Blockchain Not Sufficiently Efficient, Says Dutch Central Bankbr>
De Nederlandsche Bank (DNB), the central bank of the Netherlands, said that blockchain technology is not ready to meet the demands of large financial market infrastructures (FMI).
After three years of experimenting with distributed ledger technology (DLT), the central bank came to the conclusion that the technology’s current algorithms are unable to handle the volume of transactions of financial market infrastructures in a 100%-secure and energy-efficient way.
“The current payment systems are very efficient, can handle large volumes and provide the legal certainty of having paid,” the central bank said. “The blockchain solutions tested show that they are not sufficiently efficient, with regard to costs and energy consumption, and they can not handle the large numbers of transactions. Moreover, with some … consensus algorithms, the 100% certainty is never achieved that a transaction can not be reversed.”
DNB said it has developed and evaluated four prototypes in a bid to understand how much value the technology can bring to the country’s existing payment system. The first prototype involved the creation of a decentralized token named Dukatons and was based on the bitcoin blockchain, but energy costs proved too much of a burden.
In the second prototype, the Dukatons were created in a much less energy-consuming manner in advance. The creation of Dukatons, unlike with bitcoin, was based on a trusted party that issues them. But validators only received transaction fees while the third party kept the actual tokens.
In the third prototype, DNB decided to create its own crypto wallet for the storage of encryption keys. This prototype then served as the basis of the fourth prototype to analyze the usefulness of DLT for a financial market infrastructure, such as a payment system. According to the central bank, the prototypes showed that the blockchain solutions tested currently can not meet the high demands of FMIs.
The central bank said it has not given up on the technology, and it will continue investing in further application development.
“DNB finds the technology behind bitcoin, the blockchain, interesting and promising,” the bank said. “Perhaps new algorithms will meet all the requirements for FMIs in the future. That is why DNB continues to invest in research of this technology and is experimenting with it. DNB also conducts discussions with new and existing parties in the market about possible applications, in order to contribute to innovation.”