Author: a16z Crypto
Compiler: Jiahuan, ChainCatcher
Finance is one of the most obvious application scenarios for blockchain and also one of the most demanding in terms of infrastructure requirements. When discussing the financial uses of blockchain, a common advantage cited is its ability to integrate assets, ownership records, and execution rules into a shared system not controlled by any single counterparty. However, this does not mean blockchain is inherently equipped to meet the massive scale and complex operational demands of global financial markets.
For years, discussions about whether blockchain is ready for large-scale application have primarily focused on cost and throughput. Throughput refers to the number of transactions a chain can process per second; without sufficient processing capacity, widespread adoption of financial applications is impossible. However, as the gap in throughput has narrowed for many production systems, the focus of the discussion has started to shift.
As financial institutions begin to execute transactions on-chain and issue 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 control whether and when sensitive information is disclosed. These guarantees must remain intact even in the face of network congestion, system outages, or attacks.
Blockchain designers have been working on these issues for years. This article will discuss which problems have seen progress, which remain unsolved, and why today's blockchains are more capable of supporting financial markets than before.
Predictability: Guaranteeing Transaction Inclusion and Rule-Based Ordering
For years, processing capacity has been the most apparent bottleneck for blockchain. Foundational issues like insufficient transaction processing, network congestion, and high fees made many real-world financial scenarios unviable. Without adequate processing power, routine operations like placing or updating orders become costly and unstable once network activity increases.
Over the past few years, especially during the last infrastructure upgrade cycle, this limitation has eased significantly. In five years, the total blockchain industry throughput has grown by over 100 times. Some production blockchain systems can now handle tens of thousands of transactions per second. And this is just the beginning; as stress testing continues and new architectures are deployed, this number may increase further.
But the new issue is that throughput alone doesn't determine *when* a transaction will be included in a block. This is the problem predictability needs to solve.
Financial markets involve numerous operations that are only valid within specific time windows. Therefore, transactions must be included in blocks on time and processed according to rules that participants know in advance. For daily payments, a one-second uncertainty might not matter. But in financial markets, millisecond-level uncertainty can shake participants' trust in the trading venue.
Take an on-chain order book as an example. If a trader's order cancellation instruction fails to take effect promptly, others might execute trades against an outdated quote. Market makers would factor this risk into their quotes by widening the bid-ask spread to protect themselves, ultimately leading to worse execution prices for all participants.
In other words, predictability requires two types of guarantees: one is the guarantee that a transaction can be included in a timely manner—censorship resistance. The other is a clear guarantee regarding transaction ordering.
Resilience: Ensuring Participants Can Reliably Submit Transactions
Even with well-designed ordering rules, what if a single entity still controls who can submit and execute transactions? Imagine if the New York Stock Exchange randomly selected a single node from its globally staked participants every second to control all entry paths for transactions into the market. Clearly, these nodes would gain immense power to influence trade execution.
Transaction ordering determines the sequence after an order is on-chain, but resilience focuses on the preceding step: Can participants even *submit* an order? Must they rely on a single entry point or operator whose decisions could impact price, risk, or outcomes?
Therefore, blockchain developers are seeking stronger guarantees, shifting the focus from "the transaction will eventually be included" to "can the transaction be included *in time*?" The goal is that a valid transaction, if it reaches the network in time, should be included immediately, not just promised "soon." This is stricter than "the transaction will be processed eventually," and financial markets require precisely this certainty.
Researchers at a16z Crypto have proposed the concept and measurement of *Strong Chain Quality*, the core idea being to decouple a participant's chance of entering the next execution round from a single queue controlled by an operator. Specifically, a blockchain can reserve a portion of space in each block to process transactions submitted via other paths in the network, providing multiple entry points for valid transactions, thereby reducing a single operator's control over which trades get priority.
The goal is to make block space a shared infrastructure with multiple entry points, not a single-operator-controlled queue. This requires more complex protocol design than most systems running today, but the added complexity may be worthwhile: participants can trust their transactions will be processed normally, even under heavy network load.
Ordering: Enabling Markets to Anticipate Transaction Sequence
Predictability also depends on how a trading venue determines transaction order. Once a transaction enters a pending state, the market needs clear ordering rules.
On many blockchains, transactions are not typically finalized individually but are first batched into "blocks" by a block builder or proposer who writes them to the ledger. In many current systems, the block builder/proposer has significant discretion over which transactions to include and in what order. This design simplifies the protocol and might be acceptable for some applications. But in financial markets, transaction order directly determines who gets priority, at what price execution occurs, and whether the process is fair.
More importantly, if a single party controls the next block, it could see transactions earlier than others and act on that information. In crypto markets, this is often called MEV—the value extracted from including, excluding, or reordering transactions within a block, beyond regular block rewards.
When explaining MEV, the "sandwich attack" is a common example: a trader sees a pending transaction, executes a trade ahead of it to move the price, waits for the original transaction to execute, and then immediately executes another trade to profit from the price change. For institutional markets, the issue is more direct: whoever controls order flow could potentially make decisions using that information before other participants.
This closely resembles flaws in existing financial market structures. In traditional markets, centralized intermediaries can profit from privileged access to order flow and trading intent. If on-chain markets cannot provide strong guarantees around transaction ordering and execution rules, they risk recreating the same information asymmetries.
Blockchain protocol designers are researching more explicit ordering rules, mainly deterministic rules based on priority fees and rules set by specific trading venues for their own applications. The specific mechanisms remain an active area of research, but the basic principle is familiar to traditional finance: market participants should be able to accurately anticipate how their transactions will be ordered and executed, similar to principles like price-time priority used in traditional exchanges.
Transaction inclusion and ordering must work together. If a bid in an auction or a liquidation trade is selectively delayed before reaching the ordering stage, even the fairest ordering rules are useless. Similarly, if participants cannot predict how their transaction will be handled once included, timely inclusion itself loses much of its meaning.
High throughput makes on-chain finance possible; only predictable transaction inclusion and clear ordering rules ensure it remains usable under time-sensitive, stressed market conditions.
Privacy: Protecting Trading Intent Before Execution
A transaction can reveal information or intent a participant holds. For instance, the size and direction of an order might indicate whether a fund is building or reducing a position. If this information becomes public before the order is fully executed, other traders could front-run the trade and influence the price.
This is especially critical in the on-chain environment, as many blockchains expose pending transactions before they are finalized. Therefore, even if post-execution information cannot be completely confidential, financial markets still need to protect pre-execution privacy.
The current goal for protocol designers is to keep the specifics of a transaction confidential during the phase when the information could still be exploited by others, while supporting more diverse privacy models after execution. Once a trade is complete, information disclosure rules can change: public markets might publish full records, while a bank might disclose relevant records only to counterparties and regulators. Even without seeing all details, others should still be able to verify that the transaction complied with the rules.
To achieve this, protocol designers are exploring different cryptographic techniques, such as timelock encryption and threshold encryption. These can hide transaction content until a predetermined time elapses or a committee confirms the transaction's position in the block is fixed. At that point, even if the market sees the transaction, it's too late to front-run.
Markets can remain transparent without requiring every participant to see everyone else's unfilled orders in real-time. On-chain finance also needs to draw this line: auditable after execution, confidential before.
If blockchain is to become core financial infrastructure, it must be capable of supporting a market that participants can trust.
Throughput is just the first test. Without sufficient processing power, on-chain finance struggles to move beyond niche applications. But when speed has become a basic capability, the truly difficult questions are whether blockchain can meet the established requirements financial institutions have for market infrastructure: predictable transaction execution, clear and unambiguous priority rules, stable and stress-resistant transaction access, and protection of pre-execution information without sacrificing post-hoc transparency.
