Moody's Report: Blockchain technology can improve the efficiency of securitization transactions, but developer centralization may bring systemic risks

Moody's is one of the world's largest credit rating agencies with annual revenues of $4.2 billion. Recently, the company highlighted the growing appeal of blockchain technology companies in a new report. Blockchain-3750157_960_720

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The report, "Global Structured Finance: Blockchain Improves Operational Efficiency of Securitization, But Contains New Risks," revolves around the blockchain in securitization (ie issuing bonds or creating new tradable instruments). The potential uses are described.

Moody's senior analyst Frank Cerveny said that the use of the blockchain in the securitization sector is still "at a very early stage," but banks and other financial institutions are paying attention to its application.

Cerveny said that the massive use of blockchain will bring new risks, including the possibility of over-reliance on a small number of developers or development studios. The report reads:

“The new key parties, the developers, providers and operators of the blockchain, will be introduced into the process.

They may be closely related to the sponsor or an independent third-party service provider or be a sponsor or a third-party service provider, which may result in a certain degree of counterparty risk. As an emerging field, blockchain technology has a shortage of talents and few smart contract experts. Although anyone can issue tokens through some templates, there are many factors to consider in terms of size, including security.

Moody's said that the potential reliance of multiple securitization on the same development studio could pose systemic risks. In other words, they are decentralizing not only at the technical level but also at the social level (such as the use of developer advisors).

As we all know, decentralization helps to improve system robustness, because if one component fails, other components will not be affected. However, if all of the items use the same developer, there may be a group thinking factor that poses a systemic risk. This is part of the reason why Ethereum has multiple development teams and multiple clients. For example, development teams including Nimbus, Prysmatic Labs, Lighthouse, etc. are all working to upgrade Ethereum to Ethereum 2.0, they are all building the same things, but they are independent.

They use subtle different methods, such as which language to use, etc. All of these clients can communicate with each other and appear on the same page, but if one of them has a vulnerability, the other two clients may not be affected. The network can continue to operate normally.

Using the same method for smart contracts can be difficult because the network may not be able to run two versions of the same code for the same token at the same time, but in two languages: Solidity and Vyper.

Other blockchain approaches are more central because they may not have a common blockchain version, so through profit incentives, the creative motivation of global developers to develop the necessary skills is clearly insufficient. As a result, the choice of development studios may be less, and due to the composite effect, the underlying technology may eventually become the dominant blockchain.

That is to say, as more people work on a certain job, a certain work may be gradually improved at a faster rate, so that the barriers to entry are reduced, so that more people enter a circle until they reach a certain level.

However, running the entire domain on a blockchain does bring systemic risks to itself, especially when core developers can develop team thinking or be manipulated.

This was shown in the previous debate on block size, so conceptually, the goal must be to make the main public blockchain reach a fixed or difficult to change stage. This is likely to happen naturally. As technology improves, it may eventually reach a stage where a new improvement brings benefits below the upgrade cost. For example, if the health record of the National Health Service (NHS) runs on the blockchain, at some point it would be very difficult to convince them to upgrade, which would lead to the main blockchain from a basic code perspective. Become a static blockchain.

By then, the new blockchain may become more flexible, but logically, there must be a creative breakthrough to prove that the switching cost is reasonable. This means that the technology may reach a point where there is no systemic risk (whether social or Internet risk), but things built on it have their own considerations.