The ACTUS Financial Protocol
Creating the web for digital financial assets and unlocking the full potential of finance and blockchain.
The ACTUS Financial Protocol (AFP) enables a financial ecosystem in which digital assets can move seamlessly and frictionlessly in and out of a diversified portfolio. Hence, the trading of digital assets becomes as easy as browsing the web. As a result, market participants are able to understand and interact with any digital asset from any issuer instantaneously.
“The thesis underpinning the idea that everything will be tokenized is grounded in the aspiration that everything will be interoperable.” Stephen McKeon, The Security Token Thesis [1]
AFP enables issuers to tokenize all financial instruments in a consistent and systematic way. They can create digital assets that are interoperable and economically transparent across solutions — compatible financial building blocks that can talk to each other. Further, these assets have plug and play capabilities which allow market participants to add them to their systems and service them without prior integration or configuration.
AFP unlocks the following additional benefits that a fragmented decentralized financial system with proprietary digital assets cannot provide today:
- Frictionless: substantial costs and manual efforts can be eliminated because no integration and data reconciliation for the various digital assets in a portfolio is needed.
- Economically transparent: risk can be better managed because digital assets expose their financial obligations in an algorithmic and canonical form which enables any type of projected analysis on any portfolio or market level
- Interoperable: automation is increased because digital assets and systems can interact and contractually reference each other in a standardized way.
- Accessible: investors have access to more digital assets because barriers to own and trade assets are lowered
The AFP ecosystem provides a powerful alternative to both the centralized and the fragmented decentralized financial system.
How does AFP differ from other Protocols?
AFP provides an open blockchain-agnostic standard to create compatible digital assets across issuance platforms. It defines a canonical form for 1) the description of the underlying financial contracts and 2) the interfaces to communicate with these digital assets. AFP makes use of a powerful financial standard to achieve this: the Algorithmic Contract Types Unified Standard (ACTUS) (see www.actusfrf.org).
In essence, ACTUS encodes the payment obligations of all kinds of financial instruments contracts in a mathematically unambiguous and consistent form. This makes ACTUS the candidate of choice to encode the economics of financial instruments into smart contracts to enable interoperable digital assets. AFP leverages the unique features of ACTUS and complements these with the strength of the blockchain. AFP differentiates itself from other financial protocols in respect to the following four points:
- Coverage of Financial Instruments — AFP can issue all financial instruments in the market in a unified financial language. All instruments can be represented by parameterizing and combining a set of 32 ACTUS financial contract types. Examples are all types of loans, bonds, equities, futures, swaps, and options (currently only very exotic instruments are not covered).
- Autonomous Contracts — Each contract is unambiguously defined and encapsulates all economically relevant information. Data and logic are exposed in a consistent machine-readable form. As a result, these contracts provide all necessary information to process and analyze them.
- Banking grade logic — The smart financial contracts have built-in banking grade logic. Examples are business day conventions, custom schedule features, penalties for prepayment or payment delinquencies, obligations contingent to external observable data/events, etc.
- Open Protocol Standard — AFP defines a formal technology-agnostic standard. It allows everybody to create their own AFP implementation on the DLT (Distributed ledger technology) of their choice. We intend to make the AFP standard free and open-source.
Challenge — Interoperability of Digital Financial Assets
Finance on blockchain hasn’t had its web moment yet. Compared to the web, we are in the very early years of networked access to information. It’s the time when information silos like CompuServe, Minitel, and AOL existed and created parallel universes. The web has achieved the bridging of these silos by introducing open, universal and interoperable protocols for the exchange of information (HTML/HTTP). Such a universal protocol to enable the seamless flow of value on blockchain is missing.
Currently, every issuer creates proprietary digital assets for specific financial instruments such as loans, bonds, equity or options [2]. The various actors issue digital assets without agreement on common interfaces and formats. The economic logic of these instruments is implemented on a bespoke basis by every issuer leading to the same financial meaning being reproduced from scratch for every application. The more such siloed solutions emerge, the greater the barriers for investors to access the entirety of available digital assets.
This multitude of financial instrument implementations within and across blockchains makes it highly inefficient for users to understand and service such digital assets. Institutional players need to process, account, report, analyze and manage risk (liquidity, treasury, AML, etc.) for portfolios of digital assets and, often, there is a specialized system for each of these tasks. Every digital asset needs representation in each of these systems, leading to the following efforts and costs:
- Technical integration: institutions will need to integrate each of these proprietary digital assets into their systems and processes first before they can be added to their portfolios.
- Data reconciliation: the terms and contractual obligations need to be extracted from the smart contracts and transformed as well as mapped into the formats of the different systems.
Such a fragmented financial stack made of non-interoperable digital assets adds unnecessary friction and, hence, does not scale. It is an illusion to believe that putting financial instruments on DLTs will automatically lead to an efficient and economically transparent system. Financial information of digital assets will be immutable and accessible on a distributed ledger, but it won’t be truly interoperable when it is recorded in arbitrary formats and with proprietary interfaces. You can’t have shared information if you don’t speak the same language.
The costs to bridge these different silos and formats will offset part of the potential of a tokenized financial system. In order to achieve the same scalability and exponential network effects that the web or telephone systems have achieved, we need a shared financial protocol — a shared distributed ledger is not enough.
Solution — A Unified Financial Layer
The limitations of a fragmented financial stack can be overcome. Issuing digital assets with consistent financial notation and packaging them in standardized containers creates a frictionless ecosystem for all participants: digital assets can be handled much more efficiently, development of applications to service these assets is simplified, and users profit from a plug and play experience for digital assets.
With AFP, we provide a protocol to bridge the current financial silos and address the growing interoperability challenges. It lays the foundation for an open, interoperable and transparent financial ecosystem — it is the web for digital financial assets.
Players agreeing on this unified representation of digital assets can build an ecosystem that benefits all participants and creates network effects:
- Asset Holders — Profit from better access to financial services at lower costs. They reduce their own operational cost and can better manage their risk.
- Asset Issuers — Profit from broader market exposure and higher liquidity because of the interoperability of the digital assets.
- Third Party Service providers — Reach more potential customers as every solution will be compatible with all AFP-compliant digital assets from any issuer.
- Regulators — Identify financial risks in the market much earlier as analytical projections can be effortlessly and continuously calculated at the granular level and then easily aggregated to any desired level.
Together with other protocols that provide compliance and identity, we envision building a new powerful financial stack for finance on DLTs — a decentralized and unified alternative to the current systems.
Elements of AFP
AFP consists of three main parts. First, the economics kernel is built on top of the ACTUS standard which guarantees a unified semantics and logic across all digital assets. Second, the financial contract is modeled as a (persistable) state machine which follows a (possibly dynamic) event schedule and keeps track of the current state and ownership. Third, AFP defines communication interfaces to service, trade or analyze the digital asset. Analogous to the ERC-20 standard for tokens on Ethereum, these standardized interfaces enable interoperability for financial instruments.
Anatomy of Digital Assets
Building a new, decentralized and interoperable financial ecosystem starts with its core building blocks: the digital financial assets in this system. Financial assets, in essence, represent contractual agreements on the ownership of (other) financial assets and the exchange thereof at the current or future time and under certain terms and conditions (economics). Essentially, describing who owes what to whom and when.
While the two dimensions — ownership and economics — encode all endogenous information, digital financial assets are always embedded in a larger socio-economic context and exposed to exogenous conditions such as financial regulation and markets. For example, ownership and transfer thereof includes enforcing regulatory compliance (e.g. KYC and AML). Or, updating the variable rate in floaters or determining an option’s payoff is dependent on dynamic, external market information. Further, the owners of rights and obligations arising from a digital financial asset may renegotiate the respective terms and conditions and update the asset’s state.
In its entire lifecycle, the various systems holding a digital financial asset need to know how they can access, retrieve and record such information. Hence, digital financial assets need to expose a common set of “CRUD” operations similar to those of database systems:
- Create: issue digital assets and persist states
- Read: monitor and analyze digital assets
- Update (state and ownership): execute payment and trade digital asset
- Delete: resolve or terminate the financial contract
In order to create a unified and interoperable financial layer, AFP introduces a digital financial assets architecture that models such assets as autonomous objects. In this model, a digital financial asset encapsulates all economic and ownership information and includes standardized interfaces to service the financial market CRUD operations.
With such autonomous and interoperable digital financial assets at its core, the new AFP financial ecosystem disrupts the current paradigm of siloed finance and moves financial markets towards a new paradigm of unified finance. AFP provides a universal language to exchange digital assets in a truly interoperable way.
ACTUS — The Periodic Table of Financial Elements
ACTUS introduces a novel approach to consistently describing financial instruments. It breaks down the entirety of all existing financial instruments into 32 financial contract types. Each contract type covers a distinctive pattern of payment obligations found in financial instruments. All instruments that are frequently used can be described with these 32 contract types or a combination of them. They represent the basic financial building blocks — the periodic table of financial elements [4].
Such a systematic and modular approach radically simplifies the tokenization of assets. It enables issuance platforms to cover a much broader range of financial instruments with a manageable number of smart contracts.
Further, ACTUS is the only standard that defines all payment obligations for these financial contracts in an algorithmically unambiguous form over the entire lifecycle and does this in a consistent way for all financial instruments from cash accounts, simple loans, complex derivatives, and alternative credit enhancements.
To our knowledge, no other standard offers such a complete, consistent and normalized form to describe financial contracts. Other standards focus only on limited aspects of a financial contract, such as the identification of a transaction (UTI) or a product (UPI), the details of a trade (FIX), aggregate financial reporting data (XBRL), or business information related to derivatives trade lifecycle (FpML).
Reference Implementation — AFP on Ethereum
As we are working on the AFP standard whitepaper, we are in parallel implementing the first reference implementation of AFP on Ethereum (AFPoE) to demonstrate and prove the feasibility of the standard.
Other issuers or protocols will leverage the AFP contract issuance platform on Ethereum and benefit from
- lower barriers to entry as they can jump-start their solution by using the AFP digital assets
- a broad range of financial instruments that can be issued by just parametrizing or combining the AFP financial contracts
- a shared library of smart financial contracts that encapsulates the general financial logic and reduces the maintenance and audit efforts.
The implementation consists of the following components:
- OpenZeppelin-like library of financial smart contracts for ACTUS contract types on Solidity
- A typescript library which implements our message protocol and simplifies building decentralized apps (DApps) for AFPoE
- Testing and helper tools
The AFP Project Team
Our mission: Perfect finance by an order of magnitude and unlock the full potential of finance on blockchain through the propagation of a unified financial language, leading to complete analytics and reporting. We aim to bring the next evolution of finance by creating an open, interoperable and economically transparent standardized financial ecosystem. A system that provides complete and truthful finance by bridging present day input-output information asymmetries and ensuring compliant market integrity.
The team: the team has profound expertise in finance and blockchain and includes
- Experts in the existing and crypto financial markets.
- Blockchain developers that have been working with Ethereum since the early days.
- The originator of the periodic system of financial elements (Willi Brammertz) and other key contributors to ACTUS.
- People that have led the development of ACTUS-based banking and analytics solutions.
These diverse backgrounds have been the critical success factor to solidify the concept and break it down into a feasible approach. See a list of contributors at the end of the article.
Update: Open source implementations of ACTUS on Ethereum and more can be found in our GitHub repos.
We are collaborating closely with the ACTUS Financial Research Foundation to assure compliance with the standard and to advocate for our approach. They have already achieved important progress e.g. in discussions with the European Central Bank which has recognized the benefits of a standardized approach like ACTUS [4].
Please subscribe to our Twitter channel and Medium if you want to stay in the loop. These will be our main information channels for now.
Authors: Michael Svoboda, Nils Bundi, Johannes Pfeffer
at par is the startup behind AFP.
Thanks to our other co-founders and advisors for the support: Willi Brammertz, Johannes Escherich, Arie Levy-Cohen, Allan Mendelowitz, Milad Mostavi, Marian Oancea. Also thanks to ConsenSys and Trinkler Software for feedback and encouragement.
References:
[1] McKeon, Stephen. The Security Token Thesis. Hackernoon. May, 2018.
[2] Examples of players currently building centralized/decentralized issuance platforms for digital assets: World Bank, SIX exchange, Securitize, Polymath, Harbor, Dharma, CDx, dy/dx, UMA.
[3] ACTUS foundation: Credit to Willi Brammertz the originator of the periodic system of financial elements and founder of ACTUS.
