S3T Sun May 21 - Canton, Daml, Securities Clarity Act, AI reasoning, Ledger, Meringue, Rookeries...

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📈 📉 Macro / Headlines / Trends

Oil prices remain volatile amid Chinese & Indian demand for discounted Russian oil and a weakening economic outlook in the US driven in part by interest rates and by job losses that may occur if the US defaults on its debt per this Moody's Analytics Report (PDF).  

The G7 just released an unprecedented 41-page complaint about "economic coercion" activities by China, underscoring the continued de-globalization trend toward lower economic cooperation.

The Federal Reserve's Financial Stability Report for May notes near-term risks for the US financial system, summarized in the graphic below:

Bank stability continues to be a theme. As this Deloitte update notes, mid-sized banks have serious exposure to commercial real estate assets hard hit by the new work-from-home norms. Retail malls are another area of concern - some hope installing pickleball courts will help.  

These concerns are prompting a change in interest rate rhetoric, with Powell hinting this week about a possible pause in interest rate hikes.  

Emerging Tech - The Canton Network

The Canton Network

This week Goldman Sachs and a consortium of 30 banking industry partners announced the Canton Network, their alternative to public blockchain-based financial networks. The Canton Network whitepaper argues that public blockchains don't meet the operating requirements of regulated industries. The project intends to enable efficiencies by unifying the current silos in the banking industry. The initiative whose membership is clearly skewed toward legacy finance also could be read as a bid to stop institutional assets from flowing into crypto.

The technology

The Canton Network has a website here sharing developer info about the network and its underlying technology. A quick summary of the working parts:

• Canton Network - the blockchain and protocol
• Daml - the smart contract language, which is conceptually similar to SQL, is used to code data schema and application rules.
• Daml schemas enable a Virtual Shared System of Record (VSSR), which maintains a record of the combined data from the parties working together.
• The Canton protocol (mentioned above) ensures that each party has their own unique appropriate view of the VSSR.

Go here for a developer intro to Daml and how Daml enables multi-party financial applications. Note: There is another DAML - a DARPA modeling language project, which apparently ended in 2006. So far have not found a link between them.

Digital Asset is a Swiss-based company that created Daml and delivers Daml implementations. Their implementation for Goldman Sachs is described here.  

Based on my initial review, the technology seems compelling and well-thought-out. The Canton / Daml platform is a strong contender for the "railway" of future finance, and it will be interesting to see how its roadmap and merits stack up against those of Ethereum and other public blockchains.    

I am with those who are curious about how these enterprise blockchains like Canton will integrate (or not) with public blockchains.

A cynical take

One could read the Canton initiative as the banking industry's attempt to build their own industry blockchain, led by banking insiders like Goldman Sachs who feasibly could one day be displaced by mature versions of today's decentralized finance networks. SEC chair Gary Gensler happens to be a former partner of Goldman Sachs.

With the Canton announcement, we now learn that the SEC's regulatory stonewalling under Gensler's leadership coincided with a concerted effort by banking insiders to build an industry alliance around their own blockchain.

That is enough of a coincidence to prompt a couple of questions:

• Were banking insiders and regulators so alarmed about the rising adoption of crypto and decentralized finance on public blockchains that they felt they needed to band together to do something to slow it down?
• Was there a spoken or unspoken agreement that regulators would use their powers to hinder public blockchain adoption, thus buying the banking industry time to figure out its own version?  

I am not aware of hard evidence of such collusion, and my review of the technical tools and documentation indicates that at least from the perspective of the developers, Canton & Daml is focused on bringing long overdue efficiencies to financial transactions. Goldman and its alliance partners are logical first customers.

At the same time, I don't think the questions about collusion are patently offensive or unreasonable. Working relationships between regulators and industry leaders require transparency and accountability - and a willingness to answer pointed even accusatory questions. Collusion to hinder US financial innovation in order to aid the self-preservation of legacy institutions would constitute a massive breach of ethics. At a minimum, the timing of the Canton announcement reveals a coincidence that deserves acknowledgment and explanation.

Reintroducing the Securities Clarity Act

This week a previously introduced bill the Securities Clarity Act was reintroduced with bipartisan support. The bill was broadly welcomed by the blockchain industry.

As noted in previous editions of S3T, Congressional oversight and intervention of this kind has been badly needed at the federal agency level. The SEC and CFTC - locked in a power struggle over who would get to regulate crypto - have been issuing conflicting guidance and irresponsible shock-and-awe enforcement actions without bothering to first align with each other on a common understanding of the law, and how it should apply to digital assets.

This piece of legislation seems to be a step in the right direction, and its bipartisan support offers a glimmer of hope that both parties can start to better educate themselves on the emerging blockchain technologies and the new class of financial building blocks they enable.

Ledger Lessons

Crypto wallet company Ledger learned a harsh lesson this week about the dangers of designing and marketing products without understanding the Maverick vs. Mainstream communities in the crypto market. The Mavericks vs Mainstreamers communities in crypto (their differing mindsets and behaviors) has been long recognized and covered in S3T. Quick review for newer S3T readers:

• Mavericks: the crypto OGs who espouse the "not your keys, not your crypto" motto, and who would never use a custody service like Fidelity Crypto or Coinbase for their crypto holdings.
• Mainstreamers: newbies who came into crypto in the past year or two, who largely don't understand crypto wallets, are afraid they'll lose or forget their recovery phrases, and feel more comfortable with the user experience and security approach offered by traditional banks.

Ledger rolled out a new feature intended to help Mainstream crypto users feel more comfortable adopting self-custody wallets without having to worry about writing down a recovery phrase on a piece of paper. The new feature uses a clever mechanism to split the recovery phrase up, encrypt it, then store it with 3 different organizations - a set of precautions designed to minimize the chance of recovery phrases being hacked and funds being stolen.

Predictably (that is, to everyone but the Ledger marketing team) the Mavericks rioted. Twitter exploded with accusations that Ledger had betrayed the trust of the community (the Maverick community specifically), and that the new feature created horrible security holes in the wallet.  

Ryan Berckmans proposed what should have been the original product strategy: offer two parallel wallet products with separate hardware, firmware and software. One includes the new feature targeted at Mainstream user adoption, and the other does not. Know your customer.  

AI - Emergence of Human-like Reasoning

This Microsoft paper (PDF) surfaces evidence that Large Language Models (LLMS) such as those powering Bard and ChatGPT-4 are showing potential for general AI (a more human-like intelligence) with specific abilities to solve problems that require reasoning. The paper also explores the need to move beyond the next-word prediction approach that LLMs currently rely on.  

Elsewhere: Will LLMs reduce our need to pursue a "semantic web?"

🍱 Sensible Ideas

I am blessed to be part of a family that knows their way around the kitchen and the campfire. So each week I share what I call "sensible ideas" for good times and good food!

Lemon Meringue Pie

Each May, our family devoutly observes this tradition: When the temperature hits 90 degrees, we have Lemon Meringue Pie! In the photo above, a fresh pie awaits the festivities. So keep an eye on the thermometer these days!

Full disclosure: National Lemon Meringue Pie Day is actually August 15th (we Perrines blaze our own trail).

If you want to make your own, here's Sally McKinneys's recipe.

Classic Lemon Meringue Pie - Sally’s Baking Addiction

Homemade lemon meringue pie features a delicious homemade pie crust, tart and smooth lemon filling, and fluffy toasted meringue topping.

Sally's Baking AddictionSally

The history of Lemon Meringue Pie is - as most recipes - debated. Some have attributed the tart invention to the French, the Quakers, the Victorians, but most frequently to a Mrs. Elizabeth Goodfellow who ran a pastry shop in Philadelphia in the 1800's and founded America's first cooking school.

Also in Philadelphia in the same century: On a slightly less reputable note, a certain James Perrine ran a whisky store in Philadelphia selling a "chemically pure" malt whiskey which "commends itself to the medical profession" per ads like the one below.  Doctors and patients were advised to drink a glass after work, and another before breakfast. American history and healthcare alike seem to have been highly impacted by alcohol.

🌄 Nature Notes

How to increase your appreciation of the treasures of the natural world, and nurture its capabilities.

Understanding Rookeries

A rookery is a setting usually near water where a group of birds create a nesting colony and raise their young together.

Here are some recent photos my son took recently at the Rookery at the Smith Oaks Sanctuary about an hour outside of Houston, Texas. The trees along the water provide ideal protection and habitat for herons and egrets.

Zooming in, here are some of the birds you'll see:

BTW the egret above may look like it has experienced a painful neck injury but it is fine :) ...their necks are capable of bending and twisting in ways that our necks can't.

You can find rookeries almost anywhere so there is likely one near you.

To find one, try these online search phrases:

• The phrase "ebird rookery" returns the top rookeries noted in the ebird.org data platform. eBird maintains up-to-date information from highly visited birding sites and can help you locate safe places to bird.
• You can also try "Audubon rookery".  Local chapters of the Audubon Society throughout the US typically maintain web pages about local birding hotspots, including rookeries.

Here is a beautifully illustrated list of 8 accessible rookeries in South Carolina.

💬 Final Note

Thanks again for reading and sharing. Hope you are all S3T for a successful week!

Feel free to forward this to a friend and continue the conversation on the S3T Discord, Twitter, or LinkedIn.

Thank you!

Ralph

The opinions expressed here are mine. Not financial advice. I may hold the assets discussed.