Means to pay with any asset: digital or physical
The entire modern economy, and not blockchain ecosystems alone, suffers from a problem of insufficient compatibility and lack of mutual interaction. But technological solutions addressing the issue already exist. These include projects such as Interledger and the GEO Protocol.
A market is primarily a place where the value is transferred and exchanged. The value itself can take various forms, sometimes quite diverse: it can be constituted by physical goods, services, fiat money, cryptocurrency, real estate, industrial assets, debentures, ownership rights (stocks, for example), and so on.
And precisely because of this heterogeneity it is very difficult to make a direct exchange between all forms of value. Therefore, in the modern economy, there are various markets for the exchange of certain types of value carriers. For example, physical goods markets, services markets, stock markets, financial instruments and debt markets, real estate markets, industrial assets markets, etc. Finally, the cryptocurrency market, which itself is rather segmented due to the lack of interoperability between different blockchain ecosystems.
In fact, today all these markets are often weakly interconnected, and some of those (such as the stock market or the market of industrial assets) are very close and exclusive, (i.e. available only to a selection of major players).
The only thing that indirectly links all these markets is fiat money, which plays the role of the universal economic equivalent of value today, and the role of medium of exchange simultaneously. However, fiat money alone does not solve the problem of global interaction nor the problem of inclusivity (attracting a wider range of players, including medium and small ones, to certain markets).
In addition, many markets today operate on the basis of centralized solutions. The centralization of markets does not contribute to inclusivity, but rather tends to cultivate exclusivity, control over the market by large players and the market platforms themselves, as well as by governments and their regulatory bodies. After all, centralized structures are easier to control, both from within and the outside.
So, decentralization could definitely help here. And the obvious answer would be blockchain and cryptocurrency solutions, which are inherently decentralized!
Unfortunately not. Most of the major crypto exchanges today are centralized; vulnerable to all the disadvantages and risks that the crypto market has already had the misfortune to experience. Among many examples, we’ve seen hacks and theft of crypto assets from exchanges, the dishonest behaviour of the exchanges themselves, various manipulations in the interests of big players, and — in the worst cases — the theft of assets by the exchanges’ operators. Meanwhile, decentralized crypto exchanges are still in their infancy and have yet to make a significant impact on the market.
Furthermore, the lack of interoperability between the various blockchain ecosystems, within the crypto market itself, is contributing to further fragmentation rather than its universal integration (and the creation of a globally integrated market for the exchange and transfer of value). This is also hindered by the low scalability of blockchain projects, which is the flip side of their main technological advantages. Developers have a dilemma here: they must choose between the safety of operations and the scalability of the system because these two characteristics are inversely proportional to each other.
This latter problem has already started to be solved both by the incremental improvement of the blockchain projects themselves and by creating Layer 2 solutions — original add-ons over the basic level of distributed registries. The purpose of these Layer 2 solutions is to increase scalability (acceleration of the transactions as well as lowering their costs, increasing the network capacity, etc.)
But none of this solves the challenge of effective interaction between diverse blockchain ecosystems (although there are projects trying to solve this part of the problem); nor the challenge of integrating the blockchain market with traditional markets. Therefore, the problem we outlined at the beginning of this article still remains relevant.
Hold on, though — help is on the way, in the form of Layer 2 off-chain solutions.
The main objective of these technological solutions is to ensure the interoperability of various blockchains with one another, as well as their integration with legacy finance solutions. But they also create the possibility of digitizing any assets, including physical ones; and in a broader sense of digitizing any value carriers. That will create an opportunity to operate with all of them in the digital sphere as easily as we now operate with information on the Internet.
Picture the possibility of being able to easily pay with kilowatts of energy or square centimetres of real estate, by converting them, imperceptibly and on the fly, into the value units that are acceptable to the payee. You came to China, went to a restaurant, paid with the digital equivalent of apples that were harvested in your garden at home, which were automatically exchanged for ETH, with which a cross-border payment was made from your home country to China, before the cryptocurrency was automatically exchanged for fiat yuan, which the restaurant received to its local bank account. And all in a matter of seconds with no additional effort from your side!
Such an approach should bring us closer to creating a unified global market for everything, where any value can be easily transferred or exchanged for any other value. Simply put, we are talking about creating the Internet of Value. Its creation will allow us to solve most of the problems discussed at the beginning, including the problem of overcoming market segmentation, inclusive access for players of any level and size (starting with the smallest ones), and so on.
Imagine that the stocks of the largest companies could be bought not only by a large investor for big money through an accredited broker at an exclusive stock exchange but by any person for any amount of money. Perhaps this person could even buy in fractions of stock if he or she so wishes. After all, a tokenized asset can be divided into arbitrarily small parts and be sold on any digital exchange, and rather than only on traditional exclusive ones. Moreover, a digitized asset can be immeasurably easier, cheaper and faster to circulate.
This state of affairs should have a positive effect on the global economy as a whole: the rate of asset turnover will increase, new capital will be attracted due to a huge number of small and medium investors, markets and regions will integrate more closely with one another, world trade will revive, capital mobility will increase, the majority of asset classes will test new heights of liquidity, (even those previously considered illiquid), and so on.
But back to Layer 2 technology. On the Internet of Value, Layer 2 technologies are designed to perform functions similar to those performed by the TCP/IP protocol on the ordinary Internet. More specifically, that’s the function of the transmission protocol that enables interaction between all possible “local networks” of values, as well as between its individual value carriers.
As mentioned above, we are referring to off-chain solutions — those not based on the general distributed ledger (blockchain), as well as on the general consensus.
These projects include Interledger and the GEO Protocol.
Both projects outline their main goals as similar to those described above: the creation of protocols that ensure the interaction of various blockchain projects, banks, payment systems, etc. Both are off-chain solutions that do not have their own general distributed ledger and do not need to achieve general network consensus (which also helps to solve the scalability problem).
As a transaction channel, a combination of trustlines and state channels is used in the GEO. The latter is used in cases of cross-chain payments, or if transactions with equivalents of external blockchain assets are performed. Interledger uses “payment channels” for payments within a single blockchain; for example, Bitcoin payment channels. These are essentially a modified type of trustline, that differs from usual in that the corresponding ledger is used to escrow one or both parties’ assets and provide clear resolution mechanisms for disputes over the final net positions.
One of the major problems that need to be addressed by Layer 2 projects is the atomicity of payments, also called the double spend problem. This would involve ensuring, at the technological level, that if an asset were deducted from the sender’s account, it is guaranteed to be credited to the recipient’s account — and that the transaction only occurs once, on both sides. It sounds simple and logical, but in reality, the solution to this problem in a distributed trustless environment is not an easy task. And, unfortunately, not all solutions can boast that they have mastered it.
The GEO Protocol offers a unique and highly reliable solution to this problem, both for ordinary payments within its own network and for multi-path payments. This is a set of technological solutions using a modified version of the two-phase commit method used by two nodes utilizing local consensus. And in case of any issues, nodes involved in a conflict contact the Observers, (special service nodes of the GEO network), to resolve it. For cross payments, i.e. those involving several external blockchains (such as a payment that involves BTC and ETH), a version of off-chain atomic swap is used in the GEO.
Another advantage of the GEO is the technology enabling automatic search and closure of debt cycles, which allows it to automatically clear the mutual debt of several network participants. This technology can have far-reaching economic prospects, multiplied by a network effect.
Conclusion
So, as we see, distributed technologies are actually only now approaching the creation of a genuine Internet of Value network. The introduction of Layer 2 technology will allow us to connect different registries of values and without the need to involve a third party. This makes ILP, the GEO Protocol and similar Layer 2 solutions strong candidates for turning the idea of the Internet of Value into reality in the near future. The potential economic effects cannot be overstated.
