Blockchain Models around Overseas Remittances
Ripple, Stellar and REMIIT
In the previous article (Remittance and Cost of Trust), we discussed the reason behind high fees in overseas remittances, and that the expenses were mainly caused by intermediately banks such as SWIFT network system. Global certified institutions require the premium for the cost of providing “trust”. In contrast to domestic money transfers where it involves only two banks (sending bank, beneficiary bank), a minimum of two banks are required for overseas remittances thus requesting higher fees. In this context, the “network’s complexity” leads to high costs.
The Hawala system and the SWIFT system reviewed in the previous article should be compared considering both “trust cost” and “networks complexity”. To cut to the chase, with legal issues and global scalability problems set aside, systems like Hawala are much more beneficial to senders. Therefore, it would be normal to question next whether a “legal and globalized Hawala system” can exist. The REMIIT project is making this happen.
This article illustrates various blockchain models developed attempting to reduce trust cost and networks complexity in overseas remittances and value transfers. The difference between REMIIT and other models are discussed in three perspectives.
(1) Overseas remittance using Bitcoin
(2) The models of Ripple and Stellar
(3) The features of REMIIT
(1) Overseas remittance using Bitcoin
Bitcoins without intermediaries may be the best way for overseas remittances. A sender purchases Bitcoin and sends it to a receiver. That is it! This process costs little to nothing as the trust costs and network complexity are lowered compared to the banking systems. However, Bitcoin has a serious problem: severe fluctuation of price. It is not an appropriate mean for overseas remittances due to the fact that the price of Bitcoin is unpredictable.
(2) The models of Ripple and Stellar
Ripple and Stellar differ in the early target markets, but they may seem to be the same as the models that they aim to pursue are from same origin. (This discussion, however, does not deal with topics such as consensus algorithms and operators as it deals with models that overcome existing costs by using blockchain in the overseas remittance area.)
The models of Ripple and Stellar are more complex than just using bitcoins. They do not simply transfer cryptocurrency through a decentralized ledger, but basically put all the goods in the world on the blockchain and provide an infrastructure for exchange and movement. The key point of these blockchains is to exchange or transfer something (currency, etc.) into others on the blockchain. For this model to work, there should be four elements.
The first element is blockchain assets in the form of an IOU (I owe you) in which is a type of bond issued by a specific entity that allows certain assets such as Bitcoin or US dollar to operate on the Ripple and Stellar blockchain. This enables users to use Bitcoin, US dollar, etc. on a Ripple or Stellar and can always request the issuer for an exchange with real assets.
The next element is the issuer of the IOU, that is, the gateway. This gateway is literally a gate allowing assets to be placed on a blockchain. In order to activate the network, a number of gateways that can perform payments are required.
Third, it is the infrastructure that enables transactions between IOUs to become active. Ripple and Stella basically provide an order book and order matching system internally for this purpose.
Finally, a market maker is indispensable in order for transactions between IOUs to be active.
In addition to meeting various conditions mentioned above, there is also a critical issue in the IOU. That is, even a single statutory monetary value gives users different real values depending on which gateway is issued. Therefore, it will be difficult to provide smooth liquidity only with order books and order matching systems provided by Ripple and Stellar. To overcome this, a dealer or broker is needed to connect various values within the market and generate profits through it. If the market maker performing this role does not activate the network, the diversification of value through the IOU will eventually fail.
(Reference: https://www.stellar.org/how-it-works/stellar-basics/explainers)
As shown in the picture above, when a remitter tries to send the EUR to the recipient using the US dollar, it seems to be able to have a lot of liquidity through various brokerage orders. However, in order for this process to work smoothly, the overall network complexity increases. Even though many people think of Ripple and Stellar as a blockchain for remittance, they in fact, do not consider themselves only a model for remittance. They have designed a system that can put all random values on their chains and trade them transparently as their motto: the Internet realization of the values that can move freely. To deal with all kinds of values, however, the issue of network complexity should be resolved. Though remittance blockchains (Ripple, Stellar) replace the SWIFT system, the network complexity of their ecosystem is not much different from the existing SWIFT system. In addition, the larger problem caused by the network complexity require an excessive amount of time for the network to enter the activation phase.
As proof of this, Ripple and Stellar are not trying to maximize their long-term advantages, but they are pursuing strategies to activate the network in the short term. The xCurrent by Ripple is not a Ripple ledger but an inter-ledger-based solution specialized in bank-to-bank remittances. Stellar has recently affiliated IBM World Wire system to reduce networks complexity by utilizing a specific IOU.
It is not easy to solve the high trust cost and the networks complexity at the same time in overseas remittances. Like the Hawala system, it is possible to provide value mobility services to mere networks if they are based on specific trust relationships within a limited market. However, in order to realize this service in a larger market, it is essential to secure confidence, which naturally leads to rising costs as networks become increasingly complex.
(3) The feature of REMIIT
REMIIT uses blockchain to provide a model that simultaneously lowers trust cost and network complexity. It is possible to develop such a model because the team has experienced development teams who have had previous experiences of operating overseas remittances businesses and have a strong understanding of the blockchain. Two conditions are needed to make this model possible. One is a smart contract to reduce network complexity while lowering trust costs. Smart contracts provided by REMIIT allow intermediaries to execute secure payment and clearing transactions. Smart contracts also lower the cost of trust between intermediary agencies and remittance users as well as between the partnering intermediaries. This is described in the White Paper on the website (http://remiit.io) or the last posting: “REMIIT: Decentralized Remittance and Payment Platform”. The other element is to provide a stable coin as an effective liquidation means between each intermediary. The stable coin is a coin with its own mechanism to overcome the price volatility of existing blockchain tokens. There are currently pegged coins to certain fiat currencies like tether, and various projects are trying to stabilize coins through their token economy. REMIIT is making new attempts by organically linking the coin price stabilization mechanism with the interest of network participants. As a result, REMIIT is trying to present a roadmap that can be realized as soon as possible by selecting a unified “stable coin” rather than a distributed IOU series while lowering “trust cost” and “network complexity” through smart contracts.
Below is the picture depicting an overview of the evolution of overseas remittance and a comparison of all these models.
