And we are all together: Velo Labs’ Federated Credit Exchange Network

Velo Protocol
Velo Labs
Published in
7 min readNov 5, 2020

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A period of mass confusion follows every technological innovation. This is true for blockchain just as it was true for the earliest computer networks. These kinds of technologies are extremely complicated systems that are even more complicated to describe. The effort required to fully comprehend their innerworkings is often beyond what people are willing to commit.

To offset this fact, the tech industry uses labels and jargon as shorthand to communicate labyrinthine concepts. Though these labels are designed to simplify, they are often self-defeating. Whether one understands the nuance underlying them is often simply a product of how familiar one already is with a given subject matter. Compounding things is the fact that these labels lack standardized definitions. This leads to far-reaching interpretations by wide-ranging people, many of whom are careless with their usage.

In the blockchain industry, labeling has gotten out of hand. In an effort to differentiate their projects from the dozens of other indistinguishable projects already on the market, project teams have developed an unending stream of labels and jargon. There’s Blockchain 1.0, Blockchain 2.0, AND Blockchain 3.0, which are all different from DLT. There are forks — both hard and soft. ITOs, ICOs, STOs, and IEOs are not the same despite accomplishing similar goals. PoW, PoS, DPOS, PBFT, DAG and innumerable other blockchain consensus mechanisms have been compared and contrasted at nauseum. Yet, this isn’t to say that these labels are without specific meaning or merit. While these labels can and do confuse the general public, blockchain 1.0, 2.0 AND 3.0 are indeed different from DLT. Forks can, in fact, be hard or soft. ITOs, ICO, STOs and IEOs are technically different. And the different blockchain consensus mechanisms may just prove to be blockchain’s most profound and lasting impact on the world.

The important takeaway, then, is not that labels are bad, but rather that they must be clearly defined and consistently applied.

A federated credit exchange network

Velo Labs’ mission is to build a Federated Credit Exchange Network, powered by the Velo Protocol. But what, exactly, is a Federated Credit Exchange Network?

The Credit Exchange portion of this label is simple enough. The Velo Protocol is a financial protocol that issues digital credits pegged to any fiat currency. These digital credits are then exchanged by Trusted Partners in the course of their regular business operations. Thus, a Credit Exchange.

The key to understanding the concept of a Federated Credit Exchange Network therefore lies in the bookends. To fully comprehend the Federated Credit Exchange Network label, one must first grasp the concept of a Federated Network. For this, we look back into the bowels of the Cold War.

New networks kept us warm

In the mid-1960s, the Cuban Missile Crisis, often considered the closest the Cold War ever came to escalating into full-scale nuclear war, was fresh on everyone’s minds. Negotiations between the United States of America and the Soviet Union made clear the importance of strong communication lines between the two superpowers. As a result, the Moscow-Washington hotline was established. Meanwhile, the United States intensified their efforts to strengthen their domestic communication infrastructures to withstand a targeted nuclear attack.

The United States Air Force commissioned research into the development of a new type of communication network — one that would not suffer the vulnerabilities of existing centralized networks. Tasked with this monumental task was Paul Baran, a Polish-American engineer and computer network pioneer. Mr. Baran is notably the inventor of packet switching, the basis for nearly all data communications in modern computer networks.

The resulting 11-part epic, titled “On Distributed Communications,” outlined specific designs for a completely new type of network: a distributed adaptive message block network based on a distributed network concept. The world’s first distributed network.

Centralized, decentralized, and distributed

Mr. Baran was truly ahead of his time. Even at this early stage, he realized that the ideal communication network was one that:

“permits any person or machine to reliably and instantaneously communicate with any combination of other people or machines, anywhere, anytime, and at zero cost.”

When considering the synthesis of such a network, he proposed that all networks could be labeled as either centralized, decentralized, or distributed.

In summary, Mr. Baran defined the three labels as follows:

  1. Centralized networks operate by requiring all users to send their data to a central node, which would then deliver the data to the intended recipient. Mr. Baran believed that centralized networks were too vulnerable as the destruction of a single central node threatens the integrity of the entire network.
  2. Decentralized networks are essentially a network of centralized networks, with connections existing between each centralized network’s central nodes. While not relying on a single point, decentralized networks are also at risk as the destruction of a small number of nodes undermines the network as a whole.
  3. Distributed networks have no central nodes at all. Rather, data is sent from one user to another via the shortest route available.

Despite some minor controversy over how these labels are used today — as pointed out by Ethereum co-founder Vitalik Buterin in his famous essay — these three network types established the vital conceptual differences that continue to inform the development of computer networks and blockchain technology nearly 60 years later.

The persistent obstacle

While Mr. Baran believed it was paramount to develop distributed networks, the vast majority of the world’s networks remain centralized or, at best, decentralized. While many would agree that Mr. Baran’s ideal distributed communication network is something worth striving for, there is one major disadvantage to this kind of network that is still relevant today:

Small distributed networks are meaningless.

A distributed network must reach a certain size threshold to achieve the system’s desired properties. In other words, adoption is a network requirement. This disadvantage is particularly germane to the blockchain industry as not a single project has managed to achieved real-world usage at a mainstream scale. Progress, however, continues to be made with each passing year. Velo Labs believes that, with the advent of blockchain and DLT, their Federated Credit Exchange Network brings the world nearer-than-ever to Paul Baran’s ideal communication network.

Federated networks for adoption

As per industry norms, the federated network label does not have a single, unified definition. While outlining every competing definition is beyond the scope of this article, many submit that the ‘federated’ and ‘decentralized’ labels can be used interchangeably. This is not so. Despite similarities stemming from shared conceptual backgrounds, federated networks have specific properties that distinguish them from decentralized networks.

Simply put, a federated network is one where there is one or many core conceits that are agreed to by all network participants in a collective manner in order to facilitate communication. Core conceits can be a set of policies, algorithms, governance hierarchy, or otherwise. Behaviours outside these core conceits are left to the network participants. Federated networks are particularly appropriate when trying to protect a user’s individual rights and autonomy while still providing strong network quality guarantees.

When designing their Federated Credit Exchange Network, the Velo Labs team focused on the needs of existing market participants. By pulling from their vast experiences in both traditional and modern finance, the Velo Labs team identified which of the current financial system’s many shortcomings could reasonable be fixed. Throughout, the team never lost sight of the need for widespread adoption. There is no point in designing something that has no hope of adoption. If a solution isn’t used, it solves nothing.

Velo Labs’ Federated Credit Exchange Network’s core conceits are:

  1. The network’s core function is built on the Velo Protocol;
  2. VELO tokens serve as the network’s universal collateral;
  3. VELO token transactions are confirmed using a Federated Byzantine Agreement — the Stellar Consensus Protocol.

Velo Labs’ Federated Credit Exchange Network is best visualized as a distributed network with regulated entry points. Inside the network, there are no central nodes and all data is sent from one user to another via the shortest route available. Trusted Partners issue digital credits pegged to any fiat currency for use in their day-to-day operations. The settlement of these digital credits is guaranteed by VELO tokens. As such, VELO tokens serve as a bridge asset linking the values of different asset types and enable the transfer of liquidity in and out of the Federated Credit Exchange Network.

Outside the network, checks and balances are in place to ensure that only honest entities engage with the network. This ensures the safety and stability that current financial services market participants require and paves the way for mainstream adoption. In many ways, Velo Labs’ approach is the closest the world has gotten to the original vision of a distributed network.

To quote Mr. Paul Baran himself:

“[Communication networks] should effectively allow for the illusion that those in communication with one another are all within the same soundproofed room — and that the door is locked.”

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Velo Protocol
Velo Labs

A blockchain financial protocol enabling digital credit issuance and borderless asset transfers for businesses using a smart contract system