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Fwd: ILP - a critical analysis

From: Jehan Tremback <jehan.tremback@gmail.com>
Date: Mon, 19 Sep 2016 11:33:09 -0700
Message-ID: <CABG_PfRMK_-DnVf+G8XkWWn3YJrNjQQtnzO1V29RzP_JY6y8Zg@mail.gmail.com>
To: Interledger Community Group <public-interledger@w3.org>
Whoops, meant to put this on the list:

---------- Forwarded message ----------
From: Jehan Tremback <jehan.tremback@gmail.com>
Date: Mon, Sep 19, 2016 at 8:42 AM
Subject: Re: ILP - a critical analysis
To: Ken Griffith <kengriffith@gmail.com>


You raise some good points, but I don't think that you understand ILP. I
don't blame you, as the white paper is very dense and not especially
concerned with human readability. I didn't understand ILP either, until I
came to see it as a type of multi hop payment channel.

First of all, ILP works with escrows, in the broad general sense of the
word. I'm not familiar with the intricacies of the banking system, but
wikipedia defines escrow as "Escrow generally refers to money held by a
third-party on behalf of transacting parties".

I'll try to explain ILP's "Universal" mode. "Atomic" mode is the one with
the notaries. I think that Universal mode is much more fundamental and
important.

  1   2   3
 / \ / \ / \
A   B   C   D

The numbers are ledgers and the letters are connectors. Let's say that A
wants to send $10 to D.

A places the $10 in escrow with 1, along with the instruction "Release this
$10 to B, if B shows a signature from D to you and A. If 1 day goes by and
B has not shown the signature, give the money back to A".

B and C then also place $10 in escrow with 2 and 3 respectively, with
similar instructions.

Now D is notified that the transfer has been set up. D sends his signature
to 3, claiming the funds. 3 shows the signature to C, who uses it to claim
the funds from 2. 2 shows the signature to B, who uses it to claim the
funds from 1.

In this transaction, every connector only needs to trust the ledgers they
are directly connected to. Let's look at some failure scenarios.

Let's say that 2 is dishonest. B places the $10 in escrow with 2, but when
C shows the signature, 2 refuses to release the funds to C. Now C is out
$10. C shouldn't have trusted 2.

Further down the chain, if B got the signature even though C didn't get the
funds, B can use it to get the funds from 1. In this scenario, A has paid
$10 and D has still received $10.

On the other hand, if B doesn't get C's signature, then B can't release the
funds. The escrow that 1 has for A expires after 1 day, and the money is
given back to A. In this scenario, D has still received $10, but A has not
paid $10. 2 has stolen $10 from C, and A has benefitted from this as well.

But, in both scenarios, the only people who were affected by 2's failure
are B and C. ILP insulates every step in the transfer chain from the
others. Trust connects every link in the chain, without anyone having to
trust the whole chain.

If you can point out a way in which this mechanism could be subverted, it
will make headlines, as this is the same mechanism used in many different
types of multihop payment channel, such as Bitcoin's Lightning network and
Ethereum's Raiden. Here's a slightly more involved explanation from my
blog: http://altheamesh.com/blog/universal-payment-channels/.


To address some of your other points:

> [...] 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 [...]

Wrong. Bitcoiners have solved the trust problem. If you use Bitcoin as
intended, with your own wallet and a strong passphrase, it will not be
stolen. The problem that Bitcoiners have not solved is the usability
problem, and it's such a pain in the ass to deal with those wallets and
passphrases that people send their money to be held by a third party
exchange or wallet, who then steals it.

> 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.

> 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.

> 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?

These are actually good points, and maybe someone can get to work defining
a legal framework, or record keeping system or something. But the beauty of
ILP is that each link in the chain only trusts those that it is directly
connected to. Because of this, one ILP transfer could cross over several
jurisdictions and legal systems. This means that it is inappropriate to
bake any one regulatory regime into the low-level cryptographic ILP
protocol.

-Jehan

On Mon, Sep 19, 2016 at 7:01 AM, Ken Griffith <kengriffith@gmail.com> wrote:

> 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/a
> rticles/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=findComm
>> ent&comment=18189
>>         <http://www.xrpchat.com/topic/1991-a-big-update/?do=findComm
>> ent&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 18:33:40 UTC

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