A Note on Intermediaries
A couple of days ago, I wrote that blockchains are basically only good for cutting intermediaries out of transactions.
The idea of disintermediation gets thrown around a lot in this world. But when you talk about disintermediation, you have to be specific about where you are removing a third party.
Transactions can be broken down into three levels:
- Execution
- Clearing
- Settlement
Execution occurs when counterparties are coordinated and agree to a transaction. This is usually done through a broker or exchange.
Clearing refers to the official recording of the transaction by each party involved, along with whatever reconciliation needs to happen amongst them. Clearing can be done through a central clearinghouse that manages all of the transactions in a market. It can also be done bilaterally, directly between the two counterparties.
Settlement happens when the trade or transaction is considered complete. This is when the funds actually show up in the account.
Blockchain technology today only provides solutions for disintermediation at the clearing and settlement layers.
This is important to recognize because oftentimes, value extraction occurs at the execution layer. Middlemen often take tolls for coordinating buyer and seller or managing market liquidity, not for updating books and records. If you want to disintermediate the execution level of a transaction, a blockchain cannot help you. At least not yet… Innovation in decentralized exchange may eventually get us there.
But until then, we will still need brokers, exchanges, and other liquidity providers. Which is why, with its explosion of new assets to be traded and moved, blockchain technology has created more intermediaries than it has destroyed.