Author: a16z Crypto

Translation: Jia Huan, ChainCatcher

Finance is one of the most obvious application scenarios for blockchain and is also one of the scenarios with the highest infrastructure requirements. When discussing the financial uses of blockchain, people often mention one of its advantages: it can 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 can inherently handle the enormous scale and complex operational requirements of global financial markets.

Over the years, discussions about whether blockchain has the conditions for large-scale application have mainly revolved around cost and throughput. Throughput refers to how many transactions a chain can process per second; without sufficient processing power, it is impossible to talk about large-scale implementation for financial applications. However, as the gap in throughput among many formally operating systems gradually narrows, the focus of discussion has begun to shift.

As financial institutions begin to execute transactions on-chain and issue stablecoins and tokenized assets, they need to determine 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 decide whether and when to disclose sensitive information. Even in the face of network congestion, system interruptions, or attacks, these safeguards must remain effective.

Blockchain designers have been working on these issues for years. This article will discuss which problems have made progress, which 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 as Rules

For many years, processing capability has been the most apparent bottleneck for blockchain. Fundamental issues like insufficient transaction processing capacity, network congestion, and high fees have made it impossible for many real-world financial scenarios to materialize. Without sufficient processing power, routine operations such as placing orders or updating orders become costly and unstable once network activity increases.

In recent years, especially during the last round of infrastructure upgrades, this limitation has significantly alleviated. Over five years, the total throughput of the entire industry’s blockchain has increased by more than 100 times, with some formally operating blockchain systems now capable of processing tens of thousands of transactions per second. This is just the beginning; as stress tests advance and new architectures are implemented, this number may continue to rise.

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

In financial markets, many operations are only valid within specific time windows; therefore, transactions must be included in blocks on time and processed according to rules that participants are clearly aware of in advance. For everyday payments, a second’s uncertainty might be inconsequential; however, in financial markets, even millisecond-level uncertainty can undermine participants' trust in the trading venue.

For example, with an on-chain order book, if a trader's cancellation request fails to take effect in time, others may execute trades based on outdated quotes. Market makers will factor this risk into their quotes, protecting themselves by widening the bid-ask spread and ultimately forcing all participants to face worse execution prices.

In other words, predictability requires two types of guarantees: one is the assurance that transactions can be included in a timely manner, namely censorship-resistance; the other is clear transaction ordering guarantees.

Resilience: Ensuring Participants Can Reliably Submit Transactions

Even if the ordering rules are designed well enough, what if a single entity still controls who can submit and execute transactions? Imagine if the New York Stock Exchange randomly selected one node from globally participating stakers every second to control all transactions entering the market. Clearly, these nodes would gain tremendous power over trade execution.

Transaction ordering determines the sequence of an order once it is on-chain, while resilience focuses on the preceding step: can participants actually submit orders? Must they rely on a single entry point or operator so that the latter's decisions significantly impact prices, risks, or transaction outcomes?

Therefore, blockchain developers are seeking stronger guarantees, shifting focus from "transactions will eventually be included" to "will transactions be included in a timely manner." The goal is that as long as a valid transaction reaches the network promptly, it should be included immediately, not just receive a promise of “will be processed soon.” This is much stricter than “transactions will eventually be processed,” and it is this certainty that financial markets require.

Researchers at a16z Crypto have introduced the concept and measurement method of Strong Chain Quality, with the core idea being that opportunities for participants to enter the next round of execution should no longer depend on a single queue controlled by an operator. Specifically, blockchains can reserve part of the space in each block for processing transactions submitted from other paths in the network, providing multiple entry points for valid transactions and thus reducing a single operator's control over which transactions will be prioritized.

The aim is to transform block space into a shared infrastructure with multiple entry points instead of 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 stress, participants can believe their transactions will be processed normally.

Sorting: Allowing the Market to Anticipate Transaction Order

Predictability also depends on how the trading venue determines transaction order. Once a transaction enters a pending state, the market needs a clear set of sorting rules.

On many blockchains, transactions are usually not completed and finalized one by one; instead, they are first aggregated into batches, known as “blocks,” which are then written into the ledger by block builders or proposers. In many systems, block builders or proposers can largely determine which transactions to include and how to order them. This design aims to simplify the protocol and may be acceptable for certain applications. However, in financial markets, transaction order directly determines who gains priority, at what price trades are executed, and whether the execution process is fair.

More importantly, if one party controls the next block, it may see transactions and take action earlier than others. In the crypto market, this is often referred to as MEV (Miner Extractable Value), which is value obtained outside of regular block rewards through including, excluding, or reordering transactions in a block.

When explaining MEV, people often use the example of a “sandwich attack”: a trader sees a pending transaction and first executes a transaction before it, pushing the price, and immediately completes another transaction after it is executed, profiting from the price changes. For institutional markets, the issue is more direct: who controls the order flow can act ahead of other participants, making decisions based on that information.

This is very similar to the flaws in existing financial market structures. In traditional markets, centralized intermediaries may profit from their privilege of prioritizing access to order flow and trading intentions. If on-chain markets cannot provide strong guarantees over transaction ordering and execution rules, they may recreate the same information asymmetries.

Blockchain protocol designers are researching clearer sorting rules, primarily including deterministic rules based on priority fees, as well as rules established by specific trading venues according to their applications. The specific mechanisms are still an active area of research, but their fundamental principles are not unfamiliar to traditional finance: market participants should be able to accurately anticipate how their transactions will be sorted and executed, similar to the price-time priority principles used by traditional trading venues.

Transaction inclusion and ordering must work in synergy. If a competitive bid or clearing transaction is selectively delayed before entering the ordering phase, then even the fairest sorting rules will be of no use. Similarly, if participants cannot judge how a transaction will be processed after it is included, the significance of timely inclusion itself diminishes.

High throughput makes on-chain finance possible; only predictable transaction inclusion and clear sorting rules can ensure it is truly usable under time-sensitive and pressure-filled market conditions.

Privacy: Protecting Transaction Intent Before Execution

A transaction may expose the information or next intentions held by participants. For example, the size and direction of an order may indicate whether a fund is building or reducing its position. If this information is made public before the order is fully executed, other traders might trade ahead and affect the price.

This is particularly important in an on-chain environment, as many blockchains will publicly reveal pending transactions before they are finalized. Thus, even if the information post-execution cannot be completely confidential, financial markets still need to protect the privacy prior to execution.

Current protocol designers aim to keep the specifics confidential while transaction information is still subject to potential exploitation by others, while also supporting more diverse privacy models post-execution. After a transaction is completed, the rules for information disclosure may change: public markets can release complete records while banks may only disclose relevant records to counterparties and regulatory agencies. Even if the complete details cannot be viewed, others should still be able to verify whether the transaction complied with the rules.

To this end, protocol designers are exploring different types of encryption technologies, such as timelock encryption and threshold encryption. These technologies can keep the transaction content hidden until the preset deadline is over or the committee confirms that the transaction’s position in the block is already determined. In this way, even if the market sees this transaction at this time, it can no longer be preempted.

The market can remain transparent without requiring every participant to view other unexecuted orders in real time. On-chain finance also needs to delineate this boundary: auditable post-execution while keeping confidentiality pre-execution.

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

Throughput is just the first hurdle. Without sufficient processing capacity, on-chain finance will struggle to move beyond niche applications; however, when speed has become a foundational capability, the real challenge is whether blockchain can meet the existing requirements of financial institutions regarding market infrastructure, including predictable transaction execution, clear and unambiguous priority rules, stable and resilient transaction access, and protecting pre-execution information without sacrificing post-execution transparency.

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