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ThoughtsaboutInterledger,Ripple,XRPand

crosscurrencypayments.

RafaelOlaioPereira
CEORippexRippleGateway
rippex.net

TheRippleVisionpaper1 reaffirmedtheconceptofamulticurrencyledgerwhereatomic
crosscurrencypaymentscanoccur,poweredbyXRPinmanycases.
ThinkingabouthowthisvisionwouldinteractwiththeInterledgerProtocol2(ILP),aquestion
cameup.HowwouldanInterledgercrosscurrencypaymentusetheRippleConsensus
Ledger(RCL)?

First,letsseehowacrosscurrencypaymentwouldoccurbetweentwoILPenabled
ledgerswithfunctioningconnectors,accordingtothedescriptionspublishedintheILPwhite
paper3 .

Connectors(liquidityprovidersbetween2ormoreledgers)mayacceptapaymentinledger
Ainonecurrency,inexchangefordeliveringanothercurrencyinledgerB.Sointerledger
validatorsorpathfinderswouldreadthisasanofferexpresseditinapath,justlikeRippled,
thedaemonthatkeepstheripplenetwork,doestoday,exceptthattheledgersthathostthe
assetsmaybeoperatedbyanyentity,notonlytheRCL.Thatsgreat.

"BuildingNetworkEffectsonRipple."2015.2Mar.2016<
https://ripple.com/files/ripple_vision.pdf
>
"Interledger."2015.2Mar.2016<
https://interledger.org/
>
3
Thomas,S."AProtocolforInterledgerPayments."2015.<
https://interledger.org/interledger.pdf
>
1
2

WhenthinkingaboutRCLsroleinthisscenario,theSusPay4featureisthetoolthatenables
XRPtobecryptographicallyescrowedanescrowguaranteedbytheentireripplenetwork.
InanILPpaymentusingSusPay,RCLandXRPwouldplaythefollowingroles:

RCLescrowwouldprovideatrustoptimizedescrowwithoutasinglecounterparty,
diminishingtheneedfortrustinginaproprietaryledger.Thiscanofferreliability,availability
andaccessibilitytoanescrowservicethatischeaperthanprivateserviceswithsimilar
characteristics.

XRPwouldactasabridgecurrencyenablingpathstomovevaluefromoneledgerto
anotherusingamultilaterallyescrowed,digitalcounterpartylessassetasanintermediary
step,thatcanoptimizecashmanagementandcoststructureinpaymentsoperations5 .

Thatsawesome,butifwethinkthattheRCLhavemanysubledgersletstake1currency+
issuer=1subledgerthisimplementationwouldenableonlyXRPsubledgertoparticipatein
ILPpayments,andILPpaymentsusingmorethanoneRCLsubledgerwouldnotbe
possible.

SoXRPwouldbeRCLsconnectiontoILP,whilenonXRPtokens(RCLissuances)would
liveonehopseparatedfromit,unlessSusPayisimplementedforthem.

Thatsaid,letsnotdiscussifSusPayshouldorshouldn'tbeaddedtoallRCLssubledgers,
sincethereareongoingdiscussionsaboutthat,andletslookatanexampleofXRPtaking
partinILPpaymentsforUSD/EUR:

Weneed2connectors:1forXRP/USDandanotherforXRP/EUR
SupposingConnector1asks100XRP/USDandConnector2asks111.11XRP/EUR,this
wouldresultinanapproximateFXrateof0.9USD/EURandthemostprobablewayanILP
paymentwouldusetheRCLislikethis:

SusPay
https://github.com/ripple/rippled/blob/39b95903e36d32853c6e9ce5b6ee3d099c35ca11/src/ripple/app/tx/i
mpl/SusPay.cpp
5
"TheCostCuttingCaseforBanksRipple."2016.3Mar.2016
<
https://ripple.com/files/xrp_cost_model_paper.pdf
>

1UsingUniversalMode
Theescrowsarepreparedfromthesendersledgertotherecipientsledger,toreassurethe
nextconnectorthatthetransactionisfunded.
IntheUniversalmode,executionphasereleasesoneescroweachtime,fromtherecipientto
thesender,usingareceiptsignedbytherecipient:

2UsingAtomicMode
Intheatomicmodetheexecutionisatomic,triggeredbyatrustednotary,oratrusted
networkofnotaries,andallescrowsarereleasedatthesametime:

Theconceptsarereallysimple,yettheyarepowerful.Anyledgerintheworldbeableto
implementastandardizedandsecurewaytocommunicatetootherledgersinorderto
performvalueexchangebetweenthem.

GoingfurtherUnbundlingtheRippleNetwork

BitcoinandRippleprotocolsbroughtavisionthataninternetofvalueisnow
technologicallypossible,becausevaluecannowbemanagedinadistributedmanner.
Nevertheless,scalabilityissueshavebeenhauntingtheplansforauniversalledger.TheILP
protocolsolvesscalabilitybyallowingmanyindependentledgerstocoexistinterconnected,
removingtheneedforabigbrotherprotocoltowatchallthetransactions,andbyallowing
notariestoformadhocnetworkstodeliverpathfindingandtransactionexecutionservices.Is
itviable?

1UsingRipplesdecentralizedvalidatingandpathfindingnetworkasa
valuepropositionfornotarizingILPtransactions

Today,tocreateoffersintheRCL,partiespublishacommitmenttoexchangevaluebetween
ledgers,underacertaincondition,andrippledserversareallowedtoperformthetradeif
theyfindamatch,validatingandwritingthetransactioninabrandnewledger.RCLsnovelty
isaboutbeingdecentralized,anddecentralizedreferstoledgersmaintenance,transaction
validationandchangingtheledgersbasedonvalidatedtransactions.Inotherwords,allRCL
ledgers(i.e.currencies)arealteredbyinputsfromthesamenetworkofvalidatorswhich
alsoprovideapathfindingmechanismanduptodateinformationaboutthenetwork.

Inaddition,Rippleismovingforwardtowardsthedecentralizationofthevalidatorsnetwork,
andifitsucceeds,itwillbeaverytrustworthyinfrastructuretoverifyfinancialtransactions,
becauseserverswillbeabletopicksetsoftrustedpeersthatareveryunlikelytoact
maliciouslyinacolludedway.

Ifsuchreliablemultilateralnetworkbecomesareality,itwillmeanthatmanyplayersinthe
financialindustrywillbetrustingthenetworktheyarepartoftoverifyandperform
transactionsthatwillaffecttheirassets,sotheywouldbeallowingtheripplenetworkto
changethestateofsomeoftheirassets.

Ifthereisanetworkofvalidatorsthatistrustedenoughtochangethestateofabanks
asset,it'snottoostretchytothinkthatsomebankscouldallowanetworklikethistoactas

notaryandpathfinderforILPtransactionsfortheirledgers,withanonboardingprocessfor
connectors.

Fromthemomentanetworklikethisachievescriticalmassofqualifieddecentralization,it
willofferahugevaluepropositionandwillattractmoremembers,andcouldscaletoatop
levelworldwideparticipation.

Now,withthisvisioninthemind,it'spossibletoadmitthatmanyledgersintheworldcould
beinterconnectedbyILPandanetworkofknownnotariesthatuseaByzantineFault
ToleranceProtocol(BFTP)toincreasereliabilityandsecurity.Inotherwords,a
decentralizednetworkofnotaries(DNON).

Thataccepted,anILPenabledDNON,whichachievestohaveenoughconnectorsand
ledgerspluggedin,wouldhavemanysimilaritieswitharipplenetwork,butwithimproved
amplitude,scalabilityandmultipleprivacypossibilities,becauseitwouldbeabletomove
assetsinpublicandprivateledgers.TheDNONwouldserveaspathfinderandpayment
validatorjustlikerippledsservetodayfortheRCL.

2AddingaDigitalCounterpartylessAsset(DCA)totheequation

Inascenariolikethis,withmanyledgerswhereNconnectorsmayhaveNdifferent
desiresandtradingconditions,thevaluepropositionofabridgecurrencyisundeniable.The
desiresmatchingwouldoccurdirectly,likeEURtoUSD,orusingmorethanonehop,like
EURtoXRPtoUSD.Thatmeansthatconnector1andNmaynothavedirect
complementaryconditions,buttheremaybecomplementarydesiresthatwillconnect1to
N.
Thisprofusionofdifferentmarkets,desiresandtradingconditionssuggeststhat,forthesake
ofefficiency,somesafeharbourconnectorswouldintermediaterelationshipsbetween2or
moreotherconnectorsthatarenotdirectlyrelatedtoeachother.

Inotherwords,anymajorcorrespondentbankwouldsolvetrustissuesbetweensmaller
peersormarketmakers,ortherewouldbeapathatleastassafeandascheapthatwould
notrequirekeepingaccountsinamajorbanktoescrowandreleaseassets(thiscouldbe
RCLandXRP,orbitcoinifitisILPenabled).

Letscomparethe2theoreticalscenariosdescribedabove:

1DNON+majorbankBANKastheConnectorofconnectors(figurebelow).

Thisisnthardtoaccept:ManyconnectorshavingaccountsinBANKwouldconnect
paymentsthatwouldhopthroughBANKsledgerstoendupinanotherledger.So,it'sthe
correspondentbankmodelinsteroids.

2DNON+trustoptimizedpath(figurebelow).

Let'ssayatrustoptimizedpathisapathwheretwoseparatedconnectorsskippayingfor
correspondentbanksfeesbutcanenjoythesamesecurity,reliability,liquidityandFXrate.
Theycanuseadecentralizednetworkplusadigitalcounterpartylessasset(DCA)with
cryptographicescrowenabled,likeXRP.IfXRPcanmakeitandhaveamarketformany
othercurrencies,itwouldmakesenseconsideringitasabridgecurrencyforILPpayments.
ThefirstproblemhereiswaivingUSDsstabilityandliquidity.XRPsaccessibilityand
holdingcheapnessisblurredbyitsvolatilityandlackofliquidity,sothismustbetackled,not
byeliminatingvolatility,butbybringingittoanacceptablelevelofpredictability(i.e.more

7
volumeanddemand/supplybalance,derivatives).Recentnews6,
confirmedthatXRP

derivativesandliquidityincentivesarecoming.

TheseinitiativestosubsidizeXRPmarketmakersandtocreateXRPderivativesmayhave
animpactonmitigatingthecurrencyriskofbuyinglargeXRPpositions,butforthesakeof
focus,letsnotnotdiveintomarketmakingspecifics,butjustassumeacryptoassetina
decentralizedILPenabledledgercouldreachtheliquidityrequiredtoserveasan
institutionalbridgecurrency.

Inthissecondpic,thereisnoneedforbankaccountsabroadnoronboardingprocesses,nor
minimummonthlyvolume,etc.Thepossibilityofconnectionisopentoanyone.

Toaddtothisdiscussion,Ripplerecentlypublishedapaper8comparingquantitativelythe
costsofusingtraditionalassetsandrailsversusRippleandXRP.Thepaperstatedthatthis
trustoptimizedpathwouldsweep33%oftheinternationalpaymentinfrastructurecosts.

"XRPPortal|Ripple."2015.1Mar.2016<
https://ripple.com/xrpportal/
>
"RipplePartnerswithCryptoFacilitiesforXRPDerivatives..."2016.1Mar.2016
<
https://ripple.com/insights/ripplepartnerswithcryptofacilitiesforxrpderivatives/
>
8
"TheCostCuttingCaseforBanksRipple."2016.1Mar.2016
<
https://ripple.com/files/xrp_cost_model_paper.pdf
>
6
7

Ripplesteamvisionmakessenseandwecouldstartseeinginstitutionalvolumesfora
cryptoassetinthenearfuture,anditcouldofferanexcellentwaytomakepathsshorterand
cheaper.

Critical Requirements for the viability of DNON + DCA + ILP

Itisstillearlydaysindistributedledgersland,buttheyareapowerfulconcept.Onepossible
viablescenariofortakingpaymentstothenextlevelisILP+DNON+Ripple+DCA(like
XRP)enablingpaymentsfrommanykindsofledgers.Theviabilityofsuchschemewould
relymainlyintwofactors:

1DNONsquality.Recentannouncements9madebyMicrosoftencouragedmetothinkthat
anextraordinarypackofindependentnotariescouldonedaybearealityandprovideahigh
quality,extremelysecure,reliableanddecentralizedvalidatingnetwork,whichwouldbea
hugevaluepropositionfortheconsumersandprovidersoffinancialservices.These
networkscouldoperateinpublicandprivateledgers.

2XRPs(orsimilar)successasabridgecurrency.Withoutasupercryptoassetthemost
probablepathswillkisscorrespondentbanksUSDsandaccounts.

3RCLissuances:WhataretheapplicationsforissuancesintheRCL,
supposingtheywillnotbeupgradedtosupportSusPay.

ExtendingSusPaytoallRCLissuancesisnotinRipplesroadmapfornow10,butstillRCLis
adecentralizedexchangewhereanykindofasset/liabilitycanbeissued,tradedandusedin
payments.Suchworldwidedigitalexchangeisanewandpowerfultoolthatwillbeindirectly
connectedtoILPviaXRP+SusPay.ThenewnessaboutissuingtokensinRCListhatthey
canbeusedinadecentralizednetwork,evenbeingcentrallyadministered.Thefigurebelow
showstherelationbetweenILP,XRP,RCLissuancesandotherledgers.

"AzureBlockchainasaServiceupdate|Blog|MicrosoftAzure."2015.1Mar.2016
<
https://azure.microsoft.com/enus/blog/azureblockchainasaserviceupdate/
>
10
"RippleForumViewtopicSusPayforIOU's?."2015.2Mar.2016
<
https://forum.ripple.com/viewtopic.php?f=1&t=15816
>

So,whatistheroleofthegreenboxintheecosystem?Doestheworldneedapublic
decentralizedglobalexchange?ItendtothinkYESbutmaybenowadaysitistoosoonto
cometoconclusions.Inadditiontoitsglobalexchangesrole,RCLissuancesmayleverage
fromdecentralizedhighqualitytransactionvalidationtoplayadditionalrolesinstillunveiled
ecosystems.Butwhatthosecouldbe?
Maybe,beforegettingtothedetails,weshouldaskourselveshowthetokensinthegreen
boxdifferfrombalancesincentralizedsystems?
Note: All use cases and features described below require using independent ripple accounts and keeping private keys
private.

Control
Today,whenusinganexchange,peoplegive100%controlovertheirassetsandbalances
totheexchangesadministrator.WhendepositingUSDatbitstamporatastockbroker,the
bankbalancesANDtheexchangebalancesaretotallycontrolledbytheexchange
administrator.ARippleIOUconcentratesmorepowerontheIOUbearer,sinceonlythekey
ownerhastheauthoritytocreatetransactions,andaftercreated,nosinglecounterpartyhas
thepowertodeterminetheiroutcome.

TheIOUissuermaypreventanunknownaccountholdertoholditsbalancesusingthe
RequireAuth11 flagandcanalsofreezethebalancesusingthefreezefeature12 ,butevenwith
thistools,thereisasignificantreductioninthelevelofcontroloverthecustomersbalances
andintheparticipationonthetransactionformationandvalidation.

Accessibility,availabilityandsecurity
Todaypeoplemustrelyonawebsitesoronserverclusterscapacityofavoidingproblems
likeDDOSattacks,goodmanagement,etc,tohaveareliableaccessibilitytotheirassets
andtopublishtransactions.Adecentralizedexchangecanoffermuchbetteravailabilityand
accessibility.
ComparingRCLtothebitcoinprotocol,whichoffersasecurepaymentrailandabearer
assetthatuserscankeeptotallyprivatejustbyholdinganalphanumericsequence(Secret
Key),ripplegoesfurtherandofferstoitsusersabearerasset,apaymentrail
anda
worldwideexchange
,inwhichallthetransactionsaresettledin3.5seconds.Thismeans
thatuserscanpayXRPandRCLissuancestoeachotherandtradeeveniftheissuances
administratorisunavailable(duetoDDOSattacks,orbecauseitclosesat6pm,etc).So,for
marketmakersthesecouldbeimportantfeatures.
DerivativesissuedintheRCLmaycompletetheneedsformarketmakersthattolerate
publicactivitytostayintheRCL.

DataLosses
Anattackinaprivateexchangemayresultinpermanentdatalosswhichmaybe
catastrophiciftheadministratordoesntkeepfrequentofflinebackupsandinmalicious
transactionstransferringvalueinadvertently,andmaygiveaccesstomanyusersfundsat
once.
Inadecentralizedexchange,anattackerwouldhavetocrackeachaccountseparatelyin
ordertomess/stealusersbalances.Asuccessfulattacktoaripplegatewaythatdonotstore
userskeyswouldonlybeharmfultotheextentofitshotwalletcontentandlimitedtothe
XRPliquidityinthetimeframebetweentheattackandtheassetsbeingfrozen.Also,
becausetheledgersarepublic,theoddsofafataldatalossthatwouldpreventthegateway

11

"GatewayGuideRippleDeveloperPortalGitHubPages."2016.2Mar.2016
<
http://ripple.github.io/rippledevportal/tutorialgatewayguide.html
>
12
"Freeze|Ripple."2016.2Mar.2016<
https://ripple.com/build/freeze/
>

toreestablishthepreattackstateofitsRCLissuancesareverylow,andthereissuance
wouldbeauditablebyanyoneatanytime.

CounterpartyRiskmanagement
Today,whensomeonehavebalancesinacentralizedexchange,theonlywaytokillthis
specificcounterpartyriskistowithdrawallyourmoney,whatistotallycontrolledbythe
counterpartyandcanbeveryslow.InRipple,allittakestoreducecounterpartyrisktozero
istobuyXRP,whatcanbedonein3.5seconds.
ThisisalsovalidforRCLissuancesinascenariowhereacustodiansuffersaseveremoney
loss(i.e.asuccessfulattackoncustodiedassets,oraregulatoryfreezeonbankaccounts,
etc)inthiscaseitispossibleforthefirstmoverstotradetheirdebasedRCLissuances
beforetheyarefrozenintheRCL.

TradingFairnessandImpartiality
Thetransactionorderingintherippleprotocolissupposedtobealeatory,whateliminates
frontrunningfromthegame.
Theconditionsforatradetosucceedareequaltoeveryparticipantandfollowimpersonal
mathematicallaws,providingafairfieldforeveryonetoplay.

Geography,BoundariesandNetworkEffect
Althoughtherearesomegreatfinancialserviceprovidersandcustodiansthatcanoffer
accesstoadiversityofassets,becauseofitsopennessanddecentralization,rippleoffers
thepossibilitytoholdbalancesfromanyrippleintegratedissuer,andinmanycasesitis
possibletoacquireforeignassetsadministeredbyforeigncustodiansusing
locallyadministeredones,avoidingcostlyandcumbersomeinternationalwiretransfers.This
createsaccessibilitytoavarietyofassetsthatwillprobablybenefitfromnetworkeffectsto
keepdiversityincreasingingreaterratesthananyprivateledgerprovider.

RCLsupportsDigitalCashissuedbyCentralBanks
Wemaynotseethishappeninganytimesoon,buttheRCLoffersthepossibilityforCentral
Bankstoissuecashdirectlyinanopenledger,creatingastrongmotivetousetheRCL.

TransparencyforGovernmentsFinancialLife
Governmentstransactionsshouldbepublicandauditable,soitmaybeagoodusecasefor
governmentsandtheirpublicserviceproviderstohaveaccountsinapublicledger.Itwould
makeauditingmucheasier,fastandaccessibletoeverycitizen.
Taxpayingtransactionscouldcreatepublicassetsthatwouldbefolloweduntiltheyarepaid
backtoaprivateentity.

DecentralizedCryptographicEscrow
AlthoughthecurrentscenariosuggeststhatonlyXRPwillparticipateinILPpayments,itis
possibletocreatedecentralizedcryptographicescrowsinRCLusingmofn13 accounts.One
practicalexampleisa2of3accountwherethebuyer,thesellerandamediatorhaveone
keyeachnoneofthepartieshavefullcontroloverthefundsandanagreementisalways
necessary.
Thebuyerfundstheaccountwiththeamountnecessarytomakeapurchasebutonlysigns
apaymenttothesellerafterreceivingtheproduct,thanthesellerisabletocosignthe
transactionandreleasetheescrowandgetthemoney.Ifthereisadispute,themediator
caninterveneandmovethefundswiththehelpofthedisputeswinner.

Otherusecases
Therearestillalotofusecasesthatarenotnecessarilydirectlylinkedtovaluetransfer,like
digitalidentityforexample,thatcanleveragefromdistributedledgerstechnologies,ripple
beingoneofthemainpublicnetworksoutthere.

ImsurethereareotherusecasesImmissinghere,likenonfinancialtransactions,and
someofthefeaturescanbeachievedbyaprivateledgerconnectedtoILP,butitseemsthat
therearestillsomeuniqueinadecentralizedexchange.
AnotherpossibledevelopmentisthatmanyDCAscanbeissuedinadecentralizedway,like
aDAppthatadministratesBTCissuancesintheRCLusinganEthereumsmartcontract,
removingtheneedofacentralizedagent.

13

"MultisignRippleWiki."2014.12Apr.2016<
https://wiki.ripple.com/Multisign
>

Conclusion
Thecurrentfinancialecosystemischanging,thereisnodoubtanymoreamongindustry
leadersifdistributedledgertechnologieswillhaveanimpactonhowtheworldexchanges
value,theremainingquestionishow.

AfterunbundlingtheripplenetworkandconsideringILP,itseemsthatILPisaverypalatable
conceptforthecurrentmindset,anditisaninclusivetechnologythatmayfulfilthemissionof
creatinganopenstandardforvalueexchange.

DCAshaveattractedgreatinterestfromtraders,andareclimbingtheirwaytoenterWall
Streetsgates.Theirmainusecasessofarhavebeenactingasabridgecurrency,a
speculationtoolandapseudonymousp2pcash.

Becausetheinternetofvalueincreasesexponentiallythedemandfordigitalandaccessible
bridgecurrenciesandp2ptransactions(andpossiblymachinetomachinetransactions),
lookslikeamatteroftimeandregulationadaptationsuntiltheycreatestrongrootsand
achievetheliquiditynecessarytobeusedbybigplayers.XRPisagoodcontender
consideringRipplesclearstrategyandcloserelationtoregulatorsandbanks.

RCLissuancesseemtobelookingforastrongusecaseandmoretimeisneededtosee
howtheirroleswillevolve.Adecentralizedopenandpublicexchangewithaprofusionof
assetssoundslikeaverypowerfulconcept,butalotofparadigmshiftisrequiredfortheyto
bepartofourdailylives.Enduserapplicationsandusagearenotimpossible,andwemay
seeusagegrowthinverselyproportionaltoitscomplexity.StandardCharteredBankis
developingatradefinanceusecase14,whichmayshedsomelightonhowwethinkpublic
centrallyadministeredissuances.

Morethoughtsareneededtoestablishacleardifferencebetweenpublicandprivate
issuancessinceprivateledgerstendtobecomemoreinteroperableandaccessibleinthe
distributedfinanceera.Itsindeedanexcitingtimeinthefintechworldandthebeginningofa
newlongtrendthatwillcreateuncountabledevelopments.

Ihopethisarticlestartsmorediscussionsaboutthistheme.
14

"HowStandardCharteredisUsingRippletoRethinkTrade..."2016.19Mar.2016
<
http://www.coindesk.com/howstandardcharteredisusingrippletorethinktradefinance/
>