Digitally Distributed Ledgers is a new approach to data management and sharing that is being proposed as a solution to many of the inefficiencies afflicting the industry. The prize on offer is a new architecture, where all capital market participants work from common datasets, in near real-time, and where supporting operations are either streamlined or made redundant.
Using a distributed ledger – a term which describes a database architecture where all nodes in a system collaborate to reach a consensus on the correct state of a shared data resource and where there is no critical central master database – will mean transforming the recording of transactions from electronic certificates and databases to an audited record of the lineage of ownership of private securities.
The system will act as a central repository for details of all trades, validated based on a mathematical formula running on the computers of participants, allowing assets to be transferred without using a centralised agency such as a bank or a clearing house. Decisions on what goes into the ledger are based on cryptography and consensus mechanisms.
Trades executed on a DDL platform can be settled within fifteen minutes. This will be a fundamental change to equities trading and mean enormous cost benefits for all market participants.
How does it work?
Transactions are recorded on the STARS distributed ledger. All transactions are stored in a string of digital blocks, with each block referencing the prior one. This series of blocks record the current state of share ownership:
Each block has what is called a hash. The hash in a certain block is dependent on the hash in the previous block and the transaction(s)/data being stored in the current block.
The following illustrates what happens during a share transaction:
Participant A buys 100 shares of Scottish Resources Plc from Participant B.
Participant A sends funds to Participant B. A new block is created:
The transaction is broadcast across the network. A block of transactions is only added to the chain if it is verified by cryptographic techniques using significant computing power. The nature of the verification process is such that the validity of any block can be verified easily and quickly, effectively eliminating the possibility of fraudulent transactions and making it impossible to retroactively alter any single block of the chain:
The block is added to the chain which records the entire non-reversible history of the transaction. The database is distributed, i.e. all users are notified immediately of new additions to the ledger. The distributed nature of the ledger allows for all users to have a verified and secure version of the ledger at all times:
Participant B receives cash from Participant A. The trade has been completed.
So which exchange can possibly migrate to a system like STARS when they have legacy systems totally embedded into their operations? Only SCOTEX can.