead of people and organizations. And a blockchain, by virtue of being an internally consistent, decentralized system, can serve as a platform on which stateful decentralized applications, such as smart contracts, can run. With blockchain technology, financial instruments can be objects in the smart contracts. When a blockchain is used as the system of record for financial instruments, a smart contract will do more than just improve operational workflows; it will transition traditional financial markets onto a digital infrastructure shared by all market participants. Blockchain technology enables financial instruments to suddenly take a digital form for the first time.

Financial markets are naturally decentralized, so the infrastructure for trading and tracking ownership of assets should be, too. Financial markets have historically relied upon point-to-point communication using faxes and telephones to synchronize all of the different financial ledgers that may be found in each marketplace. But this is extremely inefficient, in particular because of the 1) analog nature of these media and 2) the consistency issues that arise from not having a single source of truth.

Financial markets are sometimes forced to rely upon partially centralized infrastructure because a central database can provide a single source of truth in otherwise decentralized ecosystems. The Depository Trust & Clearing Corporation (DTCC), which provides clearing and settlement services to some financial markets, is a great example of partially centralized infrastructure. It is a whole entity dedicated solely to hosting a central database for establishing a single source of truth in the ownership of securities. But the DTCC is just a band-aid: participants in securities markets still maintain their own internal ledgers which are often out of sync with the DTCC’s ledger.

Even when there is supposed to be a single canonical ledger hosted by a central authority, all of the market participants still want to maintain their own ledgers, so reconciliation problems persist. Financial markets are then forced to exist in an awkward hybrid state, with the same reconciliation issues as would have existed otherwise (or worse!). These infrastructure problems manifest as long trade settlement times, difficulties in proxy voting, incorrect share ownership, and many other issues.

Symbiont, with its Assembly blockchain platform, is using smart contracts to model the complex business logic and multi-party workflows of traditional financial instruments that may themselves live wholly on a blockchain network. These smart contracts can model the complete lifecycle of a financial instrument. With a loan, for instance, they can keep track of ownership, trades, interest payments, interest rate changes, who is in default, notifications, approval workflows. A blockchain network, as an internally consistent decentralized system, may establish the canonical state of those instruments in a single network shared by all market participants. 

Any software application can model that same behavior, but if it is not running on a decentralized system, then it cannot also serve as a single source of truth for an entire financial market. It will never be more than a hybrid solution that creates as many problems as it solves. When a blockchain platform is coupled with an expressive and powerful smart contract system that preserves the highest standard of security and confidentiality, there arises the possibility of transforming financial market dynamics: automating manual processes, cutting out unnecessary middlemen, improving transparency, shortening settlement times, augmenting security, eliminating errors and decreasing overall risk.

Assembly’s smart contract language is specifically designed for this purpose. It includes an advanced module system, supports contract versioning and upgrading, is fully deterministic and has built-in support for true end-to-end transaction privacy. The Symbiont smart contract language allows for the creation of large and sophisticated decentralized applications that actually prevent accounting errors from ever appearing instead of merely detecting discrepancies after the fact. Symbiont is at the forefront of the development of this exciting new technology, which allows us to reimagine an entire industry that has been burdened by technological half-measures, and to reshape it into an elegant form that fits its fundamental nature.

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