W3C home > Mailing lists > Public > public-interledger@w3.org > September 2016

ILP - a critical analysis

From: Ken Griffith <kengriffith@gmail.com>
Date: Mon, 19 Sep 2016 17:01:39 +0300
To: public-interledger@w3.org
Message-ID: <d5640bbe-5be3-3274-12a0-8c8f79a12a1b@gmail.com>
I find it curious that the language used in the ILP document uses 
financial terms in different ways than they are normally used, "escrow" 
for example.  And it invents new terms like "connector" in the place of 
what is historically called a "clearinghouse".

I do not think the multi-step escrow process actually makes it more 
secure.  Correct me if I am wrong, but a malicious connector could 
simply agree to a transfer and then fail to execute it, or reverse it 
after execution.

Introducing a new role called a notary, where there is one notary for 
each part of the transaction to verify the digital signature, adds 
another degree of complexity, without really improving security, because 
a "notary" can also be malicious and in collusion with a connector.

One problem seen with the crypto-currency community in general, of which 
Ripple is typical, is the belief that the need for human trust can be 
replaced with cryptographic trust.

What is missed is that the financial system over centuries has developed 
a system of human governance that works most of the time.  This involves 
the use of trustees and auditors, and either courts or arbitration. 
(Courts often do not work efficiently due to corruption, which is what 
makes arbitration more attractive as an inexpensive way of resolving 
disputes.)

So we see for example, the Bitcoin community rants fanatically about 
eliminating the need for trust, even as more than half of all Bitcoin 
exchanges since 2011 have failed, defaulted or stolen hundreds of 
millions of USD worth of the users funds.  Clearly, Bitcoiners have not 
solved the trust problem, and are not using the governance arrangements 
that have historically been used to mitigate the risk of insider theft.

The public ledger of Bitcoin and succeeding "blockchain" systems was 
based on the idea of "triple entry accounting", which is a way of making 
the public the auditor. (See http://iang.org/papers/triple_entry.html) 
This does not eliminate the need for an auditor, but allows the public 
to be the auditor.  You still need the other parties of classic 
governance, referred to as the "five parties model". 
(https://bitcoinmagazine.com/articles/five-parties-model-1393673552)

What I see missing in ILP is a way of incorporating the contract of the 
ledger as well as the inter-ledger rules into the payment, as is done by 
systems that use Ricardian contracts, which are open source and public 
domain and can be used by anybody. 
(https://en.wikipedia.org/wiki/Ricardian_Contract)

Second, we are missing the ability to include an arbitration clause, so 
that if any of the parties in the chain of connectors default, cheat, 
lie or fail to execute, the dispute can be efficiently resolved by human 
judgement in a jurisdiction that all parties agree to.  Ethereum 
recently demonstrated the necessity of this. 
(http://financialcryptography.com/mt/archives/001594.html)

Third, clearinghouses have historically taken the counter-party risk 
upon themselves.  An example would be the Chicago Board of Trade (CBOT) 
which runs the COMEX.  All members of the COMEX contract with CBOT which 
guarantees counter-party risk.  This enables them to safely trade with 
one another, even though they have no way to assess the 
credit-worthiness of the party on the other side of a trade.

CBOT handles the counter-party risk by requiring bonding and certain 
levels of liquidity of the members.

The ILP is attempting to build system of clearinghouses (connectors) 
that uses notaries and cryptography to eliminate counter-party risk.

However, it lacks a dispute-resolution mechanism.

In order to settle a dispute, the court or arbitrator must usually know 
who the parties are.  And here we see the third missing part of ILP. 
There needs to be a standard way of identifying an account holder who 
has agreed to the rules, and therefore can be subjected to arbitration.

I think that if these deficiencies were addressed, ILP could grow into a 
truly international standard.  But, as I see it now, Ripple are building 
a standard that works with Ripple.

But, will it really work in the real world of lawyers and contracts and 
government regulators who require financial institutions to know the 
parties on both sides of every transaction?

All it will take to expose the weaknesses in ILP is an incident like 
DAO.  If you create a number of silos of financial value that are 
connected by a series of rules like ILP or Ethereum, there are many 
parties who will attempt to use the rules to take as much value for 
themselves as they can get.  DAO demonstrated this, yet again.

That is even before you entertain the problem of people who break the 
rules, like Mt. Gox and those who use malware to steal users' keys.

Ripple's system can work between a closed group of banks, because it is 
a limited entry pool of parties who have to sign a contract with each 
other to enter and use it.  An open system as ILP proposes is a very 
different ball game.  These deficiencies need to be addressed before ILP 
can actually work in the real world.

Ken Griffith

On 9/19/2016 2:24 PM, Melvin Carvalho wrote:
>
>
> On 19 September 2016 at 13:04, Stefan Thomas <stefan@ripple.com
> <mailto:stefan@ripple.com>> wrote:
>
>     Unfortunately, I don't have any details to share on Ripple's
>     commercial deals. What I can say is that all of our solutions are
>     going to be ILP-capable, because we believe that ILP has by far the
>     best chance chance of being the protocol that powers the Internet of
>     Value. It is also the simplest which tends to be a big factor in
>     standards adoption. We're not opposed to supporting other protocols
>     in addition to ILP if there is demand from our customers.
>
>
> Agree with most of this, however im not convinced that ILP is the
> simplest protocol.  Webcredits is IMHO simpler. I do however like the
> move to modularize it into more simple pieces.  But it might come across
> better if if you continued your narrative along the lines of "we believe
> that ... "
>
> I have slight reservations about the scalability of ILP (e.g. can you
> send to and from an email address, a mobile phone, a web page, an IM
> account, irc etc.).  What I really love about it is the concept of
> connectors.  As you point out much more will be clear when real ILP
> payments are live, which Im confident is an achievable goal.
>
>
>
>     Speaking of adoption - our next goal is to build all the tools
>     needed for a real-world internetwork involving the most popular
>     crypto-currencies. Seeing is believing - we want as many people as
>     possible to experience real ILP payments. The initial intended use
>     case will be micro-payments. There is also still a lot of work to be
>     done on the reference implementation and on porting ILP to other
>     languages.
>
>     On Fri, Sep 16, 2016 at 6:13 PM, Christopher Bartley
>     <morelazers@gmail.com <mailto:morelazers@gmail.com>> wrote:
>
>         Sorry to chime in out of place but I think that this post by a
>         Ripple employee may help to clarify
>         (http://www.xrpchat.com/topic/1991-a-big-update/?do=findComment&comment=18189
>         <http://www.xrpchat.com/topic/1991-a-big-update/?do=findComment&comment=18189>)
>         My understanding is that ILP among the banks is not RCL-enabled
>         and serves as an internal subledger for each bank to escrow
>         funds prior to transfer. Because the transactions are not
>         submitted to RCL they are private and do not appear on the
>         public ledger. My understanding is that the publicly announced
>         banks are already using it to transfer fiat or will be will be
>         very soon. Deploying ILP privately will allow them to integrate
>         with other private networks or public ledgers should they chose,
>         but for now it's effectively a private and permissioned ledger
>         using ILP within network.
>
>         I'd still appreciate a response from Stephan and Adrian,
>         especially if I'm way off here.
>
>         Best,
>
>         Chris
>
>         Sent from Das Fone
>
>
>         On Sep 16, 2016 10:01 AM, "Roger Bass" <roger@traxiant.com
>         <mailto:roger@traxiant.com>> wrote:
>
>             Stefan or Adrian:
>
>             are you able to say publicly which banks will be moving
>             transactions over ILP come October 1?
>
>             Presumably, this means that a version of Ripple Connect with
>             ILP as a "protocol switch" is already shipped and deployed
>             to those banks, right?
>
>             Best,
>             Roger
>
>
>             On Thu, Sep 15, 2016 at 8:21 PM, Daniel Bateman
>             <7daniel77@gmail.com <mailto:7daniel77@gmail.com>> wrote:
>
>                 Thank you for this clarification Stefan.
>
>                 Is this information published on the Ripple website
>                 and/or Ripple wiki? If not, may I ask why not?
>
>                 Best,
>                 Daniel
>
>                 On Sep 15, 2016 7:05 PM, "Stefan Thomas"
>                 <stefan@ripple.com <mailto:stefan@ripple.com>> wrote:
>
>                     What the article is referring to is that Ripple's
>                     bank customers will be moving real money through
>                     ILP-powered Ripple products starting Oct 1st.
>
>                     Note that we were developing ILP internally for some
>                     time before we decided that it should become open
>                     standard and released the white paper. For now the
>                     commercial implementation of ILP inside of Ripple
>                     products and the open-source work happening in this
>                     group are pretty separate. We're getting really good
>                     ideas and feedback from the banks using ILP and that
>                     feeds back into the community group work. And of
>                     course the end goal is to have it all interconnect
>                     some day.
>
>                     It'll take quite some time (and a lot of community
>                     traction) before the banks would even consider
>                     connecting to a public Interledger. Hence the
>                     importance of the work this group is doing that's
>                     unrelated to Ripple. For it to be a true standard
>                     there has to be lots of activity around it that
>                     isn't directly tied to us or our customers.
>
>                     On Thu, Sep 15, 2016 at 2:22 PM, win than aung
>                     <winthan@chomeaye.com <mailto:winthan@chomeaye.com>>
>                     wrote:
>
>                         Hi guys,
>
>                         I just saw this news
>                         - http://www.afr.com/technology/nab-westpac-part-of-ripples-new-global-payments-network-20160915-grgz81
>                         <http://www.afr.com/technology/nab-westpac-part-of-ripples-new-global-payments-network-20160915-grgz81>
>
>                             Ripple has created Ripple Connect, new
>                             technology to allow banks to talk to each
>                             other, and is developing its "interledger
>                             protocol", which will go live on October 1
>                             and provide the foundation for banks to
>                             directly connect their ledgers with each
>                             other without an intermediary.
>
>
>                         Is that ready to go live on Oct 1? Which ledgers
>                         are going to try out at live on Oct 1? Gatehub?
>                         any hints?
>
>                         Thanks,
>                         Winthan
>
>
>
>
>
Received on Monday, 19 September 2016 14:02:24 UTC

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