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The central bank of the Netherlands, De Nederlandsche Bank (DNB), recently decided after a three-year period of testing that blockchain technology currently cannot meet the requirements of a financial market infrastructure, according to the bank’s website. The report mentions the inadequacies of blockchain technology areas including capacity, high energy consumption and not enough certainty for transaction confirmation.

The DNB does see the technology beneficial in improving resistance to external hacks, but by sacrificing efficiency and capacity.

Four Prototypes Tried

The DNB tested four blockchain technology prototypes in its three-year project, called Dukaton. The purpose was to create an understanding of the technology and to find out the how can the technology can better securities traffic and payment.

The first prototype was designed after bitcoin’s software by using the bank’s own software. The platform was distributed on five laptops. The parties that confirmed the transactions were rewarded for making new “Dukatons” and a transaction fee.

A second prototype was about issuing Dukatons by using an energy method that consumed less. Dukatons were made using on a reliable issuing party, a method which differs from how bitcoin is created. The party producing the Dukatons gets all the Dukatons while those that confirm the transactions get a transaction fee.

In a third prototype, a central Dukaton was replicated with a self-built wallet that lacked bitcoin software. This prototype kept the cryptographic keys for safekeeping.

The third prototype was used as the foundation for the fourth one, which evaluated DLT’s practicality for a financial market infrastructure. A website was created to show the Dukatons and the transactions that were made on the distributed ledger. Various structures were verified. Several algorithms were used for approving transactions succeeding a consensus between different network nodes.

Decisive Test Results

The prototypes demonstrate that the solutions cannot be used to satisfy financial market infrastructure needs, including efficiency, security, reliability approval, accessibility, resilience, payment conclusiveness, scalability, fees, capacity, and sustainability.

The report noted that the Eurosystem interbank payment system, Target2, currently meets the requirements of financial markets infrastructure. This system delivers effective payment systems that can settle high volumes and transaction certainty.

The blockchain pilots, by contrast, did not prove to be able to handle huge transaction volumes. Furthermore, the 100% certainty that a transaction cannot be reversed was also never attained.

There are algorithms that are resilient to malevolent parties, which can improve cyber resistance, but said algorithms were unable to meet other requirements.

Future Developments Probable

Blockchain technology could help improve the efficiency of payments with different currencies are done, the report stated.

DNB also keeps finding blockchain technology favorable and believes it is highly likely that new algorithms could meet all the needs of the financial market infrastructure. The bank keeps on experimenting with the technology.

In the meantime, central banks in numerous countries have been investigating and testing blockchain technology. The Bank of Japan and the European Central Bank lately stated in a report that DLT can produce new securities settlement tools such as cross chain atomic swaps on independent ledgers.

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