Fintech is not composed of a single standard or even a common language. There is tremendous diversity in approaches, the entities responsible for settlement and clearing, business processes, and other domains involved in the accounting, transformation and movement of value.
It is unreasonable to suggest that, simply because one technology is superior, the rest of the ecosystem will somehow admit defeat and upgrade. For example, many people still use Windows XP 16 years after the initial release. This sad state of affairs is equivalent to someone using the original Macintosh released in 1984 in the year 2000.
Consumer behavior aside, businesses are generally even slower in their upgrade cycle. Many banks still use back ends written in Cobol. Once infrastructure is known to work and meets business requirements, there is usually little incentive to upgrade or refine software and protocols for a consumer’s benefit outside of compliance or security concerns.
For Cardano, we first have to establish what would a legacy bridge even entail? What systems, standards, entities and protocols should we target to ensure there is a reasonable certainty of interoperability? Can these bridges be federated or decentralized? Or like exchanges will they become central points of failure for hackers, malicious owners or overzealous regulators?
There are three concerns that have to be addressed.
First, the representation of information and belief in its accuracy. Second, representation of value and its associated ownership. Third, representation of entities and, a particular user’s alongside the aggregate level of trust in such entities.
To be useful, information and value need to freely flow between the legacy financial world and Cardano. Then outcomes need to be established and recorded to build reputation and grounds for recourse. Yet such things are mostly scoped in nature to the actors involved. To encode them on a blockchain would make them global and permanent.
Furthermore, value cannot always freely flow in the legacy world. Embargos, sanctions, capital controls and judicial action could freeze assets. To be interoperable, one cannot create an always open escape valve for value to leak.
Finally, the brand and reputation of entities is one of the cornerstones of commercial relationships. Billions of dollars are spent yearly on marketing campaigns to establish, maintain and repair brands. If libelous, false or misleading claims are made about a person or entity, then they have the right to seek legal recourse. Yet blockchains attempt to permanently preserve history.
Like our choice of programming language, there is no ideal solution for Cardano to resolve these concerns in a ubiquitously correct way. Rather, we have to yield to supported opinion again.
Flow of information
With respect to the flow of information, this flow is known as a trusted data feed. It has a source and content. Sources have some notion of credibility and incentive to deceive or maintain honesty. Content can be arbitrarily encoded.
Given that we intend on supporting trusted hardware in our protocol stack, we have chosen to explore adding support for Professor Ari Juel et al.’s Town Crier Protocol. Assuming the existence of a credible set of data sources, Town Crier permits the secure scraping of web content for use in smart contracts and other applications.
A bootstrap list of sources will be provided by Emurgo, IOHK and the Cardano Foundation. Later this list will be replaced by a community curated list using mechanics derived from Cardano’s treasury system. Our hope is that a reputation system can materialize around good data feeds, thereby creating a positive feedback loop to gradually improve reliability and fidelity.
The representation of value is a more complex topic. Unlike information — where once the veracity, timeliness and completeness are established, protocols can behave in a reliable and deterministic way — value is more delicate.
Once tokenized, value should behave like a unique object. Information can be copied and passed around, but a token representing ownership of something (say a vehicle title) cannot be cloned and traded on two different ledgers. This act would effectively destroy the integrity of the system.
The challenge ahead
The challenge in legacy interoperability when dealing with tokenized value is that trust assumptions, reliability and auditability change as tokens flow between ledgers. For example, if Bob owns some Bitcoin and then deposits them on an exchange, then Bob now has the exchange’s representation of his Bitcoin on their ledger. In the case of MtGOX, their ledger did not conform to reality, causing the users to lose everything.
The problem is further complicated by the need for legacy systems to recognize tokens living in a cryptocurrency. As mentioned previously, businesses are historically resistant to upgrading their software and supporting new protocols. This situation makes it difficult to see a clear solution.
For Cardano, our best hope is to provide an option for users to attach a rich supply of metadata to their transactions and then wait for industry standards to emerge to hook into. Some progress has been made with the Interledger workgroup, efforts like R3Cev and international mandates to upgrade old financial protocols.
However, the larger challenge remains of quantifying and qualifying value sent from a legacy system to a cryptocurrency ledger. For example if Bob is a bank owner and issues a dollar backed token, then he can always build a bridge to send his tokens to a ledger like Cardano as a user issued asset.
While Cardano would track ownership precisely and provide all the features we have come to love such as timestamping and auditability, no cryptocurrency can make Bob an honest banker. He always has the option of running a fractional reserve bank by not backing all of his dollar tokens with real dollars. This fraud cannot be detected by a cryptocurrency unless the dollar itself was a token accounted by a digital ledger.
Finally, the representation of entities online is a classical network problem dating back to early days of the internet. Universities, businesses, government departments and any arbitrary users need to establish their identity at some point.
To this end, pragmatic yet centralized solutions like the web’s Public Key Infrastructure and ICANN’s DNS system have been implemented. Given that we enjoy the modern web, these solutions are both scalable and practical. But they do not answer a more commercially oriented question of reliability, trustworthiness and other meta characteristics necessary for determining if one wants to do business with the entity.
Multi-sided marketplace hosts like eBay have constructed a business model on providing some of this metadata alongside a framework to complete transactions. Judgements about the quality of content, events and businesses are often deeply influenced solely by online ratings from trusted sources.
The part of this point relevant to Cardano is a question of centralization of reputation. One of our goals for Cardano is to provide a financial stack for the developing world. A key to this effort is the ability to establish trust with actors one has never met.
If a single entity or a consortium of entities control who is labeled good or bad, not an organic process derived from actual interactions in the community as a whole, then these entities could arbitrarily blacklist anyone for any perceived sin. This power is against our values as a project and defeats the broader point of using a cryptocurrency.
Fortunately, the same mechanisms used in voting for treasury ballots, adding sources to a list of trusted data feeds and forking a protocol can be reused to establish a reputation space. It is an open area of research and our hope is to provide an overlay protocol for a decentralized reputation web of trust in 2018-2019 after more foundational elements have been settled.