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Blockchain based model of financial ecosystem

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  1. 1. INFRA The protocol for financial web Pavel Kravchenko, PhD
  2. 2. Why banks are interested in blockchain technology? • fast settlement • easy audit • standard set of protocols • open-source • finality of settlement and undeniability
  3. 3. Why Bitcoin/Ripple/Ethereum is not an option? • Poor scalability of a single ledger • Low speed of transaction validation • High trust to anonymous validators • Absence of KYC/AML mechanisms • Low privacy of trading positions • Built-in coin is undesirable
  4. 4. What is Infra? Infra is software with such functionality: - database that stores balances - transaction engine - decentralized exchange - communication protocol Current implementation is based on open-source Stellar codebase
  5. 5. 1) each entity has its own ledger(s) 2) no global shared ledger 3) no global consensus 4) no designated validators (financial institution = validator) 5) consensus only between parties involved in a transaction 6) identification/KYC is decentralized 7) no coin! Infra architecture principles
  6. 6. Everybody has own ledger. Users’ ledgers are shared with their bank
  7. 7. 1. User naturally share their ledgers with the bank (the same as having an account) 2. User can be a customer of different banks 3. Banks share their ledger (disclosing only required information) with regulators 4. Some banks can create shared ledger between them in order to set-up a decentralized exchange Sharing ledger is a flexible process
  8. 8. Ledger structure
  9. 9. Transaction execution steps
  10. 10. Transaction execution steps 1. Alice signs transactions to send money to Bob 2. Citi resolves Bob’s identity via federation protocol 3. Citi signs transaction (after 2FA if needed) 4. DBS signs incoming transaction, updates Bob’s ledger and sends signed transaction back to Citi. 5. Bob will update his ledger when he is online 6. Citi updates Alice’s ledger
  11. 11. Case when central/correspondent banks are involved
  12. 12. Balances are asynchronously netted after the transaction
  13. 13. Transactions are distributed inside trusted p2p network between banks (gateways). Each bank decides which other banks to trust. Technically trust means mutual exchange of public keys in order to recognize signatures of each other and establishing encrypted channel of communication.
  14. 14. Money can be sent only through chain of banks that trust each other
  15. 15. Trading offer distribution process. Step 1
  16. 16. Step 2
  17. 17. Step 3
  18. 18. Trading offer is sent by bank to all subscribed entities then responses are collected and bank decides which option to take. Trading speed can be increased using decentralized exchange concept.
  19. 19. Groups of banks can create decentralized exchanges between them
  20. 20. Different consensus mechanisms can be used in different groups of entities, for example: 1) formal signature process 2) pbft 3) Ripple or Stellar consensus 4) Proof of stake 5) etc
  21. 21. Identities are managed in a federated way
  22. 22. 1. Users are registered by their banks, so there is no global identity provider 2. Keys are stored on users’ devices (hosted wallets or multisig can be used) 3. Banks maintain databases of users’ identities and providing access to them via federation protocol 4. Requests and responses to such databases are signed 5. Level of privacy is defined by each bank itself Identity management principles
  23. 23. FAQ Who should validate transactions of a user? Only gateway/bank of the user. If payment crosses border between banks, both banks have to validate it. Correspondent banks sign transaction as well (if needed).
  24. 24. FAQ Who can become a validator? Validator is equal to a gateway. Everybody is able to become a gateway, and issue own currency, but it is useless until some users trust it. Validator validates only transactions of its users.
  25. 25. FAQ Why validators are needed at all? They implement certain functionality: 1. Registration/KYC 2. Two-factor authentication / daily limits 3. Holding physical assets for the user and issue IOU 4. Verification that user transacts with assets he/she possess 5. Managing trust relationships with other validators
  26. 26. FAQ Why should some bank trust signatures of the other bank? Establishment of mutual trust is beyond system functionality. But as soon as trust is established in a real world, digital signature produced by the bank is considered legally binding.
  27. 27. FAQ Where is the blockchain? There is no need in blocks. Transactions can be confirmed one-by-one, or by batches to increase speed.
  28. 28. FAQ What does ledger of a user contain? It contains only Alice’s balances in different currencies/assets and corresponding signed receipts (transaction) from its issuers/previous owners.
  29. 29. FAQ How Bob will know that Alice updated her ledger correctly? When there is a trade both (all) ledgers store transaction signed by all involved parties (Alice and Bob). So there is always an ultimate proof that Bob is right if Alice wants to cheat.
  30. 30. FAQ How do you prevent double spending? 1. You can’t prevent it, but you always know who has done it. 2. Banks share ledgers with regulators so it is monitored real time. 3. It’s up to the user to trust unregulated gateways
  31. 31. FAQ How do you know that certain asset/ledger/username is original? Each asset and ledger are uniquely addressed by unique identifiers (UAI and ULI) that signed by their issuer/creator. Obviously user has to know valid public key of the issuer. Usernames are tied to public keys by digital signature of bank (KYC provider).
  32. 32. FAQ How it is different from what we have now in banking industry? It is very similar. The goal is to create uniform protocol that uses cryptography & blockchain allows to speed up transaction settlement, improve transparency and audibility. Decentralized trade and currency exchange becomes possible. This protocol operates under certain assumptions that applicable to banking system - KYC is done by banks, and conflicts are managed by legal system.
  33. 33. FAQ It seems that decentralized trading won’t be efficient, if you need to wait for confirmations from other banks… This is true. But certain set of banks are able to establish “virtual Ripple” instance with shared ledger for order book. Since you don’t need formal consensus, validation of transaction will be limited only by network bandwidth. There could be unlimited amount of such decentralized exchanges at the same time.
  34. 34. FAQ Who controls connections between banks? Nobody. Infra is just a protocol of communication between them.
  35. 35. FAQ How many participants are needed to run the system? One. In a simplest case it is just open-source internet banking system that works completely independently. But if trust is established between some banks, exchange and trading works out of the box.
  36. 36. @kravchenkopo Questions & Demo requests