Why is standardization so important

Blockchain & Distributed Ledger Technology: Why Standardization Is So Important!

The roller chain is a small miracle of the modern age. Their interlocking ovals, which are held together by joints, reliably guide power through gears and gears. It is precisely because it is so efficient that roller chains are used in many products today: Bicycles and motorcycles, chain saws, agricultural and industrial machines and even airplanes call roller chains their own. Distributed ledger technology (DLT) is the role chain in the financial industry.

by Dr. Eric Günter Krause,
Head of Financial Services Infosys Consulting

The success of the roller chain did not come overnight. Hundreds of years passed before the idea became a reality and ultimately the standard. The roller chain did not make its big breakthrough until 1879, when the Swiss engineer Hans Renold began mass production in England. The timing was perfect: mass production was well established, sufficient materials were available, and Renolds had made the roller chain standardized.

What the role chain is for production, distributed ledger technology (DLT) can be for the financial sector: The platform of interlinked transactions in a common ledger is the basis of the blockchain and is suitable for many use cases. The concept is simple, but DLT needs a network in order to develop its full potential.

One thing is still missing: the standard. "

The future of DLT depends on whether all parties use standardized methods of collaboration. This increases efficiency and reduces costs and resource consumption. Ideally, there is a shared distributed ledger in which the parties can work together directly without middleware or interfaces. Unfortunately, the reality is still different. Complicated local conditions as well as regulatory and political processes slow down standardization. Companies pursue different strategies and some see the current processes as a competitive advantage. Nevertheless, it is in everyone's interest to help standardize DLT.

Opportunities for banks and institutes

Financial institutions around the world have now become aware of DLT. Credit Suisse explains that DLT is “more of an opportunity than a risk”, especially for “vertically integrated US derivatives exchanges”. NASDAQ also wants to try DLT and is even developing its own distributed ledger called Linq. Even Swift, the epitome of a middleman, is scrutinizing DLT to make sure the payment network stays relevant. It is no surprise that the institutions are curious about the impact of DLT.

A successful system would be an enormous opportunity to improve customer service without leaving the regulatory framework. "

The reasons for interest from all sides are numerous: DLT could standardize the transaction traffic between different financial institutions and replace a multitude of outdated methods and processes. Trade runs faster, bookkeeping is simplified and fraud is more easily detected. With DLT, all of this takes place in a collectively managed distributed ledger, the entries of which are created automatically and which are unchangeable and transparent.

But the technology will never reach its full potential without standardization. DLT is the same as with peer-to-peer traffic, which is based on standardized Internet protocols instead of point-to-point connections. The machines on which DLT runs also need a communication channel that goes beyond what is available in the network. What is needed is a secure, resilient and standardized data management system so that machines can interact with one another and transfer values ​​seamlessly.

Too many cooks spoil the broth?

Standards are established through a committee. Or, a certain procedure is used again and again and turns out to be the standard at some point. Efforts are already being made to standardize various elements of DLT. This includes:

1.Hyperledger:Funded by the Linux Foundation with the aim of identifying the properties that an open, cross-industry distributed ledger standard needs. The project aims to bring together different approaches, open protocols and the development of standards. Hyperledger offers a modular framework that supports various DLT components.Interledger (W3C) is an open source collaborative project that aims to develop a universal payment scheme. It should be based on open web standards and allow payments regardless of which system the sender or recipient is using.Ethereum:The non-profit Swiss Ethereum Foundation developed the Solidity programming language to standardize smart contracts. The system distributes applications and processes automatically via nodes. This reduces downtime and the risk of malfunctions. 4.W3C:The World Wide Web Consortium focuses on DLT standards Developing for the Internet, focusing above all on compatibility. 5. Other Industry consortia and working groups are working on Blockchain projects on topics such as resilience, scalability, latency, data structure, auditability, governance, jurisdiction, regulation and version control. Still others are trying to make smart contracts legal in court or to set digital standards for all financial instruments.

DLT aka Blockchain is slowly growing up

Author Dr. Eric Günter Krause
Dr. Eric Günter Krause is a partner at Infosys Consulting, the global management consulting arm of Infosys Ltd. There he is responsible for the financial services area in Germany. He holds a doctorate from the University of St. Gallen (HSG), Switzerland.
These are all positive signs that DLT is slowly growing up. Nevertheless, caution is advised: the establishment of various standards could lead to a Balkanization of the system. Such an environment would hold back progress and undermine many of the benefits of DLT. The various standardization models for DLT must become one.

So will DLT develop into a public good from which nobody can be excluded and use by one person has no effect on availability? Or will the technology be used to marginalize others and gain competitive advantages?

As with the roller chain and many other technologies, the success of DLT will depend on its standardization. It is important that companies work together and agree on flexible, open standards.

Governments and regulators need to protect technology and promote innovation at the same time. Only then can the standards be used to create new, high-performance systems and platforms. ”Aj

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