Moody’s, one of the biggest credit rating agency with yearly revenue of $4.2 billion, has highlighted the growing attraction of blockchain tech in a new report that comes at a hefty price of $750 for non subscribers.
“Structured Finance — Global: Blockchain Improves Operational Efficiency For Securitisations, Amid New Risks,” looks at the potential use of blockchain in securitization, that is debt issuance or the creation of new tradable instruments.
Frank Cerveny, Senior Analyst at Moody’s, says blockchain usage in securitization is still “in a very early stage,” but banks and other financial institutions are looking at its utilization.
Its usage at scale would introduce new risks, Cerveny says, including a potential over-reliance on a few developers or dev studios.
“New key transaction parties will be introduced to the process, namely the entities that serve as developer, provider and operator of a blockchain.
They may be either closely linked or identical with the originator, or independent third-party service providers, which could lead to a certain degree of counterparty concentration risk,” they say.
As a new field, blockchain tech has a shortage of talent with smart contract experts few and far in-between.
Although issuing a token arguably can be done by anyone through just some template, at scale there would be numerous considerations, including security.
Moody’s says potential reliance on the same dev studio by multiple securitizations could introduce risks that “may also assume a systemic component.”
In other words they are arguing for decentralization, not only at the tech level, but also in social aspects like what dev consultants are utilized.
Decentralization is known to facilitate robustness because if one component fails then the rest are not affected. If however all are using the same devs, there may be a group think factor which could introduce systemic risks.
That’s in part why ethereum has multiple development teams and multiple clients. Their work towards upgrading eth to eth2.0, for example, has Nimbus, Prysmatic Labs, Lighthouse, and others, all building the same thing, but separately.
They take subtle different approaches, like what language is used and so on, with all these clients then able to communicate with each other and able to stay on the same page, but if one of them has a bug then the other two clients might not be affected, with the network continuing to operate undisturbed.
Taking the same approach for a smart contract would be difficult because the network might not be able to simultaneously run two versions of the same code for the same token, but there are two languages: Solidity and Vyper.
Other blockchains have a more centralized approach and because they might not have a public blockchain version, there’s less creative incentive through the profit motive for devs across the globe to develop the necessary skills.
There might thus be less choices of a dev studio, with the base tech probably eventually being one dominant blockchain due to the compounding effects.
That being as more people work on something, that something might incrementally improve more quickly, making entrance barriers lower, thus adding more people in a circle until a plateau.
The entire world running on one blockchain however does introduce its own systemic risks especially from core developers who can develop group-think, or can be captured and so on.
That came to the fore during the blocksize debate, so conceptually the aim has to be for the main public blockchain to reach a stage where it is effectively set in stone or is very difficult to change.
That will probably happen naturally. As the technology improves, it will probably eventually reach a stage where the benefits of new improvements are lower than the cost of the upgrade.
If NHS health records for example are on the blockchain, persuading them to upgrade would at some point become very difficult, leading to the main blockchain becoming static from a base code point of view.
New blockchains then may rise to be more nimble, but logically there would have to be an inventive breakthrough to justify switching costs.
Meaning the tech will probably reach a point where there are no systemic risks whether social or otherwise like the internet, but what is built on top of it would have its own considerations.