Frequently Asked Questions

What is Digital Asset?

Digital Asset is a software company that builds distributed, encrypted straight through processing tools. Our technology improves efficiency, security, compliance and settlement speed.

What problems does Digital Asset’s software solve?

Legacy financial infrastructure, traditionally based on centralized, unencrypted hub-and spoke database architecture, is expensive, inefficient and vulnerable to operational failure and cyber attack. Multiple entities keep records of the same information and ensure its consistency through a cumbersome reconciliation process. Settlement latency arises because transaction information is recorded separately and errors are not identified and rectified until late in the post-trade process. Regulatory focus on enhanced transparency, reduced counterparty risk and expedited settlement times are placing challenging demands on existing infrastructure. These problems occur across many areas of post-trade processing and record keeping and result in high costs, capital requirements and added counterparty, operational, and cyber-security risks.

How does Digital Asset solve these problems?

Digital Asset software maps business logic into a network of known entities using cryptographic keys and distributed ledgers designed to enrich existing market infrastructure. Through the creation of a financial ecosystem that employs a cryptographically-secured and shared master prime record, Digital Asset software offers tremendous efficiencies and economies of scale over existing infrastructure, including the opportunity to materially reduce settlement times.

Digital Asset does more than envision the next era of high finance infrastructure. Our team recognizes the importance of regulation and existing service providers in the financial ecosystem. Digital Asset’s customers include banks, dealers, exchanges, central securities depositories (CSDs), custodians, central clearing counterparties (CCPs) and other critical infrastructure providers.

Digital Asset’s deep professional experience enables us to outline clear, realistic, and iterative steps towards implementing our software solutions that take into account the need to interact with existing infrastructure to minimize disruption. Digital Asset solutions upgrade the existing financial infrastructure to distributed ledger technology, with particular focus on preserving the important legal and regulatory protections afforded to participants in existing financial systems.

How does Digital Asset apply distributed ledger technology to financial services?

In theory, a shared, immutable ledger enables transparent, peer-to-peer, real-time settlement without the need for financial intermediaries. In reality, markets require known, reliable counterparties, rights of reversal and error correction, high levels of privacy and the operational benefits of net settlement in a system in which legal entities are responsible for the perfection of title to and legal standing of financial assets. Consequently, markets will continue to benefit from and require third party service providers to perform a variety of functions as they do today: from ensuring clean title, to enabling operational and balance sheet netting.

Assets are not currently issued solely into these distributed networks, and may never be. This necessitates careful on- and off-ramping procedures for keeping the two systems in sync as new technology is adopted. These needs can be met at the transaction layer, where Digital Asset software maps business logic and legal processes to cryptographic signature flows. As an example, our software constructs transactions that enjoy privacy and, when required, permit the ability for net settlement.

Digital Asset is designing constructive solutions that materially improve the existing financial infrastructure. In many cases, this means partnering with industry leaders and incumbent service providers to upgrade rather than displace the existing services they provide.

How is Digital Asset unique among companies in this space?

Digital Asset’s CEO, Founders, and team offer deep financial and technology industry knowledge, relationships, and expertise. Digital Asset’s combined experience uniquely positions the company to identify finance’s most critical problems, develop technological solutions, and implement them in a realistic, effective, and constructive manner.

Digital Asset has built its team with a specific challenge in mind: how best to navigate the challenges inherent in implementing new technological solutions into the existing financial landscape. We approach this challenge with a view that it is essential to minimize counterparty risk between entities. Since Digital Asset is not a party to any transaction, does not hold client assets under our custody, and our software services introduce no new counterparty risk.

Digital Asset has actively sought complementary talent and technology in order to expand the company’s core competencies. Through the acquisitions of Bits of Proof and Hyperledger, Digital Asset has built a flexible suite of services to provide a level of optionality in choice of distributed ledger technology that is not available with other companies in the space.

What are the addressable market segments for Digital Asset?

Strong use cases involve any process that requires a set of approvals from multiple and distinct entities or any process that inherently relies on the accuracy of recording such approvals. Examples include loans, securities, derivatives and FX. Digital Asset technology is not looking for problems to solve. Our technology is designed specifically in response to existing problems in post-trade settlement and record-keeping processes for wholesale financial institutions. We propose technology solutions where there are external factors driving a need to change the existing underlying infrastructure. These frequently include mounting cost pressures, increased capital requirements or changing regulatory mandates.

Is Digital Asset an exchange or taking custody of funds?

No. Digital Asset is not an exchange and does not take custody of any funds or assets. Digital Asset software facilitates the construction of highly customizable transactions and enables member institutions to execute and settle directly with each other.

What is a blockchain or distributed ledger?

A blockchain is an append-only database of transactions which has two key elements: 1) a shared, replicated ledger, and 2) a distributed database synchronizing mechanism known as a “consensus algorithm”. In a blockchain, each transaction must reference a balance received from a previous transaction and must be cryptographically signed by the legal approver of the transaction. The linked transactions form an exact chain of title over time. A blockchain is just one type of distributed ledger, not all distributed ledgers necessarily employ blocks or chain transactions.

What is a consensus algorithm?

A consensus algorithm is a set of operations by which a distributed system reaches agreement. In most distributed consensus systems, some entity must propose a ‘commitment’ of a new transaction. Some mechanisms, like the Bitcoin blockchain, expend resources in order to win the right to commit transactions (Proof-of-work, ‘PoW’). Others, like Hyperledger, predetermine a primary rotation for the entities that will order transactions and closely monitor behavior for erroneous or malicious activity (Practical Byzantine Fault Tolerance, ‘PBFT’).

Why should I consider a distributed ledger?

Today’s financial transaction recording and settlement systems require the duplication and distribution of enormous amounts of data. In many cases, incongruencies within and across these systems create inconsistent transaction data that often necessitate costly reconciliation processes.

A distributed ledger is exactly replicated and synchronized across many different entities in order to add an increased level of resiliency and data integrity. If one or many locations that hold a copy of the distributed ledger are attacked or somehow fail, the remaining locations are able to maintain the ledger in their absence.

By sharing and replicating information, distributed ledgers allow for real-time information, reduced error or “fail” rates, and tremendously reduced costs from building shared infrastructure. Furthermore, distributed ledger technology enables the opportunity for economies of scale achieved by allowing the transaction to serve simultaneously as agreement, settlement, and regulatory reporting. Instead of building countless duplicative and redundant services, one master prime record can serve as the source, eliminating the need for reconciliation and increased post-trade processing speed.

Does Digital Asset use the Bitcoin blockchain or a private network?

Digital Asset software can commit transactions to multiple different types of distributed ledgers, including “permissionless” networks (such as the Bitcoin blockchain), “permissioned” or private networks (such as Hyperledger), and traditional databases. Digital Asset continuously evaluates alternative protocols in order to verify independently the strengths and weaknesses of each distributed ledger solution, and to determine which ledger best fits each particular use case. Factors for consideration include: transaction throughput capacity, privacy, resiliency, threat model, vendor dependency, and ability to meet regulatory requirements.

For regulated financial institutions, permissionless blockchains presents a number of limitations when applied to existing capital markets. These include:

  • Insufficient transaction throughput capacity (of only a few hundred thousand transactions per day, versus typical requirements of several thousand per second)
  • An inability to limit network participation to known entities and hence to conduct “know your vendor” diligence
  • The possibility of collusion by unknown network participants to overwhelm the network
  • Various privacy considerations associated with publication of transaction information to a public network
  • A core development process that is unwieldy and difficult to influence or predict
  • Reputational issues and potential business model conflicts associated with various uses of native crypto currencies
  • Lack of settlement finality, consensus is probabilistic and not deterministic

As a consequence, the majority of Digital Asset’s solutions make use of private permissioned networks where participants are all known and permissioned.

Does Digital Asset use Colored Coins or Metacoins?

Generally, no. For the vast majority of our initial applications Digital Asset uses a purpose built permissioned ledger which supports multiple different asset classes natively. As such, there is no need to take an existing token and color it or apply an overlay metalayer. Unique tokens can be freshly created to represent assets or obligations directly. However, Digital Asset selects the right technology for the problems our clients face, so should a public blockchain be the best fit for a specific application then we will utilise the best available technological implementation, which may involve the use of colored coins.


Smart Contracts and the
Digital Asset Modeling Language (DAML)


WHAT IS A SMART CONTRACT?

Smart Contracts are software applications that are shared and run on all nodes across a blockchain network. The primary goal of blockchains with inbuilt Smart Contracts was to create self-enforcing agreements that independently control and automate the exchange of value according to predetermined rules based on predefined inputs. As with Bitcoin, Smart Contract platforms like Ethereum were designed to minimize the role of trust and enable actors that did not know each other to enter into software-enforced contractual agreements that are censorship resistant, meaning neither party, nor even governments can tamper with or prevent their execution.

WHAT ARE THE CHALLENGES OF APPLYING SMART CONTRACTS TO FINANCE?

Popular Smart Contract implementations require that the plain text of an agreement be shared across all nodes in a distributed network. While this ensures trust, it is incompatible with many applications in financial markets where the disclosure of the existence of an agreement between trading parties (e.g., a large sell order), much less deal terms, could move market prices and are rightly confidential.

Additionally, a defining characteristic of Smart Contracts is that they are self executing and/or self enforcing. In order to enforce parties to comply with the terms of a Smart Contract, the Smart Contract must be pre-funded with the full value that may need to be paid out, and will only release funds back to participants when execution has completed.

We believe there is a superior alternative to Smart Contracts for financial institutions in the majority of cases, and introduce a new language and execution environment specifically tailored for this purpose, called the Digital Asset Modeling Language.

WHAT IS THE DIGITAL ASSET MODELING LANGUAGE (DAML)?

DAML is an expressive language designed for financial institutions to model and execute agreements with certainty and finality. This technology complements Digital Asset's existing technology by providing a new, verifiable way for parties to a transaction to independently prove updates to a distributed ledger while preserving data confidentiality. DAML codifies rights and obligations in a similar manner to traditional legal contracts and workflows, and is more easily interpretable by a non-technical audience than most programming languages. It is a new Haskell-inspired functional programming language that has been under development for two years.

IS DAML A SMART CONTRACT PROGRAMMING LANGUAGE?

DAML is similar to a Smart Contract language in many ways but it is designed with the needs of financial institutions in mind. As such, it is optimized for usage in a private execution environment rather than in an open execution environment, in which it would be processed by all of the nodes in a network. DAML is designed to achieve many of the same benefits of Smart Contracts without the unnecessary trade-offs that make them unsuitable for financial services.

It could be argued that this is a closer fit to the original definition of Smart Contracts coined by Nick Szabo in the 1990s, which also focused on verifiability - but only by the stakeholders of that agreement rather than by everyone, and on certainty - being able to accurately predict all possible outcomes of the agreement rather than introducing doubt with unnecessary complexity.

WHAT ARE THE MAIN BENEFITS TO USING DAML?

Existing financial infrastructure is a fragmented collection of partial information spread across siloed data stores. Multiple records of similar but inconsistent information is duplicated and processed independently, and then the resulting outputs are compared and synchronized through a cumbersome reconciliation process. While distributed ledgers solve the problem of agreement on what the current state of the ledger is, they cannot solve the issue of agreement on what should happen to it next for complex financial agreements without revealing their contents.

By combining a shared log containing the complete provenance of these rights and obligations with an off-chain execution environment for processing the workflows of the behaviors being modeled, DAML ensures that all stakeholders can reach the same conclusions as to the result of a common workflow.

Having certainty in the integrity of both the ledger and the metadata dramatically reduces the frictions that arise from keeping multiple distinct systems in sync, and allows more flexible and efficient settlement systems by eliminating reconciliation, automating certain processes, and providing efficient arbitration.

IS DAML PROCESSED BY EVERY NODE IN THE NETWORK?

No, unlike Smart Contract platforms, agreements written using DAML do not need to be shared across multiple, often completely public, nodes in a network. Parties do not need to reveal the terms of their agreement to any undesirable third parties and it can be safely processed and authorized by only the relevant participants. All data is revealed on a need to know basis and even the distributed ledger, which only contains references to the agreement, is encrypted so other entities cannot detect even its existence on the ledger, let alone the terms.

HOW DOES DAML INTERACT WITH A DISTRIBUTED LEDGER LIKE HYPERLEDGER?

DAML serves as a logic and validation layer sitting above the ledger, providing an auditable way to prove why updates to the distributed ledger have occurred. An agreement modeled in DAML is only active if Hyperledger confirms it is valid and not referenced by any other transaction. This creates an independently verifiable logical mapping between the original business intent all the way through to the relevant Hyperledger transactions. The combination of the Digital Asset Modeling Language and Hyperledger allows for scale and privacy while maintaining a fully reconciled system across multiple parties.

HOW CAN THE EXECUTION OF DAML AGREEMENTS BE INDEPENDENTLY VERIFIED?

Each resulting step in the workflow of a DAML agreement is tied to a reference in Hyperledger and contains requirements on which parties’ cryptographic authorization is required to proceed. This ensures that every step in a DAML agreement, and hence every corresponding entry into Hyperledger, is only made with the full, multi-party authorization of all stakeholders of the transaction.

Nodes in the Hyperledger network that are not party to the agreement are still able to agree upon its outcome because they can independently verify that all of the required authorizations have been made without ever actually seeing the contents of the agreement itself. However, the contents of agreements can be provably revealed to authorized third parties such as regulators.

WHAT IS A TURING-COMPLETE LANGUAGE?

To be a Turing-complete programming language, the language must be adaptable enough to be able to solve any possible computational problem. The flexibility demanded by the Turing-completeness test requires specific capabilities to be present in a language, such as the ability to reference itself, however this can lead to undesired outcomes such as an infinite loop. A basic calculator is not Turing-complete as it can only process certain, predefined operations such as addition or multiplication. Personal computers are Turing-complete as they can theoretically process any algorithm.

WHY ISN’T DAML TURING-COMPLETE?

DAML was intentionally designed not to be Turing-complete. While Turing-complete languages can model any business domain, what they gain in flexibility they lose in analysability. This is because a Turing-complete language can be used to write any possible program. A program written in a Turing-complete language can therefore have any possible output. One cannot reason about the output of any possible program and therefore one cannot write a program that needs knowledge about the structure of that output in order to function. By restricting a language to only be able to write programs relevant to financial usage, the potential outputs of those programs becomes predictable. This allows those outputs to be queried and analysed for risk, position, interconnectedness, etc. that wouldn’t otherwise be possible.