For every financial institution, blockchain should be a top priority on the strategic agenda. Missing out on one of the biggest paradigm shifts in the history of finance would be grossly negligent. However, adapting existing business models is not easy, and banks and other finance players are not used to building on open, permission-less systems. Those who embrace the challenge and want to explore the opportunities which this new world offers should consider building on Q: Its unique architecture perfectly solves some of the biggest problems which banks commonly face in the blockchain space and opens up an opportunity space for novel business models.
This blog post is the fourth part of a short series which summarizes the benefits of building on Q. In the first post, I have described the generic properties of Q. Subsequent posts focused on DAOs and the metaverse. Future blog posts in this series will highlight the benefits which Q offers for other verticals and use cases.
Banks and Blockchain
If you asked me to describe the relationship between banks and blockchain, my answer would be “It is complicated”.
From the early days when Bitcoin first made the headlines, financial institutions have been both fascinated and frightened by the prospect of a new financial paradigm. Understandably so: At the very core of cryptocurrencies is the promise to dis-intermediate the world of finance, which should of course ring the alarm bells of financial intermediaries. On the flip-side, though, every new technology provides opportunities, and financial institutions were among the first to understand that this new technology could bring about efficiency gains and open up new revenue streams.
However, first attempts by financial institutions to incorporate blockchain technology were clumsy at best. By forming consortia to promote private blockchains, they kind of missed the whole point of blockchain: Decentralization. A lot of proof-of-concepts were started with great fanfare, just to be quietly abandoned a couple of years later as results did not meet expectations.
By 2022, however, the more forward-thinking financial institutions have learnt from past mistakes and have shifted their strategic focus entirely to public, permission-less, open-source blockchains. Without a doubt, this is the right approach: Only by embracing the philosophical and cultural changes that open systems bring about will banks be able to realize their potential.
What is clear by now is that blockchain is here to stay. Therefore, for financial institutions, integrating blockchain into their strategic roadmap is more critical than ever. Those which fail to do so run a serious risk of missing out on maybe the greatest paradigm shift in the history of finance. Similarly to retailers that missed out on the internet, financial institutions missing out on blockchain might be out of business a few years down the road.
But: There are still a lot of hurdles to be overcome. While many financial institutions have dedicated teams tasked with exploring new blockchain-based business models, there is sometimes still skepticism in the boardroom. Bringing together the new and the old world of finance remains a challenge.
The good news: The Q blockchain solves many of the issues that banks, insurance companies, asset mangers, payment providers and other financial institutions that want to deploy on public blockchains usually face.
Let’s dive into the details:
Q addresses the most common challenges faced by financial institutions
The Q blockchain is a fully decentralized, public, open-source blockchain that has everything you would expect from a state-of-the-art smart contract platform.
Beyond this, it has several unique features that are highly relevant for financial institutions:
- Q is based on a governance architecture that ensures full transparency on decisions regarding the blockchain itself. This sets it apart from other blockchains and addresses one concern which “tradfi” (as traditional finance is affectionately called by crypto enthusiasts) executives often have: Stakeholders and users of Q have full transparency about the rules that apply. There are no surprises, no backroom deals, no secret rulers that pull strings behind the scene. The rules are clearly spelled out in the Q Constitution, which is enforced via a sophisticated governance architecture specifically designed to do so.
- Companies which want to have an active say in the development of the protocol can do so via submitting governance proposals. Going even further, companies can play an active part in securing Q’s governance by applying to become a root node — a type of node unique to the Q network which is tasked with enforcing the rules of the protocol. Through such active involvement, stakeholders can gain additional confidence in the system.
- As a consequence of Q’s governance framework, the Q blockchain is non-forking — meaning that there cannot be uncertainty about which is the “right” chain. This is pretty much a necessary condition for any financial institution building on a blockchain. Imagine uncertainty about on which chain customers’ funds are, or which token represents a valid claim on a security or a physical asset — these are not situations which financial institutions want to deal with. While forking risk has long been ignored by many, it has re-entered people’s awareness in the run-up of the Ethereum “merge” — an important step in the development of the Ethereum blockchain which has lead to a fork of the network. While for a long time people assumed that forking risk would be negligible, discussions ahead of the merge have made it clear that it is not. Importantly, a comparable situation in Q would not have resulted in any uncertainty about which fork is the valid one.
- Q provides regulatory certainty for its participants: The Q protocol has been initiated by the Q International Foundation, a not-for-profit foundation based in Liechtenstein, one of the world’s leading jurisdictions for blockchain projects. Furthermore, Liechtenstein’s financial regulator FMA has assessed upon request that Q’s native token (QGOV) is not considered a transferable security under Liechtenstein law, which has been derived from the harmonized EU’s financial market regulatory framework.
- Q is ESG-compatible, which — whether you like it or not — is critically important for many financial institutions. With its delegated-proof-of-stake consensus mechanism, the Q blockchain requires minimal energy expenditure relative to proof-of-work based blockchains — a “tick-the-box” item for the “E” (for environmental) in any ESG framework. But also, Q is best-in-class in the “S” (for social) and “G” (for governance) aspects of ESG. While those aspects have been somewhat neglected in light of the urgency of environmental concerns, we expect them to gain prominence in the coming years. Q is well-prepared for this future.
But there is more: Through its governance framework, Q enables business models that go beyond the established “code-is-law” logic of existing blockchains.
Q enables entirely new products and business models
There are many use cases which which have been tested successfully by financial institutions: Cross-border transactions via cryptocurrencies, blockchain-enabled securities settlement or escrow arrangements supported by smart contracts are examples of such projects. While those can result in significant efficiency gains, they tend to focus on specific processes with limited complexity.
Q enables financial institutions to do much more: Applications built on Q have the option to plug into Q’s governance framework, thereby enabling a much broader set of business models than current blockchain-based applications.
This is a major improvement for financial institutions, whose product specifications typically include some form of discretionary decisions which cannot be fully automated via smart contracts. This is true even for the seemingly simple products like index funds, which — although they operate according to straight-forward rules — still have investment committees operated by humans to prevent fraud and abuse. Other examples abound: Think of claims processing in insurance, dispute resolution mechanisms (which may even be mandated by law) in consumer finance or setting of risk parameters in commercial lending. All of those need some degree of interpretation since not all possible future states of the world can be foreseen (in economics this is known as the phenomenon of incomplete contracts; in 2016 Oliver Hart received the Nobel Prize in Economics for his work in this area). This limitation has been a major impediment for blockchain adoption by financial institutions: A lot of prototypes failed because the necessity to integrate blockchain with traditional legal and governance structures resulted in so much friction that it simply was not worth the effort.
On Q, financial institutions can build “complete” products without the need to constantly switch back and forth between the “new” blockchain world and the “old” tradfi world. Put differently, Q enables fully digitally native products. The possibilities are endless, so here are just a few examples of products that could natively be built on Q:
- Investment funds with on-chain enforcement of investment rules;
- payment networks with decentralized dispute resolution mechanisms;
- retail insurance products with community-led claim handling;
- regulated stablecoins with in-built compliance features;
- settlement infrastructure for securities on a truly decentralized and therefore robust network;
- curated products offered by banks which plug into the yields and opportunities offered in the decentralized finance ecosystem.
While these are products that are obvious from today’s point of view, we expect many fundamentally new and improved products to emerge in the future. After all, good governance in itself is valuable precisely because it enables players to deploy business models that would not be possible without it. A fact, by the way, which has been explicitly recognized by the IMF, which states in its April 2022 Global Financial Stability Report on decentralized finance that “A transparent and credible governance system could improve risk management, facilitate good conduct of financial transactions, and eventually attract more users and capital to the platforms.”
We are confident that new governance frameworks such as the one Q offers will be the catalyst for real adoption of decentralized technology by financial institutions.
First steps for financial institutions building on Q
If you are bank, payment provider, insurance company, asset manager or in fact any other financial institution with a blockchain strategy, we encourage you to speak to Q Development AG, a company supporting the growth of the Q ecosystem. There is a structured process and operational support available for companies that consider building on Q. While Q allows you to build products fully on-chain, it also enables “hybrid” models, which combine traditional financial products with blockchain-based elements.
Of course, with Q being an open and decentralized systems, you can also just start building: A good start is the Q testnet, which allows you to experiment and build prototypes in a risk-free environment. Governance integration can be achieved via submitting a corresponding governance proposal.
Finally, if you want to familiarize yourself with the details of Q first, q.org is a good place to start. Here you will find links to Q’s White Paper, access to Q’s mainnet and much more.
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