Introducing Financial Securities Protocol
A blueprint for Financial System 3.0
Financial institutions, government bodies and intermediaries worldwide generate billions of dollars in costs from issue, clearing and life-cycle management of financial securities. These costs are shared among various stakeholders of the economy and appear in forms of various transactional frictions — protracted transfer / settlement periods, lack of liquidity and overheads. Financial Securities Protocol offers a solution based on EOS blockchain technology that revolutionises the approach to financial assets, vastly decreasing the cost footprint and promoting asset-sovereignty. Departure from “Paper Dependency” enhances liquidity, velocity and transparency of global financial markets.
Ever since the shares and bonds of Dutch East India Company started changing hands in coffee shops of London in 17th century, people were looking for more efficient ways to exchange capital and securities. Fast forward to 21st century and we have excelled in many departments; More efficient primary markets, lightning-fast electronic trading venues and internet have made Financial System 2.0 possible. Many processes in the current day and age, however, remain analogous, where issue, clearing and settlement are the main sources of costs (some asset classes are affected more than others).
Role of Blockchain
Any sensible Blockchain 101 will begin by identifying the main properties of a blockchain:
- Immutability. Blockchain guarantees immutability by linking cryptographic hashes of data into a sequentially dependent chain of blocks that contain the data in question.
- Deterministic. Relating specifically to functions of smart contracts, determinism is an essential feature required because each node of the network has to be able to compute the same result given the same inputs. Otherwise, each node that executes the contract method to validate the transaction would end up with different result and no consensus would be possible.
- Auditability. When computation takes place on the blockchain, its completion can usually be verified by other nodes. Proof of work (PoW) was the first consensus mechanism to materialise this idea — when a node computes a hash of a block that is smaller than some given number, other nodes can easily verify that the hash is indeed smaller by doing a one way hash operation, rendering all transaction data within the given block true.
What do these properties contribute to the achievement of the objectives that FSP sets out? They provide means to asset self-sovereignty.
Enabling financial assets to be held and transacted by various parties independently, and yet securely is integrated by the concept of asset self-sovereignty. This term also preempts some of the benefits derived from features of a token (increased audience of fund raising, liquidity and life-cycle management). Embedded regulatory features facilitate a security that is effectively self-regulated, adding to its sovereignty, thus minimising the amount of 3rd party interactions required.
EOS is an open-source platform for decentralised applications. The EOS main-net has been launched in Summer 2018 and dozens of dApps have been deployed on it. Delegated Proof of Stake mechanism and other features. EOS has already proven its scalability and robustness, consistently being the most active blockchain in Fall 2018. EOS has block time of 500 ms, which is suitable for high-throughput and low-latency applications such as decentralised exchanges to be implemented on top of the platform. Demux, a mechanism similar in function to Ethereum side chains, has unlocked a big potential for deterministic transaction processing off-chain and can increase transaction throughput and frequency beyond the main-net block time. FSP builds its core modules upon EOS technology in order to realise high-throughput scalable financial applications.
Financial Securities Protocol
At its core, Financial Securities Protocol is formed from a set of modules each responsible for its functionality and each contributing to the bigger purpose of the protocol. Here is a high-level overview:
fsp.securitycontract defines the base functionality of a financial asset on the protocol: it is responsible for issue, transfer and life-cycle management of securities.
fsp.regulatoracts as a gate-keeper of the protocol by constraining certain actions of other modules. E.g. if a security is issued under Regulation S, the contract will not block any requests to transfer securities to U.S. persons.
fsp.exchangeprovides a point of liquidity for instances of
fsp.security. The exchange can be implemented as a limit order book or as a one-way liquidity provider.
fsp.registryan entry point into the network. The module is responsible for KYC / AML checks and internal mapping between EOS account holders and real-world entities.
fsp.communicationis the gossip module of the protocol and is responsible for propagating essential communication within the protocol and for generating side-effects to the outside world.
Relationship between the modules can be illustrated by the life-cycle of a transfer operation below. Investor sends a transfer action to the
fsp.security contract that triggers corresponding
fsp.registry actions to validate the operation. When these checks are safely passed, an asset gets transferred to a counter-party and this change is reflected on EOS blockchain.
Financial Securities Protocol Proposals
Financial Securities Protocol Proposals, or FS2P for short, is a platform for discussion of protocol improvement proposals. Anyone is able to submit his or her proposal to be scrutinised by the community. Should a proposal gain common approval, it will be eligible to be implemented in future iterations of the protocol. As such, FS2P forms a consortium of various stakeholders that strive to improve the financial securities standard on EOS blockchain.
This concludes the introduction of Financial Securities Protocol. Motivation of FSP is to provide means to a more efficient economy by making individual financial assets self-sovereign. Establishment of a securities standard on EOS blockchain will enable interrelated, scalable and compliant financial applications to be built, maintained and audited. FS2P invites community-wide discussion for protocol improvement proposals. Future articles will dive deeper into technical details of the protocol as well wider legal implications.