Start every business day with our analyses of the most pressing developments affecting markets today, alongside a curated selection of our latest and most important insights on the global economy.
Solving for the Blockchain Design Trilemma
Almost every financial transaction made — whether you are trading derivative contracts related to corn futures or buying popcorn at the movie theater with your credit card — works the same way. Traditional financial systems depend on centralized intermediaries such as banks, credit card companies and market makers. These intermediaries process transactions using massive, centralized systems capable of processing tens of thousands of transactions every second. Advocates of decentralized finance look at these intermediaries and see coercion and waste. Decentralized peer-to-peer networks built on a blockchain can work outside of traditional finance in an environment free of trust, intermediary fees and most oversight. However, these new systems are slow. The bitcoin network can process only seven transactions per second, and ethereum can process only an average of 15 transactions per second. The challenge for designers of new decentralized finance networks is how to maintain the benefits of decentralization and security while improving scalability. This is the blockchain design trilemma.
According to a new analysis from S&P Global, technological improvements to support scalability, permissioned networks and privacy are being developed among several blockchain networks. The authors looked in depth at blockchain networks to understand the strengths and weaknesses of each in supporting financial transactions. The article, “What Can You Trust in a Trustless System – Public Blockchains for Financial Applications,” was published Oct. 11.
The three points of the blockchain design trilemma are each necessary for the further development of decentralized finance. Decentralization is clearly important. The more validators you rely on, the more reliable and less subjected to misuse your blockchain network will be. But having more validators means having fewer hardware requirements, which can create security issues. Security becomes particularly important for decentralized finance because transactions are immutable — meaning they cannot be reversed, even if the transaction was clearly fraudulent. But immutability is also a security feature. Maintaining a record of all transactions on the blockchain allows for greater security, although this security comes at a significant computational cost. Finally, there is scalability. Modern finance requires obscene levels of transactional throughput. But this type of scalability requires sophisticated hardware, which limits the number of actors who can participate in a blockchain network.
The S&P Global authors examined ethereum, polygon and solana to see how each has attempted to solve the blockchain design trilemma. Ethereum has begun applying an idea long discussed in decentralized finance: layers. Basically, layers act as independent blockchains that can be occasionally reconciled with the master blockchain. Since each layer adds additional throughput, this can improve the scale. The problem — for ethereum and others — is how to handle the reconciliation of the layers, known as the “roll-up.” Polygon 2.0 uses a network of interoperable roll-ups that are connected to the main ethereum network. Polygon uses zero-knowledge proof systems, a cryptographic solution that verifies the truth of a given statement without conveying any information about the truth, to handle the tricky business of roll-up. Solana takes a different approach, allowing validators to confirm parts of a blockchain without necessarily reviewing the entire chain. This limited validation improves throughput by requiring less of a computational load for each transaction on the system.
To read the full article on public blockchains for financial systems, click here.
Today is Tuesday, October 17, 2023, and here is today’s essential intelligence.
Written by Nathan Hunt.
Economy
Beyond Volatility: A New Way To Look At Risk Managed Index Strategy Performance
Equity markets have historically offered attractive returns. However, the volatility and risk of a significant pullback can be a notable concern for market participants. For example, the S&P 500, the leading gauge of US large-cap stocks, had an average annualized total return of 9.88% from Jan. 2, 1990, to March 31, 2023. Over this same period, the index also experienced extreme volatility spikes and periods of losses of over 50%, such as during the 2008 Global Financial Crisis. While its one-year realized volatility has historically tended to be below 20%, during both the financial crisis and the more recent COVID-19 drawdown, volatility exceeded 80% and 90%, respectively. This level of volatility and uncertainty may not be desirable for some market participants.
—Read the article from S&P Dow Jones Indices
Access more insights on the global economy >
Capital Markets
Credit FAQ: What Risk Factors Are Associated With Private Credit?
The decade-long expansion of private credit, against the backdrop of rising credit pressures, has put the focus on the burgeoning challenges in an opaque market. The Credit Conditions Committees of S&P Global Ratings manage its house view on credit developments and each quarter compile a list of top risks globally and regionally (for Asia-Pacific, Emerging Markets, Europe and North America), to assess the impact of these uncertainties on various borrowers.
—Read the report from S&P Global Ratings
Access more insights on capital markets >
Global Trade
Taiwan’s Exports Turn Positive In September 2023
After twelve successive months of declining year-on-year exports, Taiwan’s September exports showed a small positive increase year-on-year. A key factor driving the downturn in exports during late 2022 and through much of 2023 has been weak demand for Taiwan’s electronics exports in key global markets. However recent export data has shown signs of a significant turnaround, with September trade data showed strong positive export growth to the US, EU and ASEAN measured on a year-on-year basis.
—Read the article from S&P Global Market Intelligence
Access more insights on global trade >
Sustainability
Cobalt Sulfate Outlook Bearish In Q4 As EV Sales Growth Slows
The global cobalt sulfate market has a bearish outlook for the fourth quarter of 2023 after weaker-than-expected downstream demand from the consumer electronics and electric vehicles sectors led prices to decline in the third quarter. However, market sources have started seeing short-term tightness in the spot market that has supported prices. Typically, the third quarter sees strong demand for consumer electronic products and EVs, and therefore cobalt products used in the production of lithium cobalt oxide, or LCO, batteries.
—Read the article from S&P Global Commodity Insights
Access more insights on sustainability >
Energy & Commodities
European Gas Prices Jump As Geopolitical Risks Trump Fundamentals
European gas prices rallied in the week to Oct. 13 as geopolitical risk factors trumped supply and demand fundamentals with coal and carbon prices only registering moderate gains. Gas price benchmark TTF front-month jumped 46% over the course of the week to a Eur52.95/MWh close Oct. 12, the highest in almost eight months, according to Platts assessments for S&P Global Commodity Insights.
—Read the article from S&P Global Commodity Insights
Access more insights on energy and commodities >
Technology & Media
Most Rated Asian Automakers Should Steer Through Demand Volatility, EV Strains
The competitiveness of Asian automakers is being tested. Decelerating demand growth and rising electrification are shifting the industry landscape in key markets. In China, sales growth will likely remain muted next year, given fragile consumer confidence amid a slower-than-expected economic recovery. Price wars are ongoing. In the US and Europe, which are important markets for Japan and Korean automakers, pent-up demand and easing semiconductor shortages fueled a robust recovery in light vehicle sales this year. The momentum is set to weaken in 2024, with subpar economic growth and high interest rates dampening purchasing power.
—Read the report from S&P Global Ratings
Access more insights on technology and media >
