ASX’s plan to replace its CHESS system, which delivers key post-trade settlement services for the Australian Securities Exchange, involves building out two core components: A replacement application for CHESS that will support a distributed network of nodes, and the underlying infrastructure platform that will support its operation
[Read part 1 here: ]
The application will be based on Digital Asset Modeling Language (DAML) and deliver existing CHESS functionality as well as support a number of new features requested by market participants. For the underlying distributed ledger technology (DLT) infrastructure ASX’s key partners are Digital Asset and VMware.
“They bring us the ability to pull this together with everything we need to offer nodes as a managed service,” said Cliff Richards, ASX executive general manager, equity post-trade services.
Richards said there had been “some conversation” that tried to conflate the DAML-based CHESS-replacement application with the underlying DLT infrastructure platform.
The CHESS replacement is “highly regulated,” he said. The infrastructure platform, however, will be open to a range of use cases from third parties, including outside of financial services.
“This will allow third parties to develop their innovations, their intellectual property, contained in a DAML app, and they don’t have to, but they can bring it along to us. We want to host their applications for them.”
Learning from Bitcoin, Ethereum
A blockchain is “nothing more than a data structure” of blocks chained together with cryptography providing the links, Richards said. Each block in the append-only data structure contains the unique identifier of the previous block
“That is you can you cannot change the data inside a block or the sequence in which the blocks are arranged,” Richards said.
“They’re perfectly mathematically tamper-detectable,” he added. “They have an incredibly powerful audit quality, so when you're tracking the transactions in the financial markets through a blockchain, no-one can tamper with the history of what's happened. So they're very, very good for regulation and very, very good for auditors, and very, very good for dispute resolution, which happens a lot in financial markets.”
Although Bitcoin is “incredibly elegant, beautiful technology designed” the “by-product of it is environmental destruction. It is a bad, bad technology from that perspective.” However, it did come up with a “really novel way of synchronising data across the network without relying on central counterparty,” Richards said.
While Bitcoin’s blockchain can handle around seven transactions per second, CHESS needs to be able to handle tens of thousands of transactions per second.
Ethereum, which was inspired by Bitcoin and debuted in 2015, brought to the table the idea of smart contracts, Richards said.
Smart contracts are “neither smart nor contracts but they are a way to write computer code, put that transparently on a blockchain, to progress the workflow of the data that's held in the Ethereum blockchain.”
“This allows us to take a financial market that's plagued with silos, fragmented, latency prone data and orchestrate a workflow across an industry, not just inside a company - still the promise of privacy and confidentiality.” and “bugs galore”.
He referred to the as an example that ASX didn’t want to emulate. “There's no central counterparty to say, hey, something's gone wrong”; the event ended up with Ethereum being forked.
“If ASX has a problem in software, we can't afford to fork and recreate a second version of the Australian stock market,” Richards said. “That's a non-starter. So you need mature, regulated, accountable adults, institutions like ASX in the room for things that matter.”
“People trust ASX today to keep the record of what's been done,” so the “very thin implementation of distributed ledger” the exchange is using is focused on synchronising data across an industry as a precondition to orchestrating smart contract workflow across an industry. Unlike Bitcoin, “it's not about solving the double-spend problem by removing a trusted operator of the system,” Richards said.
“The Bitcoin blockchain want to get rid of any central counterparty and still eliminate the double spend; we eliminate the double spend today and we’ll continue to do that. We use a protocol and a particular design, and Digital Asset and VMware are helping us with this, that will perfect the record of the ledger without a need to have proof of work, proof of stake, high energy or high capacity [requirements].”
“We're not burning the national grid of Ireland’s electricity each year to keep the Australian stock market running,” he added.
Both Bitcoin and Ethereum are “very elegant, sophisticated, wonderful technologies that unfortunately have baggage,” but ASX has sought to “pull out the benefits” from both.
The approach taken by Digital Asset involves a global synchronisation layer that stores hashes. It is used to synchronise data that is that is kept in “segregated, private, permissioned contract stores”.
A node is “just a piece of software”. Initially ASX will initially offer nodes only as a managed service.
“We're taking the hassle factor away from the market of running these systems because they can be complicated,” Richards said. “We will expose a fully managed service in the form of an API. The API can have applications written in DAML plugged into it, written by third parties.”
ASX will scrutinise DAML applications before they are deployed and run more than one ledger from its data centres, Richards said
“The beauty of DAML is it's extremely deterministic and lends itself formal verification: A mathematical parsing of the language to check for defects. It's a functional programming language, which is different to things like Java, C++, which are imperative programming languages,” he said.
“If someone comes to us and says, ‘Hey, ASX we really like the idea of you running this infrastructure for our use case, which is about tracking the provenance of rare earths or the food supply chain,’ we are unlikely to run that on the same infrastructure that’s supporting the stock market,” the ASX exec said.
“DAML is an open source technology and anyone can write a DAML application today and in the future, bring it to ASX and say ‘I’ve got an application to do corporate actions or share registry or anything both in financial markets and some outside of financial markets,’” Richards added.
“Our job is to take the domain of CHESS beyond just brokers and take it to the entire financial services industry. So for third party innovators, fintechs, regtechs, technology companies, can write an application once and access an ecosystem.”
ASX has established a ‘DLT Solutions’ team to help businesses develop applications based on the technology.
Know your nodes
The new system will support both message-based and node-based forms of interaction. While ASX expects some organisations to run 100 per cent using the new node-based approach, others will not ready to make the leap either because they are not prepared for the investment required or remain sceptical of the technology. Richards expects that some organisations will employ both approaches.
He said the new system only has relatively modest demands when it comes to compute infrastructure because unlike cryptocurrencies it’s not running a consensus protocol that relies on proof of work or proof of stake.
The new DLT system will operate from ASX’s primary and secondary data centres.
There will be “separate logical, virtualized and physical servers” running the nodes in ASX facilities, Richards said.
“Some people say, well that’s not really distributed,” he added. “What I'd say is, well, there's a geographic distribution across a primary and a secondary data centre. We can extend that — but we're not going to leap over to an end state of radical geographical distribution, for a few reasons.
“Today, CHESS sits in a server in our primary data centre and backup data centre. And if the regulator walks in and says ‘Where’s CHESS?’ we would take them into the data centre, walk down one of the corridors, go to the rack that’s got ‘ASX’ written on it and point to the box that’s got CHESS on it.”
“It’s client, regulatory and use-case driven,” Richards added: When it debuts, ASX doesn’t lose anything by not having a more distributed system, he said. But if someone presented a use case where a different approach makes sense, the company would consider it.
Resilience
Problems like server, switch and network link outages remain a possibility, Richards told Computerworld. “But the security, resiliency and other non-functional characteristics of this software are orders of magnitude better than what we have in financial markets today.
“Things still go wrong. The question is: What's the resiliency and recovery profile of replacement technologies. And largely they’re no worse and in many areas they’re better.”
The existing CHESS system is “extremely resilient” thanks in part to being used in a production setting for two-and-a-half decades, Richards said.
“Is the new infrastructure more resilient? It will be because aspects are more distributed, not radical distribution... [and] the quality of the infrastructure and hardware that we're putting in place is contemporary.”
CHESS today is written in COBOL and running on Itanium-based servers. “That's fine if you don't touch it,” Richards said. “But if you think about what's happening in financial markets, we’ve got swathes of new regulation coming down the pipe, so we have to update our systems, and the market’s hungry for new services and products.”
Although CHESS is a “wonderful code base for doing what it does today” ASX doesn’t want to “keep enhancing on legacy.”
Rolling out additional features for the new system will be a lot simpler, Richards said.
ASX conducted an extensive consultation process with stakeholders, and from that developed a list of features that market participants were interested in. Some of those will be available from day one of the new system, while others will be added down the track.
ASX will have a “menu of configuration options available” when it comes to nodes, Richards told Computerworld. “So a vanilla node for a low to medium type user is capitalising on server virtualization and logical separation. The data is logically separated, but it may be sitting on the same shared infrastructure.”
Very high volume users, or institutions that have a regulatory requirement requiring physical segregation, can have a dedicated node based on a single-tenant, bare-metal server: “Basically it’s tell us what you want, and we’ll configure the system to suit your needs.”
Richards said he could foresee cases where people run their own node but not in the short term. Initially, it will be a case of the market getting comfortable with the new system and demonstrating to regulators that ASX has been successful in moving from a controlled, centralised environment to a more distributed environment — albeit one still controlled by ASX.
“Is there a point in time where there’s a discussion around an institution taking their own node into their own infrastructure? Yes there is, but no one's asking that yet. And if you think about that, why would you?”
The ASX exec compared it to the appeal of using cloud services instead of a business purchasing and operating its own hardware.
[Read part 1 here: ]