3 Interesting Benefits of Blockchain and How It Can Change Finance
On Thursday, January 28th, Robinhood received a request for $3 billion in collateral from the Depository Trust & Clearing Corporation (DTCC). This prompted the broker to halt purchases of GameStop shares on its trading platform in order to reduce the size of the collateral desired by the DTCC. In the aftermath of this incident, Robinhood has been rallying for a move away from the current T+2 standard for settlement of trades to instantaneous settlement. This is because the DTCC collateral requirement is a result of the current T+2 standard. Essentially, the DTCC has to ask participating brokers, such as Robinhood, for collateral to insure against the event that the broker goes bankrupt between the time the trade is entered into, and the two days it takes to settle the trade.
While a move to instantaneous settlement might not be the panacea that Robinhood is hoping for, these recent events bring attention to the tremendous benefits that would come from moving the financial infrastructure to blockchain — the technology which could ultimately enable instantaneous settlement of stocks.
While I was in San Francisco a few years ago, I met with private equity expert and technologist Ankit Kumar, who would go on to mentor and teach me about blockchain technology. He essentially told me that blockchain technology and smart contracts are a new paradigm in computing. This allows a software program to make trustworthy commitments — something not possible before. This in turn enables instantaneous settlement of contracts with zero counterparty risk and an immutable auditable trail of the transaction — all at essentially zero cost. The use cases are infinite, especially in the world of finance. Projects such as Maker, Compound and Uniswap are now building the basic infrastructure of a stable digital currency, money market, and exchange. You will likely see an explosion of use cases across all segments of finance such as payments, real estate and insurance.
Let’s look at some of the key advantages of blockchain technology and some of the potential impacts on the financial ecosystem.