The central bank of the Netherlands is preparing an ambitious experiment. It aims to investigate whether an entire financial market can be built on the blockchain.
Many of the so-called smart contract applications of the blockchains can be replicated using existing technologies. However, the man who is now responsible for a series of experiments at De Nederlandsche Bank says that the decentralised nature of the blockchains could lead to new financial market infrastructures (FMIs).
According to Bitcoin news these new structures are much more difficult to hack
As with the Bitcoin news network itself, this experiment aims to explore how to distribute the internal operations of an FMI to participating nodes of the network. To challenge the system – and break the financial market infrastructure – an attacker would need to have more than half the computing power of the entire Bitcoin news network.
News about the course of the experiments is scheduled for the end of the year. The current efforts are a reaction to the attacks by hackers, who now see themselves increasingly exposed to financial market structures. At the beginning of the month, the Board of the Bank for International Settlements (BIS) went so far as to call for direct action in the search for a solution.
In an interview with Ron Berndsen, market infrastructure manager at De Nederlandsche Bank, he explained how the blockchain could be the key to resisting more frequent attacks.
Berndsen explained CoinDesk: “If hackers did the work of shutting down two or three data centers, they would also be able to shut down financial market infrastructures. With the blockchain you would distribute everything to the nodes and you wouldn’t even know where you are.”
In order to find out whether an FMI can be built on a blockchain, Berndsen once again uses a team that he had already used for earlier experiments at the central bank.
Berndsen said that his seven-member team came about through conversations at the coffee machine and email invitations. It was important to him to get to know the Bitcoin enthusiasts within the bank.
The academic and banker is a rare image in the world of global bankers. In 2013 he started to launch a Bitcoin Full-Node for the Bitcoin network and from then on he was mining the digital currency. He said he had never received a Mining Reward, but that he had bought Bitcoin and other digital currencies. He wanted to investigate the advantages and disadvantages of each currency.
Lessons for central banks
Because of this familiarity, Berndsen was able to expand his experiments.
Last month it was announced that the central bank will use the open-source Bitcoin software to simulate the conditions of the network foundation in 2009. From this a model shall be created, which shows the system in the year 2140. Then the last Bitcoin is said to have been mined.
“As a university graduate, it is obvious to first simulate the extreme points of the system,” said Berndsen. He also teaches as a professor for FMIs and systemic risk at Tillburg University in the Netherlands. He also holds a doctorate in economics. But he considers this test to be unique in the world.
“I thought every central bank had already done that,” he said.
“I’m on many central bank committees and I really expected them to do all this, but they don’t seem to be there yet.
One of the many lessons learned from the experiment is that the bank was able to mine coins much faster when the start reward was set at 1 million. The team created a so-called DNBcoin for this purpose. The rate at which DNBcoins were dug increased, in addition to the initial reward of 1 million DNBcoins, the reward was halved every two minutes.
It should be noted that even if the team were to set the max money parameter to 21 million coins – as with Bitcoin – they would be able to mine 10 billion coins.
They have also “proven” that the network can run on fees alone when the Bitcoin reward is terminated, Berndsen said.
According to Berndsen, the third experiment will now focus on the areas of financial market infrastructures.
The definition of an FMI was set out in a report by the Bank for International Settlements in 2012: “a multilateral system of participating institutions, including the head of the system, to record clearing, settling or payments, securities, derivatives or other financial transactions”.
In his speech, Berndsen presented the results of the first two E