Author: a16z Crypto

Translation: Jiahua, ChainCatcher

Finance is one of the most obvious application scenarios for blockchain and also one of the scenarios with the highest demands on infrastructure. When discussing the financial uses of blockchain, people often mention one of its advantages: the ability to incorporate assets, ownership records, and execution rules into a shared system that is not controlled by any single counterparty. However, this does not mean that blockchain is inherently capable of meeting the vast scale and complex operational requirements of global financial markets.

For many years, discussions about whether blockchain is mature enough for large-scale application have mainly revolved around cost and throughput. Throughput refers to how many transactions a chain can handle per second; without sufficient processing capacity, there is no way to discuss large-scale deployment for financial applications. However, as the gap in throughput among many formally running systems has gradually narrowed, the focus of the discussion has begun to shift.

As financial institutions start executing transactions on-chain and issuing stablecoins and tokenized assets, they need to assess whether these networks can meet the operational requirements of real financial markets. This includes not only stable and reliable transaction access and predictable transaction processing rules, but also the ability to determine whether and when sensitive information is disclosed. Even in the face of network congestion, system outages, or attacks, these safeguards must remain effective.

Blockchain designers have been working on these issues for years. This article will discuss what progress has been made, what issues remain unresolved, and why today's blockchain is better equipped to support financial markets than in the past.

Predictability: Ensuring transactions are included and ordered according to rules

For years, processing capacity has been the most obvious bottleneck for blockchain. Fundamental issues such as insufficient transaction processing capacity, network congestion, and excessive fees have made it impossible to realize many real financial scenarios. Without adequate processing capacity, routine operations like placing or updating orders will become costly and unstable once network activity increases.

In the past few years, especially during the last infrastructure upgrade, this limitation has noticeably eased. Over five years, the total throughput of the entire industry blockchain has increased by over 100 times, with some officially running blockchain systems now able to handle tens of thousands of transactions per second. This is just the beginning, as pressure tests advance and new architectures are deployed, this figure may continue to rise.

But the new issue is that throughput alone does not indicate when a transaction will actually be included in a block. This is precisely the problem that predictability needs to address.

In financial markets, many operations are only valid within specific time windows, so transactions must be included in blocks on time and processed according to rules that participants are previously aware of. For everyday payments, a second of uncertainty may be trivial; but in financial markets, even millisecond-level uncertainty can shake participants' trust in the trading venue.

Take on-chain order books as an example: if a trader's cancellation instruction does not take effect in time, others may trade at prices that have already expired. Market makers account for this risk in their quotes by widening the bid-ask spread to protect themselves, ultimately forcing all participants to face worse execution prices.

In other words, predictability requires two types of guarantees: one is a guarantee that transactions can be timely included, i.e., censorship resistance; the other is a clear guarantee of transaction ordering.

Resilience: Ensuring participants can reliably submit transactions

Even if the ordering rules are well designed, what if a single entity can still control who can submit and execute transactions? Imagine if the New York Stock Exchange randomly selected a node from globally participating stakers every second to control the access of all transactions to the market. Clearly, these nodes would gain enormous power to influence transaction execution.

Transaction ordering determines the sequence of orders once they are on-chain, while resilience focuses on a prior step: can participants even submit orders? Are they reliant on a single entry point or operator, to the extent that the latter's decisions could influence prices, risks, or transaction outcomes?

Therefore, blockchain developers are seeking stronger guarantees, shifting the focus from "transactions will eventually be included" to "can transactions be included in a timely manner." The goal is that as long as a valid transaction reaches the network promptly, it should be immediately included, rather than just receiving a promise of "it will be processed soon." This is much stricter than "transactions will eventually be processed," and this is the kind of certainty that financial markets need.

Researchers at a16z Crypto proposed the concept and measurement method of Strong Chain Quality, aimed at ensuring that participants' opportunities for entering the next round of execution are no longer dependent on a single queue controlled by any operator. Specifically, the blockchain can reserve part of the space in each block for processing transactions submitted from other paths within the network, providing multiple access channels for valid transactions and reducing the control of a single operator over which transactions will be prioritized.

The goal is to make block space a shared infrastructure with multiple entry points, rather than a queue controlled by a single entity. This requires more complex protocol designs than currently operating systems, but the added complexity may be worthwhile: even under significant network pressure, participants can trust that their transactions will be processed normally.

Ordering: Enabling the market to predict transaction sequences

Predictability also depends on how trading venues determine transaction order. Once a transaction enters the pending state, the market needs a clear set of ordering rules.

On many blockchains, transactions are often not completed individually with final confirmation; instead, they are first aggregated into batches, referred to as "blocks," which are then written into the ledger by block builders or proposers. In many current systems, block builders or proposers have significant discretion over which transactions are included and how to arrange the transaction order. This design aims to simplify the protocol, which may still be acceptable for certain applications. However, in financial markets, transaction order directly determines who gains priority, at what price trades occur, and whether the execution process is fair.

More importantly, if one party controls the next block, they may see transactions sooner than others and act on them. In the crypto market, this is often referred to as MEV, which is the value gained beyond normal block rewards by including, excluding, or reordering transactions in a block.

When explaining MEV, people often use the example of "sandwich attacks": traders see a pending transaction, execute a trade ahead of it to push the price, and then immediately complete another transaction after it executes to profit from the price change. For institutional markets, the issue is even more straightforward: whoever controls the order flow can act before other participants, making decisions based on this information.

This is strikingly similar to the flaws in existing financial market structures. In traditional markets, centralized intermediaries may profit from preferential access to order flow and trading intentions. If on-chain markets cannot provide strong guarantees for transaction ordering and execution rules, they risk recreating the same information asymmetries.

Blockchain protocol designers are researching clearer ordering rules, mainly including deterministic rules based on priority fees and rules set by specific trading venues according to their applications. The specific mechanisms remain an active area of research, but the basic principles are not unfamiliar to traditional finance: market participants should be able to accurately predict how their transactions will be ordered and executed, similar to the price priority and time priority principles used in traditional trading venues.

Transaction inclusion and ordering must work in tandem. If a bidding quote or clearing transaction is selectively delayed before entering the ordering phase, then even the fairest ordering rules are futile. Likewise, if participants cannot ascertain how their transaction will be handled after being included, the significance of timely inclusion will be greatly diminished.

High throughput makes on-chain finance possible; only predictable transaction inclusion and clear ordering rules can ensure that it is genuinely usable under time-sensitive and market-stressed conditions.

Privacy: Protecting transaction intent before execution

A transaction may reveal the information or intent the participants hold. For example, the size and direction of an order may indicate whether a fund is building or reducing a position. If this information is made public before the order is fully executed, other traders might jump in first and influence the price.

This is especially important in on-chain environments, as many blockchains make pending transactions public before their final confirmation. Thus, even if post-execution information cannot remain completely confidential, financial markets still need to protect pre-execution privacy.

Current protocol designers' goal is to keep the specific contents of transaction information confidential during the stage when it may still be exploited by others while supporting more diverse privacy models post-execution. After a transaction is completed, information disclosure rules can accordingly change: public markets may disclose complete records, while banks may only disclose relevant records to counterparties and regulators. Even if all details cannot be viewed, others should still be able to verify whether the transaction adhered to the rules.

To achieve this, protocol designers are exploring different types of cryptographic techniques, such as timelock encryption and threshold encryption. These technologies can keep transaction contents hidden until a predetermined deadline expires or a committee confirms that the transaction's position in a block has been determined. This way, even if the market sees the transaction at that time, it can no longer be raced against.

The market can remain transparent without requiring every participant to view others' unexecuted orders in real-time. On-chain finance similarly needs to draw this line: auditable after execution, yet confidential before execution.

If blockchain is to become core financial infrastructure, it must be able to support a market that participants can trust.

Throughput is just the first test. Without sufficient processing capacity, on-chain finance will struggle to move beyond niche applications; but once speed has become a foundational capability, the truly difficult questions are whether blockchain can meet financial institutions' existing requirements for market infrastructure, including predictable transaction execution, clear and unambiguous priority rules, stable and stress-resistant transaction access, and protecting pre-execution information without sacrificing post-execution transparency.

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