This article was first published on Polymath Network - Medium
Settlement on blockchain does not yet exist, but not for lack of effort or interest. The reasons here are varied, but can be broken down most easily in two ways: by definition and through mechanics. By definition, settlement does not yet exist on blockchain because it is defined by the real-world processes and regulated participants involved in what constitutes a settled transfer of assets; without those regulations and counterparties, settlement can’t exist on blockchain. But we’re confident these pieces will come with time.
What we’re more concerned with and prepared to solve are the mechanics of why settlement on blockchain does not yet exist. In other words, the challenges inherent in blockchain that are roadblocks to making settlement a reality. These include:
- Pre-funding. Participants in a blockchain transfer are required to part with cash or assets in advance by pre-funding their transaction to mitigate counterparty credit and liquidity risks. This ensures a transfer is executed once the counterparties agree on the terms (i.e., price and amount). While this process does take advantage of blockchain automation, it’s far from the much-hyped instant settlement that some claim this supports
- Central bank digital currencies / stablecoins. To facilitate the instant transfer of funds, an interoperable central bank digital currency (CBDC) or stablecoin is needed. While there are many in the works from industry players, none currently exist.
- Delivery failures. On general-purpose blockchains, users are able to agree to a transfer without delivering the assets, or agree to multiple transfers with the same set of assets. This leads to greater counterparty risk, a lack of confidence in the technology, and general confusion. The solutions that do exist to solve this problem, like many solutions for general-purpose chains, come in the form of layer-2 fixes that drive up costs and reduce efficiencies. The right solution needs ...
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Polymath Network - Medium