Curious about ARYZE, cloud banking, full-reserve banking and blockchain? Visit our blog and subscribe to our newsletter.

To read the second installment of this DeFi Series, click here to learn more about Web3, what it aims to solve and why we need to be paying attention.

Introduction

The Internet of Value (IoV) and Web3 are often discussed interchangeably, and although they are both referring to the next stage of the internet leveraging blockchain technology, there are some differences. As mentioned in last week’s article, Web3 is all about taking back control and creating value by realigning incentives through a decentralized censure-resistant space. IoV is all about rethinking the way money is moved, a new global payment system that replaces the antiquated payment rails, creating a decentralized, inclusive “internet”, where the need for a middleman is removed.

The concept of “The Internet of Value” was first proposed by Ripple. The vision was to create a blockchain-powered space where value could be transferred as easily, cheaply, and reliably as data is transferred now. Essentially an internet of blockchains that would be chain-agnostic and value-agnostic, meaning any type of value could be transferred, including stocks, securities, intellectual property, votes, scientific discoveries, and so much more.

Let us first look at the antiquated payment systems that the IoV aims to solve and replace.

Correspondent banking, Nostro-Vostro and SWIFT

Correspondent banking is defined by Investopedia as a financial institution that provides services for another institution, usually in another country. This institution or bank acts as an “intermediary or agent, facilitating wire transfers, conducting business transactions, accepting deposits, and gathering documents on behalf of another bank”.

This enables banks without branches in some countries to offer financial services on a larger scale by partnering with corresponding banks. To facilitate settlements of foreign trades and remittances through these “partnerships”, they use what is referred to as Nostro-Vostro accounts, or prefunding.

Nostro-Vostro is Latin for “ours” and “yours”. A Nostro account is a bank account held in a foreign country by a domestic bank denominated in that country’s currency. Vostro is a foreign bank that maintains an account in a domestic bank in a domestic currency. Or simply put, our money sitting in your bank or your money sitting in our bank, a continuous tally back and forth.

Although the funds on either side of a corresponding banking arrangement are often interest-bearing, can benefit from forex trades, and still reflect on the institution’s balance sheets, the arrangement does come with some industry concerns. These include cybercrimes, the lack of background information on the funds being processed on behalf of other banks, compliance controls, and bankruptcy risks.

If we consider corresponding banking as the service and the Nostro-Vostro accounts as the funding mechanism, then Swift can best be described as the universal messaging language that executes it all.

SWIFT (Society for Worldwide Interbank Financial Telecommunications) was launched in 1973 to create a uniform standard global messaging language and replace Telex’s manual process. This meant that each financial institution had its SWIFT code, enabling a quick, secure and global transfer through the network. By 2021, SWIFT was processing 42 million messages a day, for 11,000 institutions, and dispersed in more than 200 countries.

However, the long relay of middlemen that the transactions go through makes them slow and expensive. Transactions can take anywhere between 2-5 days to finalize, and cost between 20-50 US$ in fees. This payment infrastructure also requires individuals to have traditional bank accounts, which in many developing countries is simply not possible. This completely excludes billions of people from using traditional remittance rails, either through the lack of proper documentation, or because they are only able to send small amounts of money at any given time – an amount that could almost entirely be absorbed by transfer fees.

There seems to be a consensus within the fintech space that the current payment rails and infrastructure are equivalent to pre-internet stages and point to this lack of development as the key reasons why globalization and broader financial inclusion have not been realized yet.

Globalization and financial inclusion

Due to current geopolitical conditions, trade relationships, import dependencies, and supply chains have turned out to be a point of weakness for many nations. However, prior to the recent conflicts, globalization was in many ways fostering growth, innovation, and financial inclusion.

The general concept of globalization is often defined as the movements of human beings, exchange of goods, services, capital, technologies, or cultural practices, globally. But many believe the systems are inefficient and incomplete.

Ripple co-founder and executive chairman Chris Larsen believes true globalization requires 3 key systems to work together.

“We have had interoperability of data for 25 years since the internet IP, we have had interoperability of goods since the 1950s with the invention of the shipping containers, but we still don’t have interoperability of money. You need data, goods, and money to be globally interoperating, it is coming, and it is profound”.

Chris Larsen

On numerous occasions, the Gates Foundation has stated that 2 billion people in the developing world could participate in the financial ecosystem if payment infrastructures could support micropayments. And that

“You need to be able to send 50 cents to be a real participant in the global economy”. 

Gates Foundation

This is what the Internet of Value aims to solve.

Ripplenet, On-demand liquidity (ODL), and the Interledger Protocol (ILP)

Whilst several companies and institutions are working on blockchain-based payment systems, this article will focus on the services and solutions created by Ripple Labs, as they originally coined the term “The Internet of Value”.

Ripple Labs Inc. is an American for-profit technology company focused on real-time gross settlement systems and remittance networks for banks. The company offers various products, one of which is called Ripplenet. As described on their website, this network leverages cutting-edge blockchain technology to streamline payment services and reduce costs, by offering connections to hundreds of financial institutions worldwide via a single API (Application Programming Interface). 

Ripplenet users also have access to another product called On-Demand Liquidity (ODL), which uses the digital asset XRP as a bridge currency, enabling instant settlement of transfers and eliminating the need for prefunding accounts. 

XRP is the native digital asset on the XRP Ledger — an open-source, permissionless, and decentralized blockchain. The XRP Ledger was specifically designed for payments, with inbuilt performance metrics such as scalability, speed, and low costs.

Ripple Labs owns a large portion of the XRP in existence, but has no control over the decentralized ledger it runs on. If Ripple Labs ceases to exist, the XRP ledger would continue to function, but Ripple Labs does need the XRP Ledger for some of its product services, such as ODL.

To successfully attain interoperability, the Ripplenet leverages the Inter-ledger protocol (ILP). The ILP is an open-source, stateless blockchain protocol that can be overlaid onto traditional financial systems or other blockchains, and bring interoperability between ledgers and networks. In essence, ILP routes packages of value in the same way that the internet routes packets of information.

The ILP was developed by Stefan Thomas and Evan Schwartz in association with Ripple Labs. However, the ILP is not tied to a single blockchain, company, or currency, but rather maintained by the not-for-profit Interledger Foundation, which aims to

“Provide an open, frictionless, and currency-agnostic method for transferring very small amounts of money, typically referred to as micropayments. This open network allows anyone to transfer money across currencies and ledgers, resulting in the potential rebalancing of our global payment systems”.

Interledger Foundation

The Internet of Things (IoT) and Micropayments

It is not only people in developing countries that can benefit from the ability to transact in micropayments. 

The Internet of Things (IoT) as defined by TechTarget, is as “a system of interrelated computing devices, mechanical and digital machines, objects, animals or people that are provided with unique identifiers (UIDs) and the ability to transfer data over a network without requiring human-to-human or human-to-computer interaction.”  

In 2021, there were more than 10 billion active IoT devices, with households having an average of 10 connected devices. It is estimated that 90% of the world’s data was generated within the past two years, and 2.5 quintillion bytes of data are added each day. It is also estimated that the IoT solutions and the associated data tsunami will potentially generate $4-11 trillion in economic value by 2025.

If the Internet of Value could be layered on top of the Internet of Things, it could connect them and enable micropayments, something Chris Larsen firmly believes lies in the near future.

“Think of all the connected devices and applications that should be empowered to send value between themselves, for example a 1 /1000 of a penny, that is not possible until the internet of value is in place. Once we have it layered on top of the internet of data, data and money are going to be moving together in little packets of information, not just digital assets but also in fiat currencies, and that will change models”.

Chris Larsen

In Conclusion

It is clear that blockchain technology, and by extension fintech, can and is currently solving the friction points of the traditional payment infrastructure. Change is in the air; it may be loud, it may involve conflict and experience pushback, but it is coming. With all the incredible innovation taking place, it will not be a single company, a single solution, or a single blockchain that rules the space, but rather an interconnected network of ledgers and protocols disrupting the status quo, together.

The fintech space is developing fast, and as a well-known businessman, entrepreneur, and Shark Tank Investor Kevin O’Leary stated during his 2022 Bitcoin conference speech:

“I predict in the next 10 years that crypto, blockchain, bitcoin, and all this innovation will be the 12th sector of the S&P 500, the 12th sector of the economy.”

Kevin O’Leary

The views and thoughts expressed herein are those of the authors taking part in the ARYZE Ambassador Program. They do not necessarily reflect the views of ARYZE or its employees.

Check out our blog or visit our website to learn more about ARYZE, crypto, blockchain, and tokenization. If you liked this article, please comment and share it with your network.