Author: a16z Crypto
Compiled by: Jiahuan, 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 use cases of blockchain, a key advantage often mentioned is its ability to incorporate assets, ownership records, and execution rules into a shared system not controlled by any single counterparty. However, this does not mean that blockchain is inherently equipped to meet the massive scale and complex operational requirements of global financial markets.
For years, discussions on whether blockchain is ready for large-scale application have primarily revolved around cost and throughput. Throughput refers to the number of transactions a chain can process per second. Without sufficient processing power, the large-scale adoption of financial applications is not feasible. However, as the gap in throughput among many production systems gradually narrows, the focus of the discussion has begun to shift.
As financial institutions begin to execute transactions on-chain, issuing stablecoins and tokenized assets, they need to assess whether these networks can meet the operational requirements of real-world 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. These guarantees must not fail 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 better positioned to support financial markets than before.
Predictability: Guaranteeing Transaction Inclusion and Ordering by Rule
For years, processing power has been the most obvious bottleneck for blockchain. Fundamental issues like insufficient transaction processing capacity, network congestion, and high fees have made many real-world financial scenarios impractical. Without adequate processing power, routine operations like placing or updating orders become costly and unreliable as network activity increases.
In recent years, particularly during the last infrastructure upgrade cycle, this limitation has significantly eased. Over the past five years, the total throughput of the industry's blockchains has increased by over 100 times. Some production blockchain systems can now process tens of thousands of transactions per second. And this is just the beginning; with ongoing stress testing and new architectures being deployed, this number is likely to grow further.
But the new problem is that throughput alone doesn't indicate precisely *when* a transaction will be included in a block. This is the problem that predictability addresses.
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 know in advance. For everyday payments, a second of uncertainty might be insignificant; but in financial markets, even millisecond-level uncertainty can shake participants' trust in a trading venue.
Take an on-chain order book as an example. If a trader's order cancellation fails to take effect promptly, others might trade against a stale quote. Market makers would price this risk into their quotes, protecting themselves by widening bid-ask spreads, ultimately leading to worse execution prices for all participants.
In other words, predictability requires two types of guarantees: the guarantee that a transaction can be included in a timely manner, which is censorship resistance; and a clear guarantee regarding transaction ordering.
Resilience: Ensuring Participants Can Reliably Submit Transactions
Even with well-designed ordering rules, what if a single entity can still control who can submit and execute transactions? Imagine if the NYSE randomly selected one node from a globally staked set each second, giving it control over all access to the market. Clearly, these nodes would gain significant power to influence trade execution.
Transaction ordering determines the sequence of an order once it's on-chain, while resilience focuses on the step before that: Can participants submit orders at all? Do they have to rely on a single entry point or operator, whose decisions could affect prices, risk, or outcomes?
Therefore, blockchain developers are seeking stronger guarantees, shifting the focus from "transactions will eventually be included" to "transactions can be included in a timely manner." The goal is that a valid transaction should be included as soon as it reaches the network on time, not just with a promise that it will "be processed soon." This is a much stricter requirement than "transactions will be processed eventually," and this is the kind of certainty financial markets require.
Researchers at a16z Crypto have proposed the concept and measurement of Strong Chain Quality. The core idea is to ensure that a participant's chance to enter the next round of execution no longer depends on a single queue controlled by an operator. Specifically, a blockchain can reserve a portion of space in each block to process transactions submitted from other network paths, providing multiple entry channels for valid transactions, thereby reducing a single operator's control over which transactions get priority.
The goal is to make block space a shared infrastructure with multiple entry points, not a single queue controlled by one entity. This requires more complex protocol design than most currently operational systems, but the added complexity might be worthwhile: participants can trust their transactions will be processed properly, even under intense network pressure.
Ordering: Enabling Markets to Anticipate Transaction Sequence
Predictability also depends on how a trading venue determines the order of transactions. Once a transaction enters a pending state, the market needs a clear set of ordering rules.
On many blockchains, transactions are typically not finalized individually but are first aggregated into batches, called "blocks," by a block builder or proposer who writes them to the ledger. In many current systems, the block builder or proposer has significant discretion in deciding 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, and whether the execution process is fair.
More importantly, if one party controls the next block, it may see transactions earlier than others and act on that information. In crypto markets, this is often referred to as MEV (Maximal Extractable Value), the value gained from including, excluding, or reordering transactions within a block, beyond the regular block reward.
When explaining MEV, the "sandwich attack" is often used as an example: A trader sees a pending transaction, trades ahead of it to push the price, lets it execute, and then immediately trades again to profit from the price movement. For institutional markets, the problem is more direct: whoever controls the order flow can potentially front-run other participants by leveraging that information for decision-making.
This closely mirrors flaws in existing financial market structures. In traditional markets, centralized intermediaries may profit from privileged early access to order flow and trading intent. If on-chain markets cannot provide robust guarantees about transaction ordering and execution rules, they risk recreating the same information asymmetries.
Blockchain protocol designers are researching more explicit ordering rules, mainly including deterministic rules based on priority fees and rules set by individual trading venues for their specific applications. The specific mechanisms are still an active area of research, but the basic principle is familiar to traditional finance: market participants should be able to accurately predict how their transactions will be ordered and executed, similar to principles like price-time priority used by traditional exchanges.
Transaction inclusion and ordering must work together. Fair ordering rules are meaningless if an auction bid or liquidation trade is selectively delayed before it even enters the ordering stage. Similarly, timely inclusion itself loses much of its value if participants cannot determine how their transaction will be handled once included.
High throughput makes on-chain finance possible; only predictable transaction inclusion and clear ordering rules ensure it is truly usable in time-sensitive, market-stress scenarios.
Privacy: Protecting Transaction Intent Before Execution
A transaction can reveal information or intentions a participant holds. For example, 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 it and affect the price.
This is especially important in an on-chain environment because many blockchains make pending transactions public before final confirmation. Therefore, even if post-execution information cannot be kept completely confidential, financial markets still need pre-execution privacy protection.
The goal for protocol designers today is to keep the specific content of a transaction confidential during the stage when it could still be exploited by others, while supporting more diverse privacy models after execution. Once a transaction is complete, information disclosure rules can change: public markets can publish full records, while banks might only disclose relevant records to counterparties and regulators. Even without seeing all the details, others should still be able to verify that the transaction complied with the rules.
To this end, protocol designers are exploring different types of cryptographic techniques, such as timelock encryption and threshold encryption. These technologies can keep transaction content hidden until a predetermined deadline passes or a committee confirms that the transaction's position in the block is finalized. This way, even if the market sees the transaction at that point, 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 blockchains are to become core financial infrastructure, they must be able to support markets that participants can trust.
Throughput is only the first test. Without sufficient processing power, on-chain finance struggles to move beyond niche applications. But when speed has become a baseline capability, the truly difficult questions are whether blockchains can meet the existing requirements financial institutions have for market infrastructure. This includes predictable transaction execution, clear and unambiguous priority rules, stable and stress-resistant transaction access, and protecting information before execution without sacrificing post-hoc transparency.
