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Julian_Williams

Mercury FX Confirms Plans To Send Million Dollar Payments Through xRapid

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1 hour ago, Wandering_Dog said:

I don't understand @KarmaCoverage's writeup on pooling, as I don't understand how a payment channel can be used for lending. My understanding is that a payment channel is a prefunded entity, like an SPV, and once the funds are in the channel both parties can now exchange goods or services on a ledger of credit, up to a limit of the prefunded amount. The credit can then be settled by closing the channel which moves the XRP to the required party. 

In the case of a loan, however, XRP needs to move from 1 account to another account, as the borrow needs XRP, not credit. Thus payment channels cannot be used for lending, as no XRP is actually moved, and credit does not meet the borrowers needs for XRP. 

That was a while ago. I’m guessing his understanding has likely changed a bit since back then.

Edited by Flintstone

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2 hours ago, Wandering_Dog said:

I don't understand @KarmaCoverage's writeup on pooling, as I don't understand how a payment channel can be used for lending.

FYI... I have not read this thread and this post is only answering the above question...

The "how xPool" write up was the 4th in a sort of unintended series, as I thought through the key aspects of each write up, I would let it marinate for a few months, then write it up. The whole thing started with Payment Channels & Ripple as a Lender - Part 1 (May 17) Some of this thinking is also influenced by my thinking about KarmaCoverage because it must be a multi ledger service (each risk gets its own "risk ledger") and connecting all these ledgers is KarmaCoverage which is a market making business, making markets between risk ledgers.

Regarding Ripple, I was initially coming at this from the angle of, "market participants need a way to go short, or buy a put, or swap on XRP".  There were many threads on this topic over the years, but nobody could really figure it out, shorting or loaning/borrowing crypto (which is needed to go short), because there is no crypto enforcement-ability on repayment.

After Payment Channels came out I was looking at it and realized it could be used (by Ripple, or a whale) to create a type of loan to their Exchange partners who are participating in Ripples efforts to subsidize XRP liquidity, or "market maker incentives". The Exchanges are running markets, so they would qualify as a "market maker", and the exchanges hold the crypto in a hosted wallet, so they always maintain custody of the XRP, thereby they have enforcement-ability, meaning they can enable their users to borrow XRP and "go short" just like equity brokerage houses do with stocks (borrowing from one client, lending to another client).

Miguel knows well that being able to trade both sides of a market is absolutely required for any "mature market". So, I'd figure enabling the Exchanges to enable their users to "go short" would be a desired goal. That first write up is about..

  1. Ripple Inc as a lender of XRP. Risk exposure goals: Ripple keep upside, protect borrower from downside
  2. Improved market stability, derived from the ability to short XRP
  3. How would Exchange MM’s use XRP in a PayChan without exposing the Exchange (borrower) to downside risks.

From there, I realized that Ripple is actually giving these exchanges an XRP Line of Credit (LoC), which is a type of loan. Then I started thinking about the banks wanting to use XRPLedger but there not being enough Liquidity, all while Ripple Inc is sitting on Billions of XRP which is going un-utilized in the market.

Then I was thinking of the spreads on an orderbook in terms of Quality in/out.. which is effectively equal to the interest rate on a loan. Then I was wondering how Ripple could manage lending to many banks, so the banks can lend to their corp clients for the duration of a transaction. Then I started thinking about CrowdLending and using a weighted average to calculate the cost of the interest, but making it a "weighted average Quality in/out".

This whole time I have been wondering how the Pathfinding/Routing is being accomplished across ILP via RippleNet, while going around XRPLedger where the Pathfinding is done for free. Then I realized that each bank is running their own private Rippled ledger, and they could express their Nostro/Vostro relationships via IOUs on their own Rippled ledger... with the fees/interest expressed in Quality in/out.

Then I realized if you took a bunch of Rippled ledgers and strung them together in this way, each ledger acting as an ILP Connector (multi hop bank) then each ledger's internal pathfinding algo would find the highest quality path through that bank's N/V relationships.... and since the pathfinding is accomplished across many ledgers, with no single ledger doing the full routing (or having a full routing table, business secrets and all that) the system would be accomplishing... Distributed Pathfinding.

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@KarmaCoverage

I still don't get how anyone can ever lend XRP, to me it seems like an impossible feat. 

If you give your XRP to someone it's impossible to ensure you will get it back, regardless of enforcement, the XRP can be lost forever and not only that--this loss can cause the supply to decrease. 

Who would put 100MM through that system, when the asset can be lost, and it's impossible to insure it because the supply is finite. 

 

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55 minutes ago, Wandering_Dog said:

@KarmaCoverage

I still don't get how anyone can ever lend XRP, to me it seems like an impossible feat. 

If you give your XRP to someone it's impossible to ensure you will get it back, regardless of enforcement, the XRP can be lost forever and not only that--this loss can cause the supply to decrease. 

Who would put 100MM through that system, when the asset can be lost, and it's impossible to insure it because the supply is finite. 

The way I imagined Ripple doing an XRP LoC for an exchange is...

  1. Ripple signs a legal agreement with Exchange as part of the Market Maker Incentive program.
  2. Ripple puts 1mm XRP into a payment channel, making an LoC of 1mm XRP
  3. Exchange client A wants to "go short" on 100 XRP
  4. Exchange lets Ripple know and they send Exchange a PayChan receipt for 100 XRP
  5. Exchange cashes in the PayChan receipt, so they borrow XRP from Ripple (paying 1% interest) and lend to Client A charging 3% interest. 
  6. Client A sells XRP, "going short" on the Exchange's markets/orderbooks

Regarding XRP movements during the time frame of the loan, this is from the Part 1 write up... The loans can be denominated in fiat, and collateralized and settled in XRP.

PayChan-Payoffs.png

The Exchange could alternatively...

  1. Borrow 100 XRP from Client B.
  2. Credit Client A 100 XRP who pays interest (some of which could be passed on to Client B)

The key thing to realize is that "Credit" is being created either way.

This is why I think that economist who described the Fed's reactions to the last financial crash as a "Dealer of last resort" not a "Lender of last resort" has himself a good little insight there. Because the way these systems are being set up, is that the traditional function of "Lending" is turning into more of what traditionally looked like a Specialist managing an Orderbook as a Dealer.... Spread = Interest rate

This may be because the time scale of the "borrowing" transactions has shrunk to a theoretical minimum of 2 ledger closes (under 10 second loans). But I suspect this is more of a "Narrow Banking" business model, being called an "Exchange". Everything is 100% backed, no fractional reserve.

@Wandering_Dog you are correct that Ripple would end up looking a lot like a Central Bank in this system architecture. I'm not sure what I think about this, beyond "If Ripple can capture revenue from value flowing through RippleNet (due to interest on micro loans) then Ripple will be more valuable than Google in just a few years." Regardless of the price of XRP.

Being honest, I dont know that any of what I have written is being done by Ripple. I completely made it up, within the framework of the Rippled + ILP took kit (this is all just accounting systems). I asked one person at Ripple and his/her only response after reading it was "you write well".

That said, I do think the Ripple folks understand they are building a complex adaptive system, and that if they can capture some revenue tied to whatever is flowing through that system (payment flows & value in this case) then they will make a lot of money. Typically this type of revenue "routing money" has been reserved for Banks, and it has been done by Lending, and the revenue for such routing function is paid in Interest.

This is also exactly what Google's business model does, Revenue from Flow Routing. They built a network of back-links, "cataloging the internet", and the search function is actually just acting as a Routing mechanism through the network of back-links. End users say "I want this" Google says "Its over here", and they make revenue off of acting as an Advertising Gatekeeper ,who is Routing the desired information flow, through the network towards the user + stuffing some Ads.

Ripple can do the same, but for Value. And where there is no value, or a corridor is lacking liquidity depth... guess who has a lot of XRP + a desire to deepen liquidity + reduce the price making RippleNet competitive against other connection types (correspondent banking) + would like to earn a little revenue on the flow through the network they built. Ripple will be studied as a Harvard Business School case study for decades. So much brilliance wrapped up in one company, at a special time in the world's unfolding.

Edited by KarmaCoverage

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2 hours ago, KarmaCoverage said:

The way I imagined Ripple doing an XRP LoC for an exchange is...

  1. Ripple signs a legal agreement with Exchange as part of the Market Maker Incentive program.
  2. Ripple puts 1mm XRP into a payment channel, making an LoC of 1mm XRP
  3. Exchange client A wants to "go short" on 100 XRP
  4. Exchange lets Ripple know and they send Exchange a PayChan receipt for 100 XRP
  5. Exchange cashes in the PayChan receipt, so they borrow XRP from Ripple (paying 1% interest) and lend to Client A charging 3% interest. 
  6. Client A sells XRP, "going short" on the Exchange's markets/orderbooks

Ok, so Ripple and the Exchange open a payment channel, Ripple funds the channel with 1mm XRP, then the Exchange's wallet increases by 100 XRP. The Exchange then burns down, and no one remembers the private keys. 

There is no way to enforce upon the Exchange a legal order to recoup that XRP. It's gone. In the case of fiat, you can always resolve that issue, as there is a bank or central bank that can type numbers into their database and Ripple gets their 100 units of "whatever it was" returned to them. 

The question then is, given this risk, why would anyone enter into a loan agreement with their XRP, sending it off into the unknown? The second question is, if you let people create loan contracts, and some percent of those contracts fail in a similar fashion as we described, will the quantity of usable XRP fall to 0 over a long time horizon? The answer to the second question is the problem, as even if people, their "animal spirits", start creating loans, eventually everyone will know the end state--and they will all stop loaning. Thus the system would be a pure barter system, no loans of XRP would ever exist, and people get burned now and then when they inadvertently pay the wrong address. This is a very simple system which looks nothing like a "global reserve currency". 

Without resolving the loan issue in crypto, there will be no paradigm shift in the financial system as a result of its adoption. And Ripple in this case would simply be an option for under banked people, places, and corridors--the freeway of the damned, so to speak.  

 

2 hours ago, KarmaCoverage said:

Regarding XRP movements during the time frame of the loan, this is from the Part 1 write up... The loans can be denominated in fiat, and collateralized and settled in XRP.

PayChan-Payoffs.png

The Exchange could alternatively...

  1. Borrow 100 XRP from Client B.
  2. Credit Client A 100 XRP who pays interest (some of which could be passed on to Client B)

The key thing to realize is that "Credit" is being created either way.

When you do it on your own ledgers, not on the XRPL, or in terms of credit on the XRPL, then it works fine. In fact, you would likely never settle, just like the Fed with itself. It's just normal banking using an open settlement ledger rather than just a central bank's ledger. If people want to bank entirely off the CB ledger and the commercial bank ledgers under them, they can. There can be entire banking ecosystems which only touch the the CB ledger at a crypto equivalent of a correspondent bank which is the only entity with an account at the Fed, for example. 

But, this can have nothing to do with XRP at all. Everything is liabilities of someone or something, not the exchange of XRP from one wallet to another. The settlement itself would likely be entirely liabilities based on 100% reserves that is transparent to the network for verification, as the risks involved with actually moving XRP are so absolute. Imagine for a moment if the system was up and running, Ripple was disbursing its XRP to member banks, and someone fat fingers the transfers and sends half of the XRP supply to a dead wallet. Or, imagine a system with many contracts for XRP, each of which are insured by an insurer--its mathematically impossible to provide the XRP required for all the insurance contracts, as the debt structure is exponentially larger than the base asset--in other words, insurance will become an impossibility, as all parties can see on the transparent ledger that there isn't enough XRP to cover the contracts. 

 

2 hours ago, KarmaCoverage said:

This is why I think that economist who described the Fed's reactions to the last financial crash as a "Dealer of last resort" not a "Lender of last resort" has himself a good little insight there. Because the way these systems are being set up, is that the traditional function of "Lending" is turning into more of what traditionally looked like a Specialist managing an Orderbook as a Dealer.... Spread = Interest rate

This may be because the time scale of the "borrowing" transactions has shrunk to a theoretical minimum of 2 ledger closes (under 10 second loans). But I suspect this is more of a "Narrow Banking" business model, being called an "Exchange". Everything is 100% backed, no fractional reserve.

@Wandering_Dog you are correct that Ripple would end up looking a lot like a Central Bank in this system architecture. I'm not sure what I think about this, beyond "If Ripple can capture revenue from value flowing through RippleNet (due to interest on micro loans) then Ripple will be more valuable than Google in just a few years." Regardless of the price of XRP.

The Central Bank comparison assumes Ripple has some control over elasticity of supply, creating and destroying XRP, either directly or through some agreement with validators. Without that, Ripple would be like the IMF, they have a big pot of money they can "loan" out, forcing entities to certain conditions, and wreak just as much havoc as the IMF on reserve asset dependent countries. This may be part of the reason Ripple seems to be so buddy buddy with the IMF. 

 

2 hours ago, KarmaCoverage said:

Being honest, I dont know that any of what I have written is being done by Ripple. I completely made it up, within the framework of the Rippled + ILP took kit (this is all just accounting systems). I asked one person at Ripple and his/her only response after reading it was "you write well".

That said, I do think the Ripple folks understand they are building a complex adaptive system, and that if they can capture some revenue tied to whatever is flowing through that system (payment flows & value in this case) then they will make a lot of money. Typically this type of revenue "routing money" has been reserved for Banks, and it has been done by Lending, and the revenue for such routing function is paid in Interest.

This is also exactly what Google's business model does, Revenue from Flow Routing. They built a network of back-links, "cataloging the internet", and the search function is actually just acting as a Routing mechanism through the network of back-links. End users say "I want this" Google says "Its over here", and they make revenue off of acting as an Advertising Gatekeeper ,who is Routing the desired information flow, through the network towards the user + stuffing some Ads.

Ripple can do the same, but for Value. And where there is no value, or a corridor is lacking liquidity depth... guess who has a lot of XRP + a desire to deepen liquidity + reduce the price making RippleNet competitive against other connection types (correspondent banking) + would like to earn a little revenue on the flow through the network they built. Ripple will be studied as a Harvard Business School case study for decades. So much brilliance wrapped up in one company, at a special time in the world's unfolding.

It's an interesting experiment, definitely. The loan issue gets to me, because it's a critical link. A fixed supply settlement system without loans likely won't generate any economic activity beyond the initial increase to the money supply as a result of its implementation, it will rely on the credit created outside the system to generate activity. 

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16 hours ago, htrenkle said:

best argument ever.

Everybody in this community yelling "xRaaaaapiiiiid" like maniacs, but nobody able to explain why a software which just takes orders from the order book will pump up the price. 

Cuz that weird bear guy said so🤔

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16 hours ago, KarmaCoverage said:

The way I imagined Ripple doing an XRP LoC for an exchange is...

Could we start a new thread on this? I am finding this interesting and think if we had a new thread about it, we could discuss more.

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4 minutes ago, BrownBear said:

Could we start a new thread on this? I am finding this interesting and think if we had a new thread about it, we could discuss more.

We could start multiple threads and weave them all into one great big blanket of nobody knows what the fu(k is going on.

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17 hours ago, KarmaCoverage said:

The way I imagined Ripple doing an XRP LoC for an exchange is...

  1. Ripple signs a legal agreement with Exchange as part of the Market Maker Incentive program.
  2. Ripple puts 1mm XRP into a payment channel, making an LoC of 1mm XRP
  3. Exchange client A wants to "go short" on 100 XRP
  4. Exchange lets Ripple know and they send Exchange a PayChan receipt for 100 XRP
  5. Exchange cashes in the PayChan receipt, so they borrow XRP from Ripple (paying 1% interest) and lend to Client A charging 3% interest. 
  6. Client A sells XRP, "going short" on the Exchange's markets/orderbooks

Could the borrowed XRP amount not be collaterized with the equal amount in e.g. USD? This seems to work especially well in the xRapid case, i.e. Bank sends USD to exchange, the exchange collaterizes the USD (with the XRP owner) for the XRP loan.. exchange receives XRP and sends it to exchange B. :)

Edited by jn_r

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17 hours ago, Wandering_Dog said:

There is no way to enforce upon the Exchange a legal order to recoup that XRP. It's gone.

Lloyds has a policy insuring crypto exchange "operations". I assume, that theft would be included as a coverage type. I guess the policy would have to go to the open market buy the digital asset, and give it to the insured. Then they could track the stolen XRP and try to get the thief on cash out and recover the XRP. If the keys are lost, :cray:

You have a good point, this is why so many conversations have ended without a resolution. I think the resolution can only be accomplished by stacking ledgers. Much like the set up we have today, stacking Central Bank and Commercial Bank ledgers. With the CB ledger being the "base ledger" and the Commercial bank ledger being the "credit creation ledger".

18 hours ago, Wandering_Dog said:

The second question is, if you let people create loan contracts, and some percent of those contracts fail in a similar fashion as we described, will the quantity of usable XRP fall to 0 over a long time horizon?

1. This will happen anyway, because of the burning of XRP as a transaction fee + lost keys + blackhole wallets.

2. There is an amendment process which can change the XRPLedger code. Anything is possible, if 80% of of the validators agree to change the code. This falls under the Governance aspect of blockchain management and design. The system could actually make more XRP if there was enough reason to achieve a successful vote. (someone correct me if I'm wrong)

Ripple has addressed this Governance issue with a committee driven agreement/rule book which banks must sign to join RippleNet when they buy xCurrent.

18 hours ago, Wandering_Dog said:

Without resolving the loan issue in crypto, there will be no paradigm shift in the financial system as a result of its adoption. And Ripple in this case would simply be an option for under banked people, places, and corridors--the freeway of the damned, so to speak.

I agree the issue of loaning crypto is important to find a resolution for. Some of these Stable Coins have a different set up than what I wrote up, and I think they are setting up a situation which has the potential to crash in a cascade of margin calls, and open market sell orders. 

That said, these Stable Coins are creating credit... albeit denominated in Fiat, using a base of crypto

18 hours ago, Wandering_Dog said:

When you do it on your own ledgers, not on the XRPL, or in terms of credit on the XRPL, then it works fine.

I'm not sure I follow here? 

  • "When you do it on your own ledger, not on the XRPL"... I'll consider this to be the Exchange's ledger, and yes that is where the credit is created, not on the base crypto XRPLedger.
  • "or in terms of credit on the XRPL"... Are you talking about on ledger IOUs? That would be credit created off XRPLedger, and "accounted for" on XRPLedger. 
  • "then it works fine"... what does your ideal look like?
18 hours ago, Wandering_Dog said:

In fact, you would likely never settle, just like the Fed with itself. It's just normal banking using an open settlement ledger rather than just a central bank's ledger. If people want to bank entirely off the CB ledger and the commercial bank ledgers under them, they can.

Yes, I think this is what we are looking at, and I think the motivation for such a situation is to find a solution to the USD as the global reserve currency. The US will not, and neither will most other countries, agree to submit to accounting for the world on a single Central Bank's balance sheet as the base. Well, I guess that is the current situation with the US Fed's balance sheet and the USD global reserve. Its not like the world is going to say, "ok, lets switch that over to the Chinese fiat".

That is not a solution, using a "base ledger" that is digital and transnational via DLT, may not be perfect, but it is moving in the right direction.

18 hours ago, Wandering_Dog said:

But, this can have nothing to do with XRP at all. Everything is liabilities of someone or something, not the exchange of XRP from one wallet to another. The settlement itself would likely be entirely liabilities based on 100% reserves that is transparent to the network for verification, as the risks involved with actually moving XRP are so absolute

The set up that I wrote up does have to do with XRP. The 1MM XRP in the payment channel, are actually moved into the payment channel, and the 100 XRP loan to the Exchange does actually move out of the Payment Channel into the Exchanges's XRPLedger wallet... and that XRP is then really sold on the Exchanges's orderbooks by Client A

Therefore the number of XRP floating on the open market has increased, ie an XRP distribution has occurred. 

18 hours ago, Wandering_Dog said:

The Central Bank comparison assumes Ripple has some control over elasticity of supply, creating and destroying XRP, either directly or through some agreement with validators.

The corollary I was making was... "XRP floating on the open market" ..to.. "Circulating Fiat Supply" (cash + reserve accounts).

So, an "expansion" would look like Ripple lowering the interest rates on their loans to the Exchanges/Narrow Banks... and a "contraction" would be increasing the interest rates on those loans, or calling them due, with the goal of reducing the amount of "XRP floating on the open market".

In fact if the Central Banks issue CBDC, they could hold an inventory of it just like Ripple holds an inventor of XRP and deploy many of their well known and understood monetary policy thinking.

18 hours ago, Wandering_Dog said:

It's an interesting experiment, definitely. The loan issue gets to me, because it's a critical link. A fixed supply settlement system without loans likely won't generate any economic activity beyond the initial increase to the money supply as a result of its implementation, it will rely on the credit created outside the system to generate activity. 

Yeah, I agree. 

  1. The loan issue is critical
  2. it will rely on credit created outside the system (off XRPLedger)

The way I set this situation up, the credit is created by exchanging liabilities,  Ripple is liable to the Exchange for the full 1MM XRP, and Client A is liable to the Exchange for 100 XRP, and the Exchange is making a spread between these two liabilities, paying 1%, and collecting 3%. 

If this is done internally on the exchange, by borrowing from Client B, then again the credit is created by exchanging liabilities, all on the Exchange's ledger.

The full 1MM in the Payment Channel is essentially a line of credit. Would you say a line of credit from a Commercial Bank qualifies as "credit", or "fiat supply expansion" before it is spent by the borrower, or only after?

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4 hours ago, jn_r said:

Could the borrowed XRP amount not be collaterized with the equal amount in e.g. USD? This seems to work especially well in the xRapid case, i.e. Bank sends USD to exchange, the exchange collaterizes the USD (with the XRP owner) for the XRP loan.. exchange receives XRP and sends it to exchange B. :)

In the set up I wrote about, the Bank would temporarily borrow the XRP it needs to facilitate a Corp client's payment request from Ripple. I dont see this as any different than a typical car dealer who borrows a bunch of it's inventory on the lot. The key is to turn over that inventory fast enough that the interest cost on the borrowed inventory, is lower than the profit/spread between wholesale and retail pricing.

That said, yes you could say that the XRP transaction is collateralized by the cash balance in the Corp Client's bank account.  

After the transaction the Bank is left with a need to pay back the XRP to Ripple, but they dont have it because it was sent to settle the payment. They can pay interest while they wait till they receive some inbound XRP, or buy XRP on the open market to cover their short position, or buy a derivative to cover their short exposure. If I were running the bank, I'd feel comfortable borrowing XRP up to the point of my XRP inflows. This way I have very little skin in the game, or capital exposure to XRP price movements, i'd just be making a spread. If I was a net XRP outflow bank, I'd probably just go the open market route, so debit the Corp client bank account, credit the Banks's exchange acount, and buy XRP on the open market and send it to settle the payment.

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