A couple of people question if having a blockchain that settles transactions in 3 seconds is truly a probably valuable feature to have or if transactions per second (TPS) is something we've paid too much attention to.
I think it is particularly important to discuss this more openly now, with everything new happening in the technology landscape.
Fast vs Slow
Many stocks and securities trade systems and global transactions run on "T+2" settlements design.
This means the trade date plus an additional two days, effectively 3 days at minimum, is what it takes for a trade to settle.
Sometimes, 3 days become 5 and sometimes more.
This delay was long considered normal, even useful, to allow back-office processing and error correction.
But how does this perceived value compare to faster settlements?
To understand this, one must look at the cost of slow settlements.
In securities trading for instance, the consequences of those settlement gaps are not merely inconvenient.
During the settlement period, market participants have credit exposure to each other. If one party defaults on either delivery of a security it sold or payment for a security it purchased, the counterparty to the trade may sustain financial losses.
Given the very large volume of daily trading in U.S. financial markets for instance, the amount of credit exposure that financial market participants have collectively is substantial and the risk associated with this exposure is especially great during times of systemic financial stress.
In addition to this, we are also dealing with a feature that allows fraud to thrive. Slow means that one party holds very little leverage (very close to zero) in every transaction, leaving them virtually exposed to being exploited.
Fast transactions solves all of this.
All parties involved in a trade are given equal leverage over each transactions. There's virtually no room for fraud when it comes to settlement time, and near-instant transactions means that little credit exposure, and higher money velocity.
Machine economies need speed
It is also important to consider the future of world economies.
Financial transactions will largely be carried out by machines and slow settlements is an expensive feature for machines, not only because it leaves them open to external attacks but because there's a direct energy costs associated with it.
When settlements are near-instant, machines can move money across economies at low latency, being essentially economically efficient.
Security should be intelligence
Blockchains are programmable, machined are gaining operational intelligence.
The inevitable end product here is programmable intelligence, and when it comes to finance, this means that security moves away from being fixed rules on potentially outdated data to being real-time continuously adapting intelligence.
The convergence of blockchain and AI, means that financial transactions will have applied intelligence. Fraud will be battled in real time, ensuring that even though blockchains settle transactions in 3 seconds, security measures can still be taken throughout the process.
The future will run on faster systems integrating real-time data to every operations. The near-instant settlement of blockchains are incredibly valuable for this future, a lot of people just don't realize it yet.