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Wandering_Dog

ILP, eli5

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Ok, I think I understand interledger, but its also possible that I don't understand interledger. Because I'm not sure, I'd like to ask: is anyone able to show a transaction with balance sheets, going from XRPL to USD (including the Fed ledger) or XRP to BTC, , as an example (assuming ILP functioned on each ledger)?  :drinks:

Edited by Wandering_Dog

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15 minutes ago, Wandering_Dog said:

Ok, I think I understand interledger, but its also possible that I don't understand interledger. Because I'm not sure, I'd like to ask: is anyone able to show a transaction with balance sheets, going from XRPL to USD through BTC, and including the Fed ledger, as an example (assuming ILP functioned on each ledger)?  :drinks:

I can draw a picture later, but while on mobile.

To go from one xCurrent bank to another through both RippleNet (FX exchange) and XTPLedger...

1. Debit Bank ledger client account > credit Segregated account (this is the connection to the bank's private "xCurrent ledger", or Rippled)

2. Debit Segregated account > credit xCurrent ledger (onboarding the value to RippleNet)

3. Debit xCurrent ledger value > credit Exchange... sell fiat for xrp

4. On XRPLedger... exchange A sends XRP to exchange B

5, 6, 7... reverse steps 3, 2, 1

Without CBDC the Central bank's balance sheet is not party to the transaction. Only domestic interbank settlement would flow through it's balance sheet, which would cut out steps 2-6, and replace them with methods you know well.

Just realized I left out the use of payment channel receipts which in reality would probably be used on step 4, rather than doing an on ledger transaction. This enables the 2 exchanges to do some clearing for a while and settle up on XRPLedger whenever the net positive exchange wants to cash in their paychan receipt 

Edited by KarmaCoverage

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@KarmaCoverage So it's essentially an xRapid transaction, where it finds parties that want each part of a trade, then syncs them all up, is that correct?

So if I wanted to pay XRP but the receiver wants BTC, ILP goes into the global market and finds parties that can connect these transactions according to pre-existing orders or any parties willing to make a market for a particular trade. 

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The white paper frustrates me, because they only show 1/3 of the puzzle, the accounts of account holders at a bank for example. They exclude the bank and the Fed. So, it's as though they see the world as being composed of commodities rather than credit. So in the second example the Fed is a connector, but they omit its balance sheet and just show the account holders, the banks, which use the Fed for settlement. 

 

 

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image.thumb.png.10e3dd40586360dac0f5ace218a05088.png

Edited by Wandering_Dog

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@Wandering_Dog Yeah I think/guess RippleNet uses ILP which uses payment channels on each  exchange/bank's xCurrent ledger.

So RippleNet is basically a souped up version of the IoV with the nodes (ledger operators) have additionally agreed to governance and legal contracts they have to sign to join the Ripple network.

This thread may help with understanding ILP. It was only wrapped up 1 year ago. 

 

Edited by KarmaCoverage

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3 minutes ago, KarmaCoverage said:

@Wandering_Dog Yeah I think/guess RippleNet uses ILP which uses payment channels on each  exchange/bank's xCurrent ledger.

So RippleNet is basically a souped up version of the IoV wire the nodes (ledger operators) have additionally agreed to governance and legal contracts they have to sign to join the Ripple network.

This thread may help with understanding ILP. It was only wrapped up 1 year ago. 

 

I've gone through that thread. What would be great is if someone would put together an example of the balance sheets of all parties, account holders, their banks, the CB's, and everyone else involved, so it is crystal clear exactly what is happening. Because all the current info tends to treat the thing being transferred as an asset only, such as crypto, rather than credit. 

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20 minutes ago, ADingoAteMyXRP said:

Important to note that ILP has an atomic mode and universal mode, explained here better than I could muster: 

 

I think atomic mode got axed, didn't it?

Edit: Ah, ok, looks like its present in xCurrent. 

Edited by Wandering_Dog

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9 minutes ago, Wandering_Dog said:

So, it's as though they see the world as being composed of commodities rather than credit. 

I can find a more detailed link later 

Basically ILP Connectors are the ones provisioning liquidity on 2+ ledgers (fiat or digital doesn't matter).

When the Connector recievs a Prepare packet they set aside some liquidity... on credit

There is a risk of loss of this liquidity which the Connector has set aside to fund the prepare packet. Both risk they will lose that capital (chance of loss), and that they may not lose their capital but will not succeed in collecting the spread for the payment (opportunity cost).

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9 minutes ago, Wandering_Dog said:

What would be great is if someone would put together an example of the balance sheets of all parties, account holders, their banks, the CB's, and everyone else involved

The closest thing to that, is the video I made. The one that mostly describes a domestic economy settlement process in a world with CBDC, at the end I show how an international payment using CBDC and XRPLedger would work.

I think the CB balance sheet is not involved in an ILP payment path. At most it is indirectly, because the commercial bank should be tied to it's Central Bank.

 

Edited by KarmaCoverage

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My assumption is that CBDC’s will be most useful for bank-to-bank (or CB) reconciliation rather than as a means of retail payment/forex transfer. Is that correct? Or will XRP face competition from digital fiat?

Edited by ADingoAteMyXRP

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10 hours ago, KarmaCoverage said:

Basically ILP Connectors are the ones provisioning liquidity on 2+ ledgers (fiat or digital doesn't matter).

When the Connector recievs a Prepare packet they set aside some liquidity... on credit

This is what I don't understand. If a bank is using it's Fed account, then it can't create credit, it can only borrow. Is ILP assuming that banks are using LOC with the Fed? Or is ILP saying the Fed is the connector? Because the paper makes it sound like "anyone can be a connector to transfer liquidity" but in reality only the central banks can do that, unless we are discussing crypto only. 

 

Edited by Wandering_Dog

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13 hours ago, ADingoAteMyXRP said:

My assumption is that CBDC’s will be most useful for bank-to-bank (or CB) reconciliation rather than as a means of retail payment/forex transfer. Is that correct? Or will XRP face competition from digital fiat?

My assumption of a CBDC is basically tokenised fiat. There would be no competition with XRP as a CBDC would essentially be a national walled garden.

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7 hours ago, Wandering_Dog said:

This is what I don't understand. If a bank is using it's Fed account, then it can't create credit, it can only borrow. Is ILP assuming that banks are using LOC with the Fed? Or is ILP saying the Fed is the connector?

Because the paper makes it sound like "anyone can be a connector to transfer liquidity" but in reality only the central banks can do that, unless we are discussing crypto only. 

I think of an ILP Connector much like the old role of a Specialist on the floor of the NYSE, and also as a Dealer as described by Mehrling here.

I also think most of the "connectors" will be using both fractional reserve commercial bank ledgers and narrow bank exchange ledgers and digital asset ledgers. Depending on the nature of each ledger they can fund their position by either a deposit or loan from the bank, a deposit or margin at the exchange, or simply a deposit on a digital asset ledger.

Quote

"When the Connector receive a Prepare packet they set aside some liquidity... on credit"... what I understand to functionally happen is that a sender and receiver have a few connectors in between them on the payment path.

Say Sender Bank A > Exchange A > XRPLedger > BTC ledger > Fiat stable coin > Receiver cash ... Each > is a Connector, or a Dealer with value held on both ledgers before and after their hop.

When funding and settling in these positions on each ledger, the Connector/Dealer can use a commercial bank loan (credit), or non-credit Central Bank cash (ILP works with paper cash also). Either way the Dealer is hitting the ledgers that fall under the jurisdiction of the CB and Banking regulators of that jurisdiction.

In the process, each connector along the path actually sends the value to the next connector, and then waits for a Fulfillment packet to collect the value the previous connector sent to them. 

Quote

https://interledger.org/rfcs/0001-interledger-architecture/#connector-risk-and-mitigation

Interledger connectors accept some risk in exchange for the revenue they generate from facilitating payments. In the Interledger payment flow, connectors incur outgoing obligations on the receiver-side account, before they become entitled to incoming obligations on the sender-side account. After each connector receives a fulfillpacket, they have a window of time to deliver the fulfill packet to their counterparty on the sender-side account. Connectors that fail to deliver the fulfillpacket in time may lose money.

This is where Universal mode vs Atomic mode gets important.... In Universal mode the value is sent forward, while in Atomic mode if the end to end transaction (the full path) does not execute, then none of the hops will execute. RippleNet I believe is run in Atomic mode (not sure who runs the Notary service, Ripple?), while the IoV is run in Universal mode which is much more open, but has some more risk exposure for a Connector.

This may also help with the process flow. https://interledger.org/rfcs/0032-peering-clearing-settlement/

I typically think of ILP Connectors operating using accounts at a Narrow Bank, aka an Exchange and without Margin. So their positions on all ledgers are fully collateralized. There is obviously room for a Connector/Dealer to borrow collateral, but for simplicity sake I usually think of everything being 100% fully collateralized first, like a Narrow Bank.

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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?

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