Corda Blockchain: Transforming the threat into opportunities for financial institutions

Blockchain was born to enable parties who don’t know each to perform secure peer-to-peer transactions without the intervention of a central control authority. This new exchange paradigm disrupts the current financial system where institutions play the role of trust parties that guarantee transactions.

Thus, when the first blockchains emerged, the financial sector considered them as a competing threat that could brunt the whole financial world. On the other hand, those blockchains in their initial shape were not fully compliant with the specific constraints of financial institutions (security and regulatory constraints, scalability, performance, etc.).

The financial world had then to search for answers allowing to take advantage of this cutting-edge technology and taking into consideration the complex exigencies of the sector.

What limitations of public blockchain technologies for the financial sector?

Firstly, all data within those technologies are shared with all participants in the network, which results in a major problem in terms of confidentiality. In the financial world, such radical transparency is not adequate in terms of regulation for most business use-cases.

The second drawback stems from the first: the performance and the scalability problem. For example, Ethereum currently requires each node to process all transactions and store the statements of all accounts. This reduces the possible throughput of all nodes in the network to that of a single node. Take the example of an interbank blockchain, this would require each member to check, process and store all transactions made by all other actors in this blockchain network. While this would be technically feasible, the cost of computing and storing would create a significant hurdle for most of the financial institutions.

In third place comes the identity management problem. In public blockchains, users’ identities are kept anonymous and only digital signatures are used. In the financial sector where traceability is a key concept, the inability of ascertaining the real identity of a transaction initiator is a very significant limitation.

Lastly, those technologies suffer from a massive talent shortage. This developers’ unavailability is mostly due to the specific or uncommon programming languages used by these blockchain platforms (Solidity for Ethereum, Golang for Hyperledger, etc).

How Corda meets the financial sector specific needs?

Basically, Corda is a set of immutable state objects that record the existence, the content and the current state of an agreement between two or more parties.

When a transaction or agreement is issued between two parties also called nodes, a state object is generated and shared only between the nodes involved in the transaction. The consensus around this transaction is managed by a dedicated node called “Notary” which avoids the double-spent of occurring in the network.

This mechanism is perfectly compatible with the very important confidentiality requirement for financial institutions: each transaction is only shared between the actors authorized to see it.

By solving the confidentiality problem, Corda indirectly resolves both performance and scalability issues. Nodes only record in their ledgers the transactions in which they participate, without having to register each transaction that takes place on the Corda network. This provides a significant performance advantage.

Moreover, identity management is one of the key topics that the consortium has tried to improve compared to other blockchains. Unlike other platforms that promote anonymity, the Corda network is semi-private.

Indeed, to join a Corda network, a node needs to prove its identity to a “Doorman” to get a signed certificate. This system ensures that each entity node joining the network is clearly identified.

Finally, Corda Smart Contract can be written with java and run by a Java Virtual Machine. By adopting these technologies, which are already well known to financial institutions and for which they already have qualified resources, Corda avoids the technological skills barrier that characterizes other public blockchains and facilitates its adoption within the financial sector.

Corda not only answers the financial sector expectations, but it also brings notable features such as interoperability and file transfer

As for the file transfer feature, Corda enables referencing a file hash called (file’s footprint) in a transaction. The file itself is not included for performance reasons. When needed by the recipient node, a shared file can be uploaded automatically from the transaction’s originating node using its footprint and stored locally to avoid re-requesting when needed again.

The consortium is constantly improving the platform to make it more stable and robust. A new version Corda 4 was launched last February, containing remarkable features. This new release mainly focused on easing migrations in large scale networks, facilitating applications upgrade in the blockchain network, and reducing errors and inconsistency within the Corda transactions.

Corda’s advantages and specificities have raised the interest of many companies, which have started to try out the solution conducting proof of concepts (POC) or prototypes that went live. For example, BearingPoint has chosen the Corda technology to implement two concrete business cases about “KYC process optimization” and “Traceability of supporting documents” that led both to successful solutions.

Authors: Hamza El Kacimi, Ana Tereza Mascarenhas, Mohammed Karim Bouarafa and Ismael Abid

Consultant in IT Advisory @BearingPoint FR — Working in IT Transformation projects, implementing innovative and disruptive technologies. Blockchain enthusiast !