Adam Krellenstein, co-founder and chief technology officer of Symbiont, says Ethereum is the only other smart contract system and that it's "not well suited" to financial applications in general.

Krellenstein said of Ethereum: "It's a very interesting project; they've accomplished a lot. But it's not well suited for permissioned ledgers and financial applications in general.

"Writing smart contracts in Solidity and then running them on the Ethereum blockchain is not ideal by a long shot for the kind of markets that we are targeting. For that you want a smart contract system more like ours, and you want it to be ledger agnostic, and you want a more stable, secure codebase."

Krellenstein is also behind Counterparty, a non-profit, open-source community-driven project software suit and protocol for the Bitcoin blockchain. Along with Counterparty's other creators, Robby Dermody and Even Wagner, Krellenstein founded Symbiont, an institution-facing software provider which delivers a proprietary smart contacts full stack solution. In this they are joined by CEO Mark Smith.

In some respects Symbiont extends Counterparty's embedded consensus approach. In August this year Symbiont issued its own securities on the Bitcoin blockchain in the form of a smart contract defining its terms and conditions and some logic pertaining to the financial instrument.

"Symbiont has its own novel smart contract system independent of Ethereum. Really there are only two in the world – Ethereum's and ours. Ours is written in existing high level general purpose languages, but that's all I can say about it. It has the same functionality. It is also Turing complete and operates across ledgers.

"We are working with a number of large financial institutions which are currently interested in this technology and have seen the potential that it has for disrupting and completely redesigning the architecture of financial networks."

R3CEV

The enterprise blockchain landscape is also evolving fast. Every week more big banks seem to be joining the powerful R3 consortium. Following another avenue, one of unilateral experimentation, an Ethereum smart contracts tool kit is now offered via Microsoft's Azure cloud service. Krellenstein said he could not comment on either of these projects at this time, but did talk about a recent report examining coloured coins and watermarked token, written by R3's head of market research, Tim Swanson.

Adam Krellenstein, CTO and co-founder of Symbiont
Adam Krellenstein, CTO and co-founder of Symbiont

Krellenstein said one of the pitfalls of a token system was the breaking of the fungibility of bitcoins when associating them with metadata. "With Symbiont and with Counterparty, you are not doing that because you are not attaching the metadata to outputs, you are just storing it in the chain more generally. A coloured coin is associated to a bitcoin, but a counterparty token or a Symbiont smart contract is not.

"The combination of smart contracts and distributed cryptographic ledgers is a very powerful one for changing the way that financial instruments are issued, traded, created and managed. We firmly believe that smart contracts are the way to go because you can represent the entire financial instrument on the cryptographic ledger, rather than part on and part off. Our system is much more powerful than token systems – you could write a token system inside the smart contract system but not the other way around.

"There are other companies that are using token systems – even more primitive than what Counterparty had a year ago – and applying them to finance. And there are some open source projects that are taking smart contracts and using them for general purpose things on a public ledger. But Symbiont really is special in its application of smart contracts to finance."

Rootstock

Rootstock, which proposes a hybrid federated sidechain and merged mining approach to doing smart contracts using the Bitcoin network, is about to be formally launched in Mexico City on 4 and 5 December. Comparisons have been made between Rootstock's approach and Counterparty/Symbiont. Krellenstein invoked security in regard to merged mining, the process whereby miners on the Bitcoin blockchain use their hashing power to secure another blockchain. The economic incentives of merged-mining are such that the miners of the parent chain can attack the sidechain effectively for free, he said.

"Looking at something like Rootstock, I think there are a lot of trade-offs in the architecture we ourselves would not like to make and that's why we have a different one. Merged mining is pretty much the only established solution to securing a decentralised side chain. You are effectively asking the miners of the parent chain to mine your smaller chain out of good will. It doesn't create the economic incentives for honesty and honest participation that just having your own chain does.

"The biggest alternative to it is the one that Counterparty uses, and actually Symbiont uses as well – embedded consensus. Instead of building a second blockchain and a second currency and trying to peg the two together and having to mine the second chain, you just store all of your data in the main chain. You separate out the consensus logic from the transaction logic.

"That's what Counterparty did, for instance. Counterparty lives inside Bitcoin and all of the data and history of all transactions for the Counterparty network exist entirely within Bitcoin; inside regular bitcoin transactions. The bitcoin miners and users just don't know about it. It's hidden in there and then the Counterparty network lies on top of it and uses that data for its peer to peer network.

"That's a powerful idea and the security model is very sound. It doesn't change the economic incentive, you inherit all the security of the underlying chain without any good will or other involvement of the miners. Bitcoin miners have been mining Counterparty transactions for almost two years now, and without even knowing it, as it were. That's the best way, we think, of adding functionality to a chain with embedded consensus, as opposed to the side chain. There are some use cases for side chains, particularly if you are looking to deal with bitcoin cryptocurrency."

Netting securities settlement

In recent presentations and discussions, systems architects from places like Barclays Investment Bank have highlighted the complexity of the industrial scale trading and settlement environment where financial smart contracts would inhere. Integration with such systems entails the netting of securities settlements, whereby algorithms seek settlement optimisation by combining long and short positions, for example, and netting hundreds of thousands of transactions very rapidly.

Krellenstein said: "Actually executable logic is very straightforward. Our smart contract system is designed for managing that kind of financial logic and it works very straightforwardly. The actual logic of things like exchanges and representing these financial instruments is very straightforward particularly to smart contracts as opposed to tokens.

"When it comes to deployment integration and how that's done alongside existing systems, it's very much a case of focusing on replacing small bits of the existing system where ever possible, and making a smooth transition. So the existing system can be replaced by new systems smoothly.

"That said, a lot of our focus is on use cases in markets where there doesn't exist a strong, well established technological paradigm for managing those instruments. So there is a lot of greenfield in capital markets for blockchains and smart contracts, where we can demonstrate the power of our technology without having to overcome too many roadblocks.

"Our smart contract system is part of a full stack solution. Our system is exposed through traditional fintech APIs so that it can be a plug and play replacement for existing systems and change the architecture without changing the way that, for instance, traders trade those instruments on a screen.

"We are the rails of the system. We are the lowest level and we expect to have institutions build and connect with our APIs so that they can get the benefits of this technology without having to fundamentally change the way that they work – and right off the bat."