Over the past three years, we carried out experiments, developing and evaluating four prototypes named Dukaton, based on distributed ledger technology (DLT). Our aim was to gather knowledge and assess the usefulness of the technology in improving payments and securities transactions.
Our first prototype was a Dukaton based on the bitcoin software. Using lengthy calculations, we created Dukatons on five laptop computers in our own blockchain. Parties validating the transactions to put them into the blockchain were given a reward for creating new Dukatons and a transaction fee. In the second prototype, the Dukatons were created upfront, in a way that required far less energy. Unlike bitcoins, these Dukatons were issued by a single trusted issuer, which was given all Dukatons. Parties validating the transactions to put them into the blockchain were only given a transaction fee. We subsequently simulated a centrally created Dukaton in the third prototype. This did not involve bitcoin software, but an electronic wallet developed in-house that stored the required cryptographic keys for security purposes. This prototype then served as a basis for the fourth prototype, which we used to analyse the usefulness of DLT for a financial market infrastructure, such as a payment system. To do so, we built a website to provide an overview of all Dukatons and transactions in the distributed ledger and tested various configurations. A number of algorithms were used that validate a transaction following consensus among a number of nodes in a network.
The prototypes have shown that the blockchain solutions we tested currently fail to meet the high demands made of financial market infrastructures (FMIs). FMIs must meet requirements in the areas of authorisation, availability, capacity, costs, efficiency, finality of payment (legal certainty), reliability, scalability, security, sustainability, and resilience. These requirements are strict because FMIs play a key role in settling payments and securities transactions. One example of an FMI is Target2, which is the Eurosystem's interbank payment system. Today's payment systems are highly efficient, can handle large volumes and offer the legal certainty that a payment is completed. The blockchain solutions we tested proved to be inefficient – in terms of both costs and energy consumption – and unable to handle large numbers of transactions. Furthermore, several consensus algorithms we used will never achieve the full certainty of a transaction, so that it cannot be undone, which the central banks' Target2 system offers. Other algorithms are able to withstand parties with malicious intent and have the potential of raising the FMIs' cyber resilience, but they currently fail to meet other FMI requirements. DLT may well offer enhanced efficiency in payments that involve multiple currencies, however.
We believe the blockchain technology underlying bitcoin is interesting and promising, and future algorithms may well offer improved compliance with FMI requirements. This is why we keep investing in deepening our understanding the technology and conducting experiments. We are also engaged in discussions with new and incumbent market players about potential applications in order to contribute to innovation based on our own role in society.