W3C home > Mailing lists > Public > public-interledger@w3.org > October 2015

Re: Escrow Risk (was Interledger and Privacy)

From: Evan Schwartz <evan@ripple.com>
Date: Thu, 29 Oct 2015 11:33:10 +0900
Message-ID: <CAONA2jVdNQG6RGXiB2Wd1H0Q6AVvvT-eDErgUPU3Omt9xNWH9Q@mail.gmail.com>
To: Arie Y LEVY COHEN <arielevycohen@gmail.com>
Cc: Ryan Fugger <arv@ryanfugger.com>, public-interledger@w3.org
I think having rating agencies for ledgers might actually make connectors
too reliant on those ratings, as opposed to their own due diligence. How
would a connector price the risk incurred by dealing with Bank of America
or Bitcoin? Similar to how they price different assets they decide to
trade: historical data, knowledge and understanding of the systems/markets
they're dealing in, reputation, self-funded insurance, hedging, etc

Agreed with Ryan that this shouldn't be part of the core protocol either way

On Thu, Oct 29, 2015 at 10:28 AM, Arie Y LEVY COHEN <arielevycohen@gmail.com
> wrote:

> Yep, I surmised that and got the gist of it from Adrian's response.
> Ratings are measure/a way to measure risk to help connectors with pricing:
> how will each connector decide what to charge absent a standard measure for
> rating risk?
>
> --
> Heritage & Legacy Advisory | Multi-Generational Wealth Preservation
>
> Arie Y. LEVY-COHEN
> FINANCIAL ADVISOR | INTERNATIONAL CLIENT ADVISOR
> PRIVATE WEALTH MANAGEMENT | NEW YORK
> ECONOMICS | FINANCE | BLOCKCHAIN
> P: 917.692.6999
>
> On Oct 28, 2015, at 9:08 PM, Ryan Fugger <arv@ryanfugger.com> wrote:
>
> Arie, rating each ledger for its escrow risk to help connectors price
> their services makes a lot more sense than rating the connectors
> themselves. I would still say this should not be a part of the core
> protocol since it is not required for performing ILP transactions, but can
> easily be offered as a third party service after the fact if there is
> demand for it.
>
> In general I would think that connectors would need to be familiar enough
> with the ledgers they connect to price their own offerings accurately
> accounting for escrow risk on each ledger. Connectors have no need to know
> about ledgers they do not connect/participate in.
> On Oct 28, 2015 1:41 AM, "Arie Y LEVY COHEN" <arielevycohen@gmail.com>
> wrote:
>
>> Thank you Adrian, for both!
>>
>> Following that explanation, and pardon the harp on risk and the measure
>> of it, would I be understanding well to think it is the escrow agent
>> (connectorI then that might benefit from a rating (reputation) assigned to
>> each of the ledgers?
>>
>> I reckon some rating standard might help these connectors determine what
>> they will charge for being that connecting bridge between two ledgers.
>>
>> Now, it was pointed out to me that my question suggested ratings work,
>> when that very system seems to have failed us (e.g. rating of CDO/CMO's).
>> Perhaps, but maybe an opportunity to improve how we rate these ledgers?
>>
>> --
>> Heritage & Legacy Advisory | Multi-Generational Wealth Preservation
>>
>> Arie Y. LEVY-COHEN
>> FINANCIAL ADVISOR | INTERNATIONAL CLIENT ADVISOR
>> PRIVATE WEALTH MANAGEMENT | NEW YORK
>> ECONOMICS | FINANCE | BLOCKCHAIN
>> P: 917.692.6999
>>
>> On Oct 28, 2015, at 1:40 AM, Adrian Hope-Bailie <adrian@hopebailie.com>
>> wrote:
>>
>> It was pointed out to me that my reference to the central bank is
>> misleading. I put it in there because Arie asked about central banks but
>> it's actually a poor example.
>>
>> So, to be clear, control of when to release or reverse the escrow sits
>> with the ledger. In the case I was thinking of, the central bank is a
>> "connector" between two retail banks, (a poor example because in this case
>> the banks normally hold funds/obligations with the central bank as opposed
>> to the central bank holding accounts at the retail banks). I was trying
>> emphasize that the quality of the participants determines the risk.
>>
>> In reality, where the ledger has ultimate control over if and when to
>> release or reverse the escrow funds the connectors are the only entities
>> ever exposed to risk of not being settled. The assumption is that they will
>> price this into their offers based on which two ledgers they are connecting
>> and how much they trust those ledgers to execute the escrow properly.
>>
>>
>>
>> On 26 October 2015 at 17:39, Adrian Hope-Bailie <adrian@hopebailie.com>
>> wrote:
>>
>>> More Arie questions to scratch your head over:
>>>
>>> Given the connector ultimately holds the money for however long in
>>> "escrow":
>>>
>>>    - is there counterparty risk relative to where the escrow money sits
>>>       (call it escrow risk??)?
>>>       - could central banks play a role here?
>>>       - IMF / BIS?
>>>
>>> I'd only classify this as counter-party (settlement) risk if there is a
>>> chance that the reserved funds are lost before they are released (i.e. they
>>> weren't really in escrow).
>>>
>>> The risk of this happening will differ from ledger to ledger and
>>> connector to connector (e.g. If the connector is the central bank I'd say
>>> the risk is close to zero...) and this is another characteristic of the
>>> ledgers and connectors that a user may consider in path-finding.
>>>
>>> If there is some way for the user to get a guarantee that the funds are
>>> truly in escrow the risk is very low.
>>>
>>> Perhaps this would be through some independent certification of the
>>> ledger system if it is a closed ledger?
>>>
>>> For a system like Ripple or Bitcoin it is almost non-existent because
>>> the system is open and the user can verify that the funds are in escrow if
>>> they want to.
>>>
>>> This topic feels like it has some more questions that are not
>>> immediately apparent...
>>>
>>
>>


-- 
Evan Schwartz | Software Architect | Ripple Labs
[image: ripple.com] <http://ripple.com>
Received on Thursday, 29 October 2015 02:33:59 UTC

This archive was generated by hypermail 2.3.1 : Thursday, 29 October 2015 02:33:59 UTC