Why a DLT is still (often) better for centralized systems
In the Distributed Ledger Tech (DLT, aka blockchain) world there’s a perennial question: “why is that better than a database.” Sometimes, that’s the right question, but there’s a whole class of problems that are solved by providing trust and transparency. It turns out that these benefits come despite there being a centralized party with power.
As an example of some of these benefits, let’s take the case of a company issuing stock. In reality, a company can do all sorts of things from revoking shares to issuing an enormous amount of stock. The legal system provides protections for shareholders. Often smaller companies keep track of their shares on excel spreadsheets.
Moving these shares to a DLT system provides a few benefits:
- Management Simplicity
- Easier liquidity
If the company issues and revokes it shares publicly then it’s easily provable what happened and when. Now, the company doesn’t have to make all the information public to everyone in the world, but only to its stakeholders. If a company acts maliciously, it’s easily provable. One might have to resort back to the legal system, but at least the proof is right there and undeniable. Regulators should also appreciate this advantage, it would drastically simplify the audit process.
The company can build out its rules at the first issuance and then let the system take care of handling the rules. For instance, it can issue shares and make them only tradable to accredited investors. At this point the company does not have to be an active participant in every trade because the DLT system will handle making sure all trades follow the rules.
Easier liquidity is related to both transparency and management simplicity. If it’s easy, not a legal nightmare, and the transaction costs are low: more trading can (and will) happen. Companies can ensure that they remain fully regulatory compliant, while allowing the secondary market to flourish around their previously illiquid shares.
This was just a quick overview of a specific use case, but hopefully it illustrates that decentralized doesn’t necessarily need to mean that everything is decentralized. Holding companies and individuals accountable allows for a more fluid and dynamic market. These concepts apply to everything from issuing stock, to playing games, to neighborhood associations. The more trust, accountability and the right-kind-of transparency we can introduce into our systems of interaction, the better.