Author: a16z Crypto
Translated by: Jiahuan, ChainCatcher
Finance is one of the most obvious applications for blockchain, and also one of the scenarios with the highest infrastructure requirements. When discussing the financial uses of blockchain, people often mention one of its advantages: the ability to incorporate assets, ownership records, and execution rules into a shared system not controlled by any single counterparty. But this does not mean that blockchain is naturally capable of handling the massive scale and complex operational requirements of global financial markets.
For years, discussions about whether blockchain is ready 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 capacity, large-scale adoption of financial applications is impossible. However, as the throughput gap among many production systems has gradually narrowed, the focus of the discussion has begun to shift.
As financial institutions start executing transactions on-chain and issuing 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 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 issues have seen progress, which remain unresolved, and why blockchains today are better equipped to support financial markets than in the past.
Predictability: Guaranteeing Transaction Inclusion and Ordering by Rules
For years, processing capacity has been the most obvious bottleneck for blockchain. Fundamental issues like insufficient transaction processing capacity, network congestion, and high fees made many real-world financial scenarios impossible to implement. Without enough processing capacity, routine operations like placing or updating orders become costly and execution becomes unstable once network activity increases.
Over the past few years, especially during the most recent wave of infrastructure upgrades, this limitation has been significantly alleviated. In five years, the total throughput of blockchains across the industry has increased by more than 100 times. Some production systems can now process tens of thousands of transactions per second. This is just the beginning; as stress testing progresses and new architectures are implemented, this number could continue to increase.
But the new issue is that throughput itself doesn’t indicate when exactly a transaction will be included in a block. This is the problem that predictability needs to solve.
In financial markets, many operations are only valid within a specific time window. Therefore, transactions must be included in a block on time and processed according to rules that participants know clearly in advance. For everyday payments, a one-second uncertainty might be insignificant; 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 cancel order isn’t executed in time, others might trade against a stale quote. Market makers will price this risk into their quotes, protecting themselves by widening the bid-ask spread, ultimately resulting in worse execution prices for all participants.
In other words, predictability requires two types of guarantees: a guarantee that transactions can be included in a timely manner, i.e., censorship resistance; and clear guarantees regarding transaction ordering.
Resilience: Ensuring Participants Can Reliably Submit Transactions
Even if the ordering rules are well-designed, what if a single entity still controls who can submit and execute transactions? Imagine if the NYSE randomly selected a node from globally staked participants every second, and that node controlled the channel for all transactions entering the market. Obviously, these nodes would gain immense power to influence transaction execution.
Transaction ordering determines the sequence of an order once it’s on-chain, while resilience focuses on an earlier step: can participants actually submit orders? Do they have to rely on a single entry point or operator, such that the operator’s decisions can affect prices, risk, or trading outcomes?
Therefore, blockchain developers are seeking stronger guarantees, shifting the focus from “transactions will eventually be included” to “can transactions be included in a timely manner.” The goal is that as long as a valid transaction reaches the network in time, it should be included immediately, rather than just getting a promise of “will be processed soon.” This is much stricter than “transactions will be processed eventually,” and financial markets need this kind of certainty.
Researchers at a16z Crypto have proposed the concept and measurement method of Strong Chain Quality. The core idea is that a participant’s chance to enter the next round of execution no longer depends on a single queue controlled by one operator. Specifically, a blockchain can reserve a portion of space in each block for processing 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 processing.
The goal is to make blockspace a shared infrastructure with multiple entry points, rather than a single queue controlled by one entity. This requires more complex protocol design than current production systems, but the added complexity may be worthwhile: even under immense network pressure, participants can trust that their transactions will be processed normally.
Ordering: Enabling Markets to Predict Transaction Sequence
Predictability also depends on how a trading venue decides the order of transactions. Once transactions are in a pending state, the market needs a clear set of ordering rules.
On many blockchains, transactions are not usually finalized one by one. Instead, they are first gathered into batches, or “blocks,” which are then written to the ledger by a block builder or proposer. In many current systems, the block builder or proposer has significant discretion over which transactions to include and how to order them. 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 they execute, and whether the process is fair.
More importantly, if one party controls the next block, it might see transactions and act on them before others. In crypto markets, this is often referred to as MEV, the value extracted beyond standard block rewards by including, excluding, or reordering transactions within a block.
When explaining MEV, people often use the example of a “sandwich attack”: a trader sees a pending transaction, executes a trade before it to push the price, waits for the original transaction to execute, and then immediately completes another trade to profit from the price movement. For institutional markets, the problem is more direct: whoever controls the order flow can use that information to make decisions before other participants.
This is very similar to a flaw 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 about transaction ordering and execution rules, they risk recreating the same information asymmetry.
Blockchain protocol designers are researching more explicit ordering rules, mainly including deterministic rules based on priority fees, and rules set by specific trading venues based on their own applications. The specific mechanisms are still an active area of research, but the basic principle is not unfamiliar to traditional finance: market participants should be able to accurately predict how their transactions will be ordered and executed, similar to the price-time priority principle used in traditional trading venues.
Transaction inclusion and ordering must work together. If a competitive bid or liquidation transaction is selectively delayed before entering the ordering stage, even the fairest ordering rules are useless. Similarly, if participants cannot predict how their transaction will be treated after inclusion, timely inclusion itself becomes much less meaningful.
High throughput makes on-chain finance possible; only predictable transaction inclusion and clear ordering rules can ensure it is truly usable in time-sensitive situations and under market stress.
Privacy: Protecting Transaction Intent Before Execution
A transaction can reveal information held by a participant or their next intention. For example, the size and direction of an order might show whether a fund is building or reducing a position. If this information becomes public before the order is fully executed, other traders might front-run the trade and affect the price.
This is especially important in on-chain environments because many blockchains make pending transactions public before they are finalized. Therefore, even if post-execution information cannot be completely confidential, financial markets still need to protect pre-execution privacy.
Current protocol designers aim to keep the specific content of a transaction confidential during the stage when the information could still be exploited by others, while supporting more diverse privacy models after the transaction is executed. After execution, the rules for information disclosure can change: public markets can publish a complete record, 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 followed the rules.
To this end, protocol designers are exploring different types of cryptographic techniques, such as timelock encryption and threshold encryption. These techniques can keep transaction content hidden until a predetermined period ends, or until a committee confirms the transaction’s position in a block is fixed. This way, even if the market sees the transaction at that point, it is already too late to front-run.
Markets can remain transparent without requiring every participant to see everyone else’s unexecuted orders in real-time. On-chain finance also needs to draw this line: auditable post-execution, but confidential pre-execution.
If blockchain is to become core financial infrastructure, it must be able to support a market that participants can trust.
Throughput is only the first test. Without sufficient processing capacity, on-chain finance will struggle to move beyond niche applications. But when speed has become a basic capability, the truly difficult question is whether blockchain can meet the existing requirements of financial institutions for market infrastructure, including predictable transaction execution, clear and unambiguous priority rules, stable and stress-resistant transaction access, and the protection of pre-trade information without sacrificing post-trade transparency.