Tradfi Crypto Adoption:  From early stage prototypes to Canton Network

Blockchains, or at least early stage prototypes, have been around longer than Bitcoin – the seminal cryptocurrency. As early as 1991, Stuart Haber and Scott Stornetta proposed a system where a chain of blocks secured by cryptography could prevent tampering of digital records. Distributed ledgers, or the idea of maintaining shared records across multiple parties, have existed in various forms for centuries, even dating back to the Roman Empire. However, it was not until Satoshi Nakamoto combined these concepts to solve the Byzantine Generals’ problem in the late 2000s that the world saw the first decentralized digital money – Bitcoin – and the potential of blockchain technology became more apparent.

A Slow Start

Despite this promise, blockchain adoption within traditional finance (tradfi) has been much slower than expected. Some critics dismissed it as a “solution in search of a problem,” but this ignores the very real challenges that had to be overcome before the financial sector could adopt it.

The first obstacle was cultural. Blockchain and cryptocurrencies were created and promoted by cypherpunks – a group with a strong anti-establishment ethos, far removed from the risk-averse world of grey-suited bankers and regulators. The association with illicit activities in crypto’s early years also deterred adoption. The first major use case for Bitcoin was Silk Road, an online black market shut down by the FBI in 2013, that resulted in its founder, Ross Ulbricht, receiving an 11 year jail sentence. This cemented the perception of crypto as a tool for crime, a stigma that has proved very hard to overcome.

In addition to these cultural impediments, adoption has also been hindered by a lack of regulatory clarity, with governments slow to layout a legal framework for digital assets, partly because they were yet to be convinced of the benefits from blockchain technology and partly because of the potential disruptive impact on their cherished fiat global monetary system. Over time, however, it has become clear that blockchain is not just a passing fad or a Ponzi scheme. Many countries are now implementing digital asset legislation, which is a must-have for tradfi firms operating in one of the most heavily regulated industries in the world.

Blockchain Specific Impediments

Overcoming cultural and legalistic obstacles are only necessary conditions for widespread tradfi adoption of blockchain technology and digital assets, but they are not sufficient. Two additional obstacles remain and they arise because of the way early blockchains (such as Bitcoin and Ethereum) were designed and implemented.

Due to the desire to create the most trust-minimized form of money possible, the creators of these pioneering blockchains embraced decentralization, to ensure that no single entity was able to control the network (censorship resistance), and open verification based on maths (cryptography). To achieve this public, permissionless, blockchains were developed. By ensuring that the full history of transactions were visible to everyone who wished to connect to the network, users could independently verify the validity of the blockchain. The only element of privacy available to users of these blockchains comes from the ability to severe the link between the crypto wallet used to make transactions and their real world identities. In short, users may not know the identities of other users involved in transactions over the blockchain (hence pseudo-anonymity), but the details of the transactions including the sender, the receiver, the amount and the timestamp, are fully visible. Such sharing of information about assets and applications with all users of the network is beneficial when one is seeking to create a trust-minimized form of money to rival state-issued fiat currency, but it is a problem for tradfi firms where financial privacy is of paramount importance.

The second issue with these early blockchains¹ is they have very limited transaction bandwidth (7 tps in the case of Bitcoin, roughly double that for Ethereum). For tradfi players used to being able to process tens of thousands of transactions per second, this is a severe limitation. The most popular workaround to this transaction bandwidth problem in the crypto world is to utilize so-called Layer 2’s and rollups (optimistic or zero knowledge), frameworks built on top of the primary (Layer 1) blockchain that batches off-chain transactions and periodically post proofs back to the Layer 1 for validation. While this addresses the scalability issue of the layer 1 blockchains, it means users giving up control over the assets. This is not really viable for tradfi institutions, and combined with the lack of privacy, has proved to be a bit of a deal breaker.

One proposed solution has been private, permissioned blockchains, where all participants are vetted. These offer privacy and mitigate risks from bad actors, but they tend to fragment into isolated networks that cannot easily interoperate. For finance, which depends on interconnected ecosystems (banks, custodians, regulators, etc.), such fragmentation undermines the benefits of blockchain.

A New Solution

Canton Network offers a way forward. Canton Network is a smart contract “network of networks” designed to overcome the challenges of privacy and scalability, thereby paving the way for the next wave of tradfi adoption. A consortium led by Digital Asset and including Goldman Sachs, BNP Paribas, and Microsoft, Canton Network differs from Bitcoin and Ethereum by ensuring that participants only see the transactions relevant to them. Not only does this ensure privacy, with users able to share as much or as little data/information with other users as they wish, but the design also provides a natural way to boost scalability because the set-up allows for parallel transaction processing.

Digging Into The Details

Canton Network has three key components:

• Nodes where private data and smart contracts are deployed for a domain
• Sync Domain where encrypted transactions are ordered for a domain
• Global Synchronizer where transactions are settled across domains

Domains are similar to private blockchains that have their own rules, operators and data and each tradfi institution (commercial bank, asset manager etc) can set one up. The smart contracts that run on these domains use Daml, an open source programming language that is composable (meaning individual contracts and workflows can be combined to create more complex transactions/systems) and prioritizes data privacy and authorization, allowing only permitted parties to access specific data within a smart contract. Once established other tradfi participants are able to connect to domains in order to make transactions such as issuing, trading or settling financial assets.

Importantly, each participant is not able to see all of the transactions in the domain just those that are pertinent to them (ie, a need-to-know-basis). Obviously what this means is that each user can only see their own local ledger, which is a subset of a larger virtual ledger – see image. When receiving a transaction the party only needs to verify that the transaction is consistent with their partial view of the network, and that is also complies with the smart contract logic and was correctly authorized.

Canton Network Transaction Graph

Source: Canton Network: A Network of Networks for Smart Contract Applications (white paper²)

Obviously, for this set-up to work correctly, it must necessarily be the case that the partial views each user can see of the transaction ledger must be consistent with the views of other users. Without such agreement no user would be able to determine what is the valid state of the transaction records. They way Canton Network ensures is via synchronized validation.

The Global Synchronizer, which went live on Mainnet in June 2024 after a year of testing, provides a shared clock and an ordering layer that coordinates transactions across domains. Borrowing the original ethos of the early blockchains, the Global Synchronizer is decentrally operated by independent entities called Super Validators. When a transaction involves multiple domains (like trading a tokenized bond for tokenized cash), these Super Validators help orchestrate the atomic commit so that multi-party updates either succeed everywhere or fail everywhere, thereby eliminating any inconsistencies³. In addition, they validate cryptographic proofs and metadata of cross-domain transactions without accessing private transaction details. This ensures the union of all partial views forms a coherent global ledger – the correctness of participants are able to verify – with no double-spending or conflicting states.

In this way, Canton delivers both privacy and consistency. Parallel transaction processing also addresses the scalability issue that has long hindered tradfi adoption.

Introducing Canton Coin

Like the internet, Canton aims to be a “network of networks,” whose value grows with the number of users. To encourage growth, the launch of the Global Synchronizer included a token, Canton Coin, which serves as a payment and incentive mechanism.

According to the Canton Coin white paper, over the first ten years of operation of the Global Synchronizer, 100 billion Canton Coins can be minted, thereafter there will be an annual limit of 2.5 billion Canton Coins. During the early stage ramp-up phase, the majority of this minting (over 75%) will go to Super Validators in return for bearing the cost of deployment and infrastructure maintenance. However, once the bootstrapping phase is over, their share of minting will fall away sharply, with the majority going to APP developers – see image.

Canton Coin Minting Split

Source: Digital Assets

Tying minting strictly to network contributions and avoiding presales or founder allocations, Canton Coin discourages speculation – a notable contrast to many crypto projects, particularly meme coins which are all about the pump!

By addressing the twin challenges of privacy and scalability, which has been impediments to tradfi crypto adoption Canton Network provides a credible path for blockchain adoption in traditional finance. At Trakx, we believe this is an important bridge between the two industries, and we are excited to have joined Canton Network as a node operator.

1 Not all Layer 1 blockchains have such extreme transaction bandwidth limitations. Solana, for instance, is able to process a much higher volume of transactions due to its different design structure, and this serves to weaken the well-known blockchain trilemma – see: https://trakx.io/resources/research/solana-light-at-the-end-of-the-tunnel/

2 See: https://www.digitalasset.com/hubfs/Canton/Canton%20Network%20-%20White%20Paper.pdf

3 As mentioned earlier, the smart contract is written in Daml, which is a deterministic language and this guarantees that all parties compute the same outcomes from the same inputs.