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Blockchain for Investments
Capabilities, Architecture, Costs
ScienceSoft brings 19 years of experience in investment software engineering and 5 years in blockchain to deliver secure decentralized solutions for the investment domain.
Blockchain for Investments in a Nutshell
Investment firms use blockchain to automate investor servicing, trading, and risk management workflows while ensuring operational transparency and compliance. Blockchain for investments can cut the costs associated with trade support, compliance control, and investor reporting by up to 50%.
Blockchain reduces trade transaction processing time from milliseconds to microseconds and enables settlement in seconds rather than days. It can remove intermediaries across fund administration and custody, making investments more affordable to investors of all sizes. Real-time visibility of positions in blockchain helps asset owners and managers better analyze portfolio performance and promptly rebalance portfolios for higher yield.
Asset tokenization on blockchain accelerates the time-to-market for securities and alternative assets, enables fractional asset ownership, and allows for trading without geographical boundaries. This makes assets more liquid and accessible, giving investment firms an opportunity to enhance asset value and expand their investor base.
Blockchain in the Investment Industry: Market Info
The global market of blockchain for banking and financial services was valued at $4.61 billion in 2023 and is projected to reach $27.69 billion by 2028, growing at a CAGR of 40.4%.
The market segment of blockchain-supported investments is anticipated to show a corresponding increase. The main driver for the rise of investment blockchain solutions is their ability to provide secure, fast, and cost-effective trade transactions. Investment firms value blockchain for its ability to support compliant servicing and new liquid investment vehicles.
According to Deloitte, asset management firms have been among the most progressive in trialing blockchain technology within the world of financial services. A survey conducted by the firm shows that 77% of investment leaders believe they will lose a competitive advantage if they don’t adopt blockchain.
Investment Areas That Benefit From Blockchain Technology
Investment management
Investment service providers and investors can monitor the data on asset valuations, orders, allocations, and cash positions in real time and trace its complete history in the blockchain ledger. The traceability and immutability of all data on blockchain increases portfolio transparency, streamlines investment planning, and enhances trust between the parties.
Direct (peer-to-peer) investments
Smart contracts automate investment ordering, trading, escrow, and settlement, enabling secure, cost-effective transactions with no involvement of intermediaries like finance and governmental authorities. Investors can set up tailored rules for autonomous portfolio operations (e.g., portfolio rebalancing when asset exposures reach certain levels).
Trading and post-trade
Blockchain offers near-instant, 24/7 processing of domestic and cross-border financial transactions associated with investment and trade activities. Smart-contract-supported automation of funds transfer, asset ownership transfer, clearing, and settlement ensures efficient trading and post-trade workflows and minimizes counterparty risks.
Automated investment ordering and tamper-resistant recordkeeping of related transactions on blockchain ensure accurate financial reporting and reduce the risk of unauthorized activity or fund mismanagement. Smart contracts can automate multi-step institutional workflows like buying assets back when predefined price thresholds are met.
Investor onboarding and KYC
Blockchain apps can connect to third-party sources (AML/OFAC databases, credit rating platforms, etc.) to capture pre-vetted investor identity data and screen investors against the local sanction lists. The initial KYC details and further data changes are recorded on the blockchain for secure storage and streamlined investor authentication.
Investment compliance control
Smart contracts enforce transaction compliance checks (e.g., verifying eligibility and ownership limits for accredited investors) against the investment firm’s service policies and regional investment regulations, such as SEC for the US or SAMA for the KSA. Non-compliant transactions are immediately auto-restricted to prevent compliance breaches.
Tokenizing fractions of securities and alternative assets (physical commodities, real estate, green energy, etc.) on blockchain helps speed up asset offering, increase asset liquidity, and democratize access to investments for institutions and individuals worldwide. The lifecycle of tokenized assets can be traced end to end, from issuance to dividend payments.
Asset custody
Blockchain provides infrastructure for securely storing and managing tokenized assets and blockchain-native assets (cryptocurrencies, crypto-pegged tokens). Digital and hardware crypto wallets rely on secure key management protocols and multi-signature user authentication to ensure that institutional and retail investors can safely store, access, and transfer their holdings.
Opportunities for investment industry startups
Cryptocurrencies are a unique asset class that quickly gained traction among institutional investors as an alternative vehicle. Some of the fintech startups among ScienceSoft’s clients believe that issuing a custom cryptocurrency and wrapping it into exchange-traded products (ETPs) is a go-to way to attract institutional investors from around the globe. With the market cap for altcoins having grown by over 1,000x through the decade, it’s hard to disagree.
Another strategy for startups could be to introduce innovative staking solutions. The global staking market attracted millions of individual investors and surged to $187.9 billion in just a few years. With liquid staking named the fastest-growing DeFi segment, offering go-to solutions for this blockchain-native investment model could help startups minimize market entry risks and drive swift revenue.
Sample Architecture for an Investment Solution on Blockchain
Below, ScienceSoft’s blockchain consultants share a sample architecture of a blockchain-based solution that can support key investment processes like portfolio management, investment order management, trading, and investor reporting.
Depending on your needs, our architects can design the entire blockchain system or its particular parts, for example, investment apps, smart contracts, or integrations.
- A user submits an e-signed investment transaction (e.g., a buy or sell order) via a role-specific web or mobile application. Institutional investors may integrate the app with their existing systems to automate submissions. Particular transactions can also be enforced automatically by smart contracts upon predefined events (e.g., asset reallocation when weights exceed or drop below certain limits).
- For accurate autonomous transactions, smart contracts need access to capital market data from off-chain sources (e.g., stock market, FX, and crypto market data platforms). Smart contracts get the relevant data through blockchain oracles. Oracles also enable interoperability between the source blockchain and other blockchains and centralized venues, which opens a wider opportunity for secondary trading.
- The transaction is transmitted to the blockchain network (public, private, or hybrid). Investment metadata, such as transaction-supporting documents, is transferred to off-chain storage to avoid costly and power-consuming storage on the blockchain.
- The transaction gets validated by authorized peers (validator nodes) according to the blockchain network’s consensus protocol, such as Proof of Stake or Proof of Authority.
- The validated transaction is combined with other transactions to form a new block.
- Investment transaction data gets encrypted through a cryptographic hash function (SHA-256, Kessak-256, MD5, etc.) and stored in timestamped blocks. The blocks form an immutable blockchain ledger.
- All the blockchain network participants can view the new investment transaction in their own copies of the shared ledger.
Value-adding integrations for investment blockchain solutions:
- Investment accounting software: to securely synchronize the data related to investment transactions between the blockchain and traditional ledgers.
- Investment portfolio management software: to automatically submit investment transactions (e.g., reallocation requests triggered by changes in portfolio models).
- Investment analytics system: to leverage crypto portfolio performance data in general investment analytics.
- Crypto wallets: to manage crypto assets (tokenized assets, cryptocurrencies) and securely store digital identities.
- Payment gateways: to process money transfers (deposits to accounts, fund withdrawals, service fee payments, etc.) in fiat currencies and cryptocurrencies.
Prominent Examples of Blockchain Use in Investments
Vanguard Uses Blockchain to Process Index Data for $1.3 Trillion Funds
Vanguard, the world’s largest provider of mutual funds, employed blockchain to manage data for its index investing vehicles, including its largest mutual fund, the $800 billion Total Stock Market Index Fund.
The blockchain solution allowed Vanguard to automate 100% of previously manual tasks related to index data capture from the Center for Research in Security Prices (CRSP) system, its cleansing, validation, and syncing across disparate databases. The index data now gets instantly auto-updated and reconciled every time CRSP makes a change to its indices.
Vanguard’s blockchain-based software currently processes index data for $1.3 trillion of funds, or one-quarter of its total $5.2 trillion in assets under management.
JP Morgan’s Blockchain Solution Settled $900B in Tokenized Assets
JP Morgan, the world’s largest investment bank, launched an asset tokenization platform, Onyx Digital Assets, on its proprietary blockchain Onyx (now Kinesis). The platform is used by global investment innovators, including the world's largest asset manager, BlackRock, to tokenize assets and manage trading operations.
The solution offers near-real-time 24/7 processing of cross-border investment transactions. By the end of 2023, Onyx Digital Assets helped settle tokenized U.S. treasuries with $900+ billion in worth.
JP Morgan estimates that the planned upgrade of its asset tokenization platform will let wealth management firms capture $400 billion of new revenue opportunities annually through a broader distribution of alternative investments.
Combining blockchain with AI for enhanced investor experience
Crypto robo advisors stand out as a prime example of how blockchain drives further evolution in advanced investment tools. By bringing AI’s predictive power and trade automation to the crypto space, crypto robo advisors democratize access to complex crypto markets and reduce financial risks for investors with little domain background.
For crypto investment venues, introducing such a solution helps bring in a broader customer base and higher trading activity. Traditional advisory services like Betterment and Wealthfront, who have upgraded their robo advisors with crypto features, say this is also a go-to way to enhance the experience and loyalty of their existing automated investing clients.
Tech Stack for Developing Blockchain Investment Software
Addressing the Challenges of Blockchain in Investments
Challenge #1. Integration with legacy investment systems
For efficient and compliant operations, a blockchain solution has to be integrated with the investment organization’s back-office systems. For example, integrating with investment accounting software is a must to align with SEC guidelines for dual-ledger usage. Blockchain can be connected to modern investment solutions via APIs, but the approach doesn’t fit legacy systems due to their obsolete communication protocols and data structures.
Solution
Challenge #2. Ensuring the accuracy and security of smart contracts
Logic flaws in smart contracts can lead to huge financial losses and data breaches. For example, Compound Finance lost $80M due to a tiny syntax error in the token protocol code. Moreover, bad actors may exploit security gaps in smart contracts to steal investor funds. Investment firms need to ensure 100% accuracy and robust security of their smart contracts, but this is a challenging task, as too many planning and engineering aspects can go wrong.
Solution
Challenge #3. Reducing the costs of transaction processing on blockchain
In public blockchains, transaction processing fees (gas) fluctuate depending on network congestion. As the demand for blockchain-based apps increases, the fees for transacting on popular blockchains like Ethereum show steady growth. Some of our clients from the investment domain expect that this will run up the TCO and reduce the ROI of blockchain-based solutions in the long run.
Solution
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Costs of Implementing Blockchain for Investments
Based on ScienceSoft’s experience, developing a blockchain-based investment solution may cost from $200,000 to $2,000,000+, depending on the type of software, its functional scope, security and compliance requirements, and the complexity of integrations.
$200,000–$500,000
A tokenized asset offering solution that features asset tokens, a primary token selling platform, and smart contracts for trade automation.
$300,000–$600,000+
A blockchain-based investment management solution that features manager and investor apps and smart contracts for service automation.
$600,000–$2,000,000+
A full-featured blockchain that comprises a multi-party transactional network, smart contracts for automated investing and trading, and role-specific apps.
Build Robust Investment Blockchain Software With ScienceSoft
In investment IT since 2005 and in blockchain development since 2020, ScienceSoft offers full-cycle services to help investment management companies and fintech startups create reliable blockchain solutions. In our blockchain projects, we rely on mature quality management and security management systems backed by ISO 9001 and ISO 27001 certifications.
Consulting for investment blockchain initiatives
We analyze the feasibility of blockchain for your case, design the architecture, UX/UI, and tech stack of your investment solution, and build a detailed plan for its implementation. You also get expert advice on blockchain security, compliance, and project cost optimization.
Custom blockchain software development
We engineer your blockchain software from scratch, integrate it with the required systems, and run all necessary QA procedures. Our team thoroughly tests investment smart contracts to eliminate logic and security vulnerabilities. You get a high-quality solution promptly and at the optimal cost.