By Charles Hoskinson, Founder and Chief Executive Officer Input Output HK

Trevor Koverko and I first met way back in the annals of crypto history, before Ethereum was launched, at Decentral in Toronto. At that time the blockchain community was small and tightly-knit, bound together by a shared vision of a new type of technology and theory which would democratize finance in much the same way that the internet has democratized communication.

Over the next couple of years the space saw an explosion in interest with new projects and teams forming to explore novel use-cases and iterations of blockchain technology. Trevor and Chris Housser, the founders of Polymath and passionate advocates for security tokens, began exploring a powerful thesis that within the next few years the financial world would see huge disruption triggered by the tokenization of financial assets onto public blockchains.

While institutional and retail financial investment has managed incremental improvement over the last decade there has been little in the way of disruptive innovation. In contrast to this, Polymath’s vision was of a stampede towards a world where all financial assets can be represented through security tokens managed on public blockchains. This has the potential to deliver globally accessible, transparent, and liquid financial markets trading programmatically defined assets rooted in real world value.

Today’s blockchain landscape is largely dominated by general purpose blockchains such as Cardano and Ethereum. These provide platforms that enable permission-less innovation, commoditized trust, censorship resistance and communities that tend to be orientated towards the ethos of decentralization. This focus on being general purpose and “unstoppable” makes them perfectly suited for organizations to innovate and explore new ideas across a wide range of domains.

How a particular blockchain is positioned within the DLT landscape is driven by a series of technical and organizational design decisions made in the base layer of the ledger. These range from trade-offs in centralization between permissioned and permission-less block authoring, choices of how to determine the canonical chain and the finality associated with that choice, basing governance either on-chain or off-chain and how development teams are organized and funded.

This means that every blockchain needs to decide whether to “please some of the people all of the time” or “please all of the people some of the time”. For the current generation of general purpose blockchains the approach has been to make choices and trade-offs that are oriented to covering as many use-cases (or people) as possible. When designing a ledger and associated systems focused exclusively on securities and financial assets, there is a huge opportunity to optimize for just this specific use-case and build a platform whose performance and characteristics is a perfect match for this (and only this) domain.

Financial markets and their participants have a very specific set of requirements around finality of transactions, identity and regulatory compliance. While security token protocols built on top of general purpose blockchains serve a purpose in allowing organizations to quickly innovate and iterate, they are ultimately constrained by the choices made by their base layer which, being tuned to more general use-cases, are often non-optimal for financial markets and thus hamper the adoption and usability of security tokens. The financial domain is unique as it needs to bridge traditional finance into public ledgers, attract risk averse institutions and has unique characteristics that require creative and innovative solutions.

So what should a domain specific distributed and decentralized framework look like for digital securities?

Firstly, it should include a robust and transparent set of financial primitives. These include a language which is rooted in financial products to describe assets with their functional and regulatory characteristics, a collateral system for more sophisticated financial products and stable coins, cryptographically secured market data availability on-chain to determine asset cashflows, identity for all participants which is fit for regulated markets and fast and final transaction confirmations. It must deliver a solution in which the seemingly irreconcilable drivers of privacy and transparency can be solved through cryptography and distributed ledgers.

Secondly, there should be a clear separation of concerns between identity, asset ownership and compliance allowing each of these components to evolve independently while together unlocking financial markets within and across regulatory boundaries. Balancing the need to enforce complex compliance across identity and transfer restrictions, with confidentiality for market participants and regulatory auditing, needs innovative architecture and cryptography.

Thirdly and most importantly, it is an ecosystem that encourages participation across the financial ecosystem. Financial systems today have a complex and intertwined topology of market participants — reducing friction and barriers to entry across this network needs a community and partnerships laser focused on the challenges and opportunities of securities and financial access and who have a shared incentive in a successful outcome.

I’ve always enjoyed traveling and visiting countries off the beaten path — countries which may appear marginalized but in practice have a huge appetite for innovation as well as a wealth of smart and technically ambitious citizens. I’m passionate about improving financial accessibility — giving everyone, regardless of geographical location equal access to financial markets and products. A blockchain purposed exclusively to issue, manage and trade financial assets which can flexibly cover a multitude of jurisdictions, regulatory perimeters and asset classes is a giant stride in that direction.

Polymath has shown technical and market leadership over the last 18 months as they have developed their existing protocol on top of Ethereum, proving the case that there is a huge appetite for programmable tokenized assets and gaining invaluable experience and team members along the way. The Polymath team have shown maturity, vision and a measured approach to establish their brand and technical competency.

The opportunity to solve these complex problems and co-architect a securities purposed blockchain alongside the Polymath team while engaging with the community and ecosystem that Polymath has been building over the last two years is an exciting prospect. Combining my research-driven approach and deep technical understanding of distributed systems with Polymath’s financial domain knowledge and insight, market leading brand and existing network of ecosystem partners will allow us to deliver a solution which we intend to deliver on Polymath’s vision of the security token stampede.

While the last decade has seen an emergence of FinTech startups that have started to improve and innovate retail banking, institutional finance and markets have cleaved to legacy technology, retained high barriers to entry and seen only incremental change.

To paraphrase Hemingway, disruption in financial markets will happen in “two ways, gradually, and then suddenly”. For blockchain technology to achieve broad adoption it needs to solve real problems and offer solutions which are orders of magnitude better than our current systems. The new Polymath securities specific distributed ledger technology platform that we are architecting, which will be highly optimized to the requirements of financial investors, issuers and markets, has the potential for innovation and global participation that can lead us towards this sudden disruption, and the next evolution of open and decentralized finance.

About the author;

Charles Hoskinson is a Colorado-based technology entrepreneur and mathematician. He attended Metropolitan State University of Denver and University of Colorado Boulder to study analytic number theory before moving into cryptography through industry exposure.

His professional experience includes founding three cryptocurrency-related start-ups — Invictus Innovations, Ethereum and IOHK — and he has held a variety of posts in both the public and private sectors. He was the founding chairman of the Bitcoin Foundation’s education committee and established the Cryptocurrency Research Group in 2013.

His current projects focus on educating people about cryptocurrency, being an evangelist for decentralization and making cryptographic tools easier to use for the mainstream. This includes leading the research, design and development of Cardano, a third-generation cryptocurrency that launched in September 2017.

LinkedIn | Twitter @IOHK_Charles