A series of workshops attended by Blockchain experts in Sydney to address the design options, trade-offs and the technical challenges of issuing a fiat-backed token on a blockchain/distributed ledger.
The first application is the digital Australian dollar - for practical reasons. Such reasons include a relatively known legal landscape and a strong local appetite for this technology to be realized.
The design of this system is guided by the immediate goal of creating a blockchain token backed by Australian dollar, however the principles of these designs should apply to any other fiat currency and, in fact - any blockchain assets backed by - or redeemable for - 'real world' securities/assets.
The majority of fiat (e.g. dollar) transactions are already 'digital'- i.e. they merely exist in bank computers/databases and have enjoyed the benefits of digitisation already for a long time.
Virtual currencies have also existed for some time - such as 'Linden Dollars' in the game Second Life, or to some extent loyalty point schemes. However, since the economics, rules and value of these are entirely dependent on one organization (or small group of organizations) - their utility is limited. The rules may change, the company may discontinue the program, confiscate or dilute the points at any time. Their longevity is tied to the company's and its systems. Additionally there are very few ways in which to interact with these toy credits, hence the economies around them have had very limited scope.
Crypto-currencies - by contrast - rely on game theory,mathematics (particularly cryptography) and resources such as electricity to create scarcity. Tokenizing these on a blockchain allows these assets to become smart, programmable property and to interact with other financial instruments in a much more fluid and flexible manner, and in ways that are only now being invented.
Innovations and advantages that previously applied only to crypto-currencies and abstract tokens can now be applied to traditional currencies and assets with direct implications in the traditional financial system, blurring the distinction between 'on-chain' and 'off-chain'.
There are many different solutions for creating a digital currency as they are all solving different problems.
Bitcoin is designed to work in an untrusted (potentially adversarial) environment where a third party is unavailable or cannot be trusted to perform the transaction on behalf of two participants. The network takes the role of this trusted third party. The identity of the participants may be unknown, however - once revealed - there is a permanently transparent record for that identity which, which may also uncover information about its counter-parties and about other transactions. Therefore in some instances, the (unmodified) Bitcoin network is likely too transparent for many real-world applications, especially in the world of traditional finance.
Ethereum is designed to be a general computing platform that operates in an open, untrusted (potentially adversarial) environment. Ethereum allows more complex code (known as contracts) to execute, by removing the need for the counter parties to trust each others' execution and trust the Ethereum blockchain's execution instead. Ethereum transactions at a basic level are also transparent to most participants in a given Ethereum blockchain instance, however there is scope for more complex data and logic to be included in transactions, which may allow finer-grained control of access to potentially sensitive data.
Monero - unlike Ethereum - does not offer a 'trustless' execution environment, but offers an improved privacy model. In Monero, the participants in a transaction know its details (and can use the blockchain to prove it), however third parties are unable to decode these details, despite the data being available to them. This employs 'ring signature' technology. Additionally a third party may be provided a key to view the details of an otherwise opaque transaction, e.g. for auditing purposes.
Z-Cash is one of several systems to employ 'zero knowledge proofs' (zk-SNARKS) - which allows statements (proofs) to be asserted as correct or incorrect without revealing the underlying data for the assertions.
Tether is a company that issues tokens (USDT, EURT,GBPT) which are backed by currency deposits. On-ramps and off-ramps to the Tether bank accounts require AML/KYC. The tokens are issued in a meta-data on the Bitcoin blockchain via Omnilayer, which allows tokens to be issued on top of bitcoin transactions. The total supply can be interregated (although somewhat clumsily) from analysis of the bitcoin blockchain, and the supposed balance of the bank account(s) is published by Tether to assure the public that all tokens are backed by their equivalent fiat currency.
However, the current smart-contract capabilities, settlement times and throughput capabilities of the Bitcoin blockchain have been overtaken by other systems and the technical capabilities are generally limited. Additionally Tether suffers from being closely associated with one particular exchange (BitFinex), so that perceived counterparty risk related to the exchange also have - at times - had notable effects on the value of the Tether peg to its currency counterpart.
Some high level goals include:
- Enable smart-contract code to deal with and manipulate 'real-world' assets backed by currency in the traditional financial system - blurring the distinction between what was previously 'on chain' vs 'off chain'
- Allow markets (exchanges) to offer trading between crypto-assets, dollars, fiat currencies and other 'real-world' assets, without major changes to their platform
- Allow DEXs (decentralized exchanges) to handle trading and order matching of fiat and other traditional assets
- Allow traditional financial institutions access to benefits of blockchain technology, such as real-time auditing and faster settlement
- Allow an ecosystem of custodial institutions ("Deposit Receipt Gateways") to evolve and compete, based on capabilities and trust
- Improve liquidity and ease of settlement for the emerging world of fintech startups who wish to settle/transact in instruments other than existing crypto-currencies
- Provide a minimum-viable product (MVP) base platform: consisting of a design model, and a code framework which can be used to kick-start real-world implementations
- Open technology - use existing open technology platforms and IP, especially where the roadmap of those technologies aligns with the goals of this project, or whose limitations are known to be resolvable in future. Similarly the results of this work and the possibility to improve it should be open to anyone.
- Low barriers to entry: becoming a participant in the system should be easy, possible over the internet, and not require the permission of others. As an example: transacting in the system may require only ownership of tokens. Custodial gateway participants (by nature) have more work to do in their roles - but can become general participants immediately.
Examples of digital fiat-backed blockchain assets exist already, both privately issued (such as Tether - i.e. USDT, EURT), as well as private 'consortium' efforts - usually in the form of closed-door trials and experiments by players that include:
- The Bank of England (BoE)
- The People's Bank of China
- Monetary Authority of Singapore (MAS) - Project Ubin
- Hong Kong Monetary Authority
- Bank of Canada - Project Jasper
- Santander Group of banks
- Barclays Bank
- Commonwealth Bank of Australia (CBA)
The goal of the workshop is to survey the wider landscape of emerging options and likely intended features. Additionally second layer (future) extensibility is to be a key factor in design decisions.
How to tokenise dollars (or fiat currency) to create blockchain assets that can be transacted within distributed economies, across financial institutions and within smart-contracts
Below are the function and non functional requirements the technical workshops are trying to solve for.
| Requirement | Description |
|---|---|
| Legally compliant | The system must support compliance with Australian laws, and broadly with international laws. |
| Low barrier to participation | Joining the network should not require permission from any central authority, although other functions may require their co-operation - i.e. it should be useful to existing crypto-currency markets & users as well as traditional institutions. |
| Fungible | Any token must be equivalent to another token from the same gateway (Deposit Receipt Counterparty) |
| Identified parties | Participants must be able to identify who they are transacting with. |
| Open | is open to any individual or entity. Is not limited to use between a limited number of financial institutions. |
| No mediation | A holder of digital dollars can transfer dollars directly to another party without mediation by a third party. |
| Pegged | one digital dollar’s value will track the value of the underlying asset extremely closely - i.e. be equivalent to a dollar from a central bank. The accuracy of this tracking may take market factors into account including the DRI's Gateway's creditworthiness |
| Trust | The holders of the collateral that backs the digital dollar need to be trusted to be effective, however how they achieve this is of their concern. A commercial bank might have better trust than an exchange but worse than a central bank, for instance. |
| Private | only the parties involved in a transactions can see the parties, their balances and transaction amount, however these facts can be proven, if required. |
| Finality | Transactions must be final and irrevocable |
| Micro transactions | Can support sub 1 cent transactions |
| Delivery versus Payment | Digital assets (tokens) can be exchanged with a digital dollar in one atomic transaction. |
| Escrow | can be held in escrow by parties or programs (smart contracts). |
| Time aware | Transactions can be linked to time. e.g. transfer at a point in time, escrow until a point in time. |
| Oracles | External data can be used to as inputs to transactions. For example, a weather event, a stock price, news etc. |
| Integration | Description |
|---|---|
| Participant metadata | Participants (accounts) may attach descriptions of themselves and their assets, e.g. identify fields, or the current usage state of an asset, e.g. debt/mortgage, savings |
| AML/KYC capability | Allow use of AML/KYC services to certify identities used in the system |
| Identity and meta-data query | Participants may issue permission to other participants to query specific identity meta-data OR check that a held meta-data field matches that from a previous certification |
| Requirement | Description |
|---|---|
| 1000 txs/sec | 1000 transactions per second is what Australia's New Payment Platform (NPP) was initially sized to. |
| Bridgeable - Consortium-friendly and multi-chain friendly | It should be possible to use digital tokens in other systems and in other chains, provided they can reference these tokens and the corresponding stake can be audited/verified at any time |
| Sub Sec Latency | Transactions |
| 1 million nodes | EFTPOS is closing in on 1 million terminals in Australia |
| Machine/Mobile/IoT | Transactions can be signed/initiated on devices with low computing power. |
There are number of technical challenges that need to be solved in order to meet the functional and non functional requirements.
| Challenge | Description |
|---|---|
| Privacy | Privacy of parties, transactions and balances |
| Transparency | It should be possible to prove a given reserve, balance, or the successful completion of any given transaction - provided the key/permission to do so. |
| Performance | Scaling the number of participants, transaction throughput and reducing the transaction latency |
| Trust | Securing the collateral that pegs the value |
| Identity | Managing the identity of the participants which can be people, machines or things |
| Key management | The secure store of private keys must be supported and eased wherever possible |
| TERM | Description in our context |
|---|---|
| Account | An identifier who is the owner/principal or recipient of tokens/funds at any time. Note that an actual identity (such as a natural person) can correlate to multiple accounts and that an account can correlate to multiple identities, or none - as in the case of a multi-signature escrow or a smart contract that operates independently. |
| Blockchain | A distributed ledger that batches transactions into linked blocks |
| Crypto-currency | An asset (token) whose trust, concensus and economic model comes solely from the game-theory and economics of a DL (blockchain) system, enforced by rules shared by all participants rather than through an external controller/issuer such as a deposit facility, or through the raising of capital |
| Distributed Ledger | A peer-to-peer, append only datastore that uses consensus to synchonise cryptographically secured data. |
| DR | "Depository Receipts" (custody tokens) provided by a participant, backed by assets (e.g. dollars) in custody |
| DRI | "Deposit Receipt Institution" - aka Gateway, aka "Deposit Receipt Counterparty" |
| Keychain | Also known as a 'wallet' in crypto-currency. Private keys used to sign transactions or execute logic. |
| DEX | A Decentralised Exchange (DEX) facilitates the exchange of different blockchain tokens between parties without a third party intermediatory. |
| MRB | Minimum Reserve balance - an amount that a custodial institution (normally a bank) is required to hold to be compliant with any applicable regulations (e.g. overnight reserves) |
| (Private) Nodal logic | Programmable logic that is owned by and automatically executed by a participant in the system but whose execution is private and internal to other participants - i.e. not publicly verifiable, outside of its inputs and outputs appearing to be valid for any given transaction. Private nodal logic can involve methods such as execution off-chain (such as in R3), or through zero-knowledge proofs. Most web services (e.g. HTTP APIs) execute private nodal logic, without proof of integrity. |
| Participant | Any actor that interacts with the distributed ledger. eg individual, company, thing or autonomous code |
| Smart Contract | Programmable logic that is executed in a distributed environment (blockchain typically) or whose execution integrity can be verified by counterparties. Smart contract are usually transparent, allowing participants to verify logic matches their expectations and agreements, although there are methods to (deliberately) remove some of that transparency where greater privacy is desired |
| Virtual Currency | See above - i.e. currencies that are not crypto-currencies but exist in other closed ecosystems such as games and loyalty points. |