Jump to content
Sign in to follow this  
Wandering_Dog

ILP, eli5

Recommended Posts

1 hour ago, Wandering_Dog said:

Any "transfer" of a bank deposit liability between 2 banks, for example, involves 3 ledgers. The bank, the fed, and another bank. So if the Fed is not running interledger, what is going on? 2 banks can't transfer anything without communicating with the fed. 

So a bank may send ILP packets to another bank, but who is communicating with the Fed to actually settle the transaction?

Any bank can have direct business and credit relations with another bank (e.g. by vostro/nostro) - i.e. that they do not necessarily need the central bank for settlements.

Edited by tar

Share this post


Link to post
Share on other sites
1 hour ago, Wandering_Dog said:

Any "transfer" of a bank deposit liability between 2 banks, for example, involves 3 ledgers. The bank, the fed, and another bank. So if the Fed is not running interledger, what is going on? 2 banks can't transfer anything without communicating with the fed. 

So a bank may send ILP packets to another bank, but who is communicating with the Fed to actually settle the transaction?

You are missing the market maker in this story. The thing is, with ILP, no money leaves any ledger. On ledger A the money is transfered from BankA/customerA to the market maker (Also on BankA ledger), on ledger B the money is transfered from market maker (on BankB ledger) to bankB/CustomerB.

Because no money is leaving any ledger (it is a local payment from customer to mm and vice versa) it does not need to be settled with the CB

Edit: market maker should be 'connector'

Edited by jn_r

Share this post


Link to post
Share on other sites
29 minutes ago, tar said:

Any bank can have direct business and credit relations with another bank (e.g. by vostro/nostro) - i.e. that they do not necessarily need the central bank for settlements.

A "direct" relationship would be a 1st degree connection.

DLT introduces a new 2nd degree connection between banks.

The CB has a monopoly on the 2nd degree bank-to-bank connection, and I expect that to continue within domestic economies.

XRPLedger is being made available as an alternative 2nd degree connection between banks for international flows. 

Edited by KarmaCoverage

Share this post


Link to post
Share on other sites

Hm, private parties who want to be connectors disperse their bank deposits to multiple commercial banks, and create a private payment layer below the Fed using banks' existing infrastructure?

If the flow is balanced, would banks need reserves? They create money through loans and all payments could be settled on this new layer. Banks make money with zero risk (!), effectively pushing their liquidity risk onto participating private citizens who borrow from the banks? 

If flow is unbalanced, each bank has its own interest rate that connectors face as a constraint on their activity, pushing up connector fees on deficit commercial bank ledgers and down in surplus commercial bank ledgers? 

Is a citizen, acting as a connector, then considered a bank, and are they then regulated as such?

Edit: ILP currently acts as a point keeping system, it doesn't involve settlement and doesn't involve the transfer of "actually money" ie bank deposits (and perhaps not crypto either). As with all things, it requires the adoption of the gov to function beyond a point keeping system.  

Edited by Wandering_Dog

Share this post


Link to post
Share on other sites
11 hours ago, tar said:

Any bank can have direct business and credit relations with another bank (e.g. by vostro/nostro) - i.e. that they do not necessarily need the central bank for settlements.

Just to be clear, you are saying that a bank can open an account with another bank, and hold some of their competitor's bank deposits, and vice versa, correct?

Edited by Wandering_Dog
Satz struktur

Share this post


Link to post
Share on other sites
1 hour ago, Wandering_Dog said:

Just to be clear, you are saying that a bank can open an account with another bank, and hold some of their competitor's bank deposits, and vice versa, correct?

Technically yes. I am not sure if they handle that as usual bank deposits account or just as special (clearing) account.

Edited by tar

Share this post


Link to post
Share on other sites
3 hours ago, Wandering_Dog said:

Hm, private parties who want to be connectors disperse their bank deposits to multiple commercial banks, and create a private payment layer below the Fed using banks' existing infrastructure?

If the flow is balanced, would banks need reserves? They create money through loans and all payments could be settled on this new layer. Banks make money with zero risk (!), effectively pushing their liquidity risk onto participating private citizens who borrow from the banks?

Your assumption of balanced flows is unrealistic as credit relationships always have involved risk.

3 hours ago, Wandering_Dog said:

If flow is unbalanced, each bank has its own interest rate that connectors face as a constraint on their activity, pushing up connector fees on deficit commercial bank ledgers and down in surplus commercial bank ledgers? 

Is a citizen, acting as a connector, then considered a bank, and are they then regulated as such?

The regulation for private parties is managed by the regulation of the bank/exchange they have their account on.

Share this post


Link to post
Share on other sites
42 minutes ago, tar said:

Technically yes. I am not sure if they handle that as usual bank deposits account or just as special (clearing) account.

I'm assuming that implies a hierarchical relationship between the 2 banks, as why would a bank, equivalent of another bank, agree to hold their liabilities as an asset, when those liabilities ultimately have no "value", given that the bank can create an infinite amount of them.  

Unless we have data on Bank of America holding deposits at Wells Fargo, for example. It strikes me as making little sense. 

Share this post


Link to post
Share on other sites
35 minutes ago, tar said:

The regulation for private parties is managed by the regulation of the bank/exchange they have their account on.

If you or I start a business as connectors, or if we conduct business as connectors under our own names, are we not payment providers, or providing some form of payment service?

Share this post


Link to post
Share on other sites

There are slight differences between the first implementations of ILP and the current one. I found the following link describe it pretty well:

https://interledger.org/rfcs/0027-interledger-protocol-4/#differences-from-previous-versions-of-ilp

Quote

Differences from Previous Versions of ILP

  • Designed for Smaller, More Homogenous Packet Amounts - ILPv4 applies a number of simplifications by only supporting low-value packets. Larger amounts can be sent through higher-level protocols that implement chunked payments, but the core network is optimized for sending large volumes of small packets. This renders unnecessary some of the more complex features of previous versions like Liquidity Curves for expressing how exchange rates may vary depending on the packet amount. Lower-value packets also help to minimize connector risks.
  • Payment Channels, Not On-Ledger Escrow - Since ILPv4 is optimized for smaller packets, speed and cost are of greater importance than in previous versions. ILPv4 uses ledgers or payment channels for settling bilateral payment obligations but ILPv4 packets are sent just between connectors, rather than through the underlying ledgers themselves. This enables packet timeouts to be short, because they do not need to include the processing time of slower ledgers, which further reduces connector risks. See Why Unconditional Payment Channels for more details.
  • Forwarding, Not Delivery - ILPv4 connectors forward packets based on their local exchange rates, in contrast with the first version of ILP in which connectors would attempt to deliver a fixed destination amount. Now, instead of fixed destination amount delivery being built into the core protocol, senders may use higher-level protocols to indicate the minimum amount the receiver should accept for a given packet and receivers can reject packets with less than that. This significantly simplifies the connector behavior, because they do not need to maintain up-to-date price information on the entire rest of the network and can simply apply their local rate instead. If receivers want to receive no more than a certain amount, they can reject packets that go too far over the amount and senders can retry the packet with lower amounts.
  • Quoting is an Application Concern - Connectors are only responsible for forwarding ILP packets and do not need to implement a separate protocol for quoting. Applications can use test packets to determine the exchange rate of a particular path.

Here a picture of the overall layered architecture:

ILP-layer-model.png

Share this post


Link to post
Share on other sites
23 hours ago, Wandering_Dog said:

I'm assuming that implies a hierarchical relationship between the 2 banks, as why would a bank, equivalent of another bank, agree to hold their liabilities as an asset, when those liabilities ultimately have no "value", given that the bank can create an infinite amount of them.

Huh?

1) Why do claims/obligations have no value, per se? Their value depend on the solvency of its particular debtor.

2) Nobody can create an infinite amount of claims/liabilities without hurting the solvency of the particular debtor (you could argue in favor of the central bank and state, but this is a special topic). Here, the banks are in a credit relationship for which the debtor is liable for its obligations, of course.

23 hours ago, Wandering_Dog said:

Unless we have data on Bank of America holding deposits at Wells Fargo, for example. It strikes me as making little sense. 

Why?

Share this post


Link to post
Share on other sites
23 hours ago, Wandering_Dog said:

If you or I start a business as connectors, or if we conduct business as connectors under our own names, are we not payment providers, or providing some form of payment service?

What type of connector? I mean you need accounts on a bank or on an exchange or actually be a bank or an exchange to be a connector, don't you? And if you become an exchange you need to adopt the regulation processes.

Edited by tar

Share this post


Link to post
Share on other sites
1 hour ago, tar said:

What type of connector? I mean you need accounts on a bank or on an exchange or actually be a bank or an exchange to be a connector, don't you? And if you become an exchange you need to adopt the regulation processes.

This was assuming that ILP involved actual bank deposits with bank account holders acting as a payment layer. This isn't what ILP is, per Evan Schwartz above, ILP doesn't use bank deposit money and is not currently connected to any monetary system, making it an arbitrary tally record. If you or I recorded our monopoly money tx's in a T account online, then currently the 2 systems would be equivalent. 

The descriptions of ILP above are incorrect.

Share this post


Link to post
Share on other sites
1 hour ago, tar said:

Huh?

1) Why do claims/obligations have no value, per se? Their value depend on the solvency of its particular debtor.

Well, why do we have a central bank with reserve deposits at all, @tar? According to your claim that the value of a bank's liabilities (a bank deposit) is a function of the solvency of the borrower, then bank's can settle transfers of their liabilities using their own assets, or even derivatives based on those assets, according to who the borrower is. But we don't see that do we? 

Furthermore, think about what you just said. The solvency of a borrower is a function of bank lending, that's circular. Hence the value of bank deposits is a function of bank deposits--not very useful information. 

 

1 hour ago, tar said:

2) Nobody can create an infinite amount of claims/liabilities without hurting the solvency of the particular debtor (you could argue in favor of the central bank and state, but this is a special topic). Here, the banks are in a credit relationship for which the debtor is liable for its obligations, of course.

Barclays can type any number into its ledger that it wants. If it wanted to over capitalize in 2009, it could have typed 6 trillion into its ledger rather than 6 billion, or any number. The Qataris would likely be indifferent, considering the interest rate can be set to 0 and repayment delayed forever, or erased entirely just as easily.

 

1 hour ago, tar said:

Why?

Why? Think about it. I can issue you bank deposits in my fictional bank. Here's a trillion. Will you accept my unconvertible liability as payment?

Share this post


Link to post
Share on other sites
Sign in to follow this  

×