R3 Chief Economist Alisa DiCaprio
Five major blockchain projects have failed in 2022. Failure is an inevitable part of any industry, but the collapse of FTX, ASX, Terra/Luna, we.trade and Tradelens in such a short period of time raised eyebrows. The underlying distributed ledger technology (DLT) itself.
Rather than looking at each case individually, it’s important to consider the patterns across these projects. That way, we can properly assess what went wrong and what these failures will mean for the sector in 2023.
- not due to technology
Blockchain is a distinct commonality between FTX, ASX, Terra/Luna, we.trade, and Tradelens projects. Many skeptics see these collapses specifically as: I’m here. technology Failure.
But this way of thinking quickly runs into problems. These five projects use different protocols, suggesting that blockchain alone is not the whole story. They also combine both public and private blockchains, including Hyperledger Fabric (HLF), DAML on VMWare, and Ethereum, and many of these protocols have already been successfully deployed in other cases. It has been. Blockchain technology itself is therefore unlikely to be responsible for the failure of these projects.
- always consider cost
Both the ASX and we.trade projects cited high costs as the main reason for their bankruptcy.
Designing a solution using an entirely new technology can be expensive. Training engineering teams, building ongoing service relationships with providers, and continually iterating solutions requires significant funding from the banks and exchanges behind these projects.
For ASX, these factors meant that the final product would be very different from the original proposal. This also highlights related challenges. It is difficult to estimate the return on investment for new deployments, as cost recovery is implementation dependent. Venturing into uncharted territory also means that costs will change as the project progresses.
- Building a network is a delicate process
When Maersk began gathering members of the TradeLens network, an entirely new Network of Container Operators (GSBN) was formed with operators who did not want to join TradeLens but were interested in the kind of solutions they were creating. . Politics still matter.
Both we.trade and Tradelens have been particularly reluctant to adopt their solutions within their industry. Both have created and deployed complete solutions for members to use, but other entities outside this circle have decided not to be involved in their respective services.
FTX and Terra/Luna presented a different kind of networking problem. The interconnectivity of cryptocurrencies and exchanges has had a domino effect. When their projects failed, they brought others down with them.
Networks are building blocks for widespread adoption, but they can also be a source of vulnerability. Regulation will help avoid this problem in the future.
- Regulation is key to adoption
Decentralized finance (DeFi) operates in a separate ecosystem from traditional finance (TradFi), and cryptocurrencies lack a coherent regulatory structure. Blockchain itself does not require any specific regulation, but it interacts with financial regulation in new ways.
While Terra and FTX did not violate regulations, they lacked the risk management controls and consumer protections associated with traditional finance. This created uncertainty and made it impossible for regulators to intervene after a problem was identified. Both failed so quickly that they didn’t have time to implement traditional stability measures.
Both we.trade and Tradelens have created their own legal structures as a solution to the lack of regulation. However, this created another barrier to adoption, with potential members having to agree to a new and unfamiliar set of rules.
Regulation is therefore a critical component of success, providing the legal and regulatory certainty companies need to adopt solutions at scale.
- New systems must integrate with existing infrastructure
Integrating with existing infrastructure is expensive, but essential to the success of any blockchain project. This was the cause of his failure of ASX to overhaul a complete system, which was too costly.
Integration was a key selling point for FTX. Centralized exchanges bridge the gap between DeFi and TradFi. Much of FTX’s early success was due to its interoperability.
The complete lack of interoperability in the Terra/Luna project has led to strong industry changes to support projects backed by liquid assets, which is typically part of the design process. Further challenges arise because it only occurs after full deployment, not partial.
measure of success
All of the above blockchain projects were startups. ASX worked with an established consultancy firm, but the project was still designed in a relatively untested programming language.
This meant that while each company interacted to some extent with traditional financial frameworks, none had built the infrastructure and stakeholder ecosystems necessary to survive, let alone thrive. .
The use of blockchain has definitely impacted the cost and difficulty of deployment in these projects. However, from a business perspective, success and adoption ultimately depend on attracting other participants and operating within a regulatory environment.
DLT is already bringing significant efficiency benefits to financial markets across a range of successful use cases, from the Depository Trust and Clearing Corporation for equity clearing to Spunta for interbank reconciliation. Realizing this potential on a broad level requires operating within the scaffolding and constraints of the very system you are trying to destroy.