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Correspondent banking. So say a bank in the States needs to send money to one in Spain. They may not have a relationship, so they go through an intermediary ban

Correspondent banking. So say a bank in the States needs to send money to one in Spain. They may not have a relationship, so they go through an intermediary bank. You can use a smart contract to eliminate the trust in the intermediary bank, so eliminating that counter party risk

karpierz 3y ago
How exactly does the Spanish bank get the USD that the American bank sent without trusting a third party?
- brobinson 3y ago
  You don't need to trust when you can verify. The source code for the intermediary bank (smart contract) would be available for everyone to read.
  - karpierz 3y ago
    I'm not talking about code. The goal of the transaction is for the Spanish bank to have access to USD. In the example given, the Spanish bank would then have to take the crypto it got and trust an exchange to give it USD in exchange for the crypto. How do you get USD to the Spanish bank without trusting a third party?
    - csumtin 3y ago
      USD doesn't have smart contract abilities so yes you are correct about trusting a third party to exchange crypto to USD. You could use a stablecoin but that requires you to trust the stable coin backing.
    - TimJRobinson 3y ago
      There are many USD stablecoins they can use: https://www.coingecko.com/en/categories/stablecoins https://www.coingecko.com/en/categories/stablecoins. The top two are the most liquid but are also centralized, many of the others are fully decentralized.
- chrisco255 3y ago
  They may be willing to accept trusting the dollar-backed token issuer. In the case of USDC, it's Circle. But there's nothing stopping JPMorgan, BoA, Wells Fargo, Western Union, etc implementing their own dollar backed tokens, and I suspect we'll see more and more of that as regulatory clarity settles. Maybe the Fed themselves will issue tokens in this way. It's also entirely possible to construct a permissioned, yet decentralized exchange of tokens among whitelisted parties. Either way USD is never sent trustlessly.
  - theamk 3y ago
    Your first and last sentence contradict to each other. If you already have a third party which both sender and receiver of money can trust, what's the point of blockchain?
    - chrisco255 3y ago
      There are hundreds of use cases for it. We are discussing one in particular which is for international settlement of USD backed tokens with limited trust assumptions necessary. Because we are talking about USD and not BTC or ETH, there is ALWAYS an intermediary involved in any transaction that is not paper cash in hand. The sender and receiver still benefit from a permissionless, automated, international, instant transfer of funds with a cryptographically certified audit trail. The blockchain runs 24/7 and has no downtime. A token can be fully programmed and fine tuned for whatever parameters need to be checked to authorize a transfer. Those rules are transparent and auditable to everyone involved. The transfer goes through within seconds and the cost of the transfer does not scale with the value of the transfer.
csumtin 3y ago
Explanation: bankA -> bankB -> bankC. bankC creates a secret number, hashes it and sends it to bankA. bankA sends money to bankB locked to hash. bankB can't get money until they have that secret number. bankB sends money to bankC locked to hash. bankC reveals secret number to bankB to unlock that money. bankB does the same with bankA. Tada, we eliminated the risk of bankB running away with money. This is the lightning network
- csumtin 3y ago
  I realise that this might seem a bit niche but we can use this to create a payment network(like visa). This system is better as the nodes in the network don't need to trust each other. Cast your mind back to 2008 and hopefully this means that one bank falling over doesn't bring down the whole system.
- JumpCrisscross 3y ago
  > we eliminated the risk of bankB running away with money This isn't a real risk with correspondent banks. Instead, it's counterparty risk: bankB failing while it holds the funds in transfer. That risk can be mitigated with smart contracts, but it's not eliminated. (Correspondent banks also take a portion of the client bank's fraud and AML risk.)
  - csumtin 3y ago
    I think the bank failing risk is eliminated, if it fails the forwarded payment is unlocked so bankA gets their money back.
    - JumpCrisscross 3y ago
      > think the bank failing risk is eliminated, if it fails the forwarded payment is unlocked so bankA gets their money back Bank failing in this context would be the bridge (EDIT: contract) gets hacked. Hence mitigated, but not eliminated.
      - 3y ago

karpierz 3y ago

How exactly does the Spanish bank get the USD that the American bank sent without trusting a third party?

brobinson 3y ago
You don't need to trust when you can verify. The source code for the intermediary bank (smart contract) would be available for everyone to read.
- karpierz 3y ago
  I'm not talking about code. The goal of the transaction is for the Spanish bank to have access to USD. In the example given, the Spanish bank would then have to take the crypto it got and trust an exchange to give it USD in exchange for the crypto. How do you get USD to the Spanish bank without trusting a third party?
  - csumtin 3y ago
    USD doesn't have smart contract abilities so yes you are correct about trusting a third party to exchange crypto to USD. You could use a stablecoin but that requires you to trust the stable coin backing.
  - TimJRobinson 3y ago
    There are many USD stablecoins they can use: https://www.coingecko.com/en/categories/stablecoins https://www.coingecko.com/en/categories/stablecoins. The top two are the most liquid but are also centralized, many of the others are fully decentralized.
chrisco255 3y ago
They may be willing to accept trusting the dollar-backed token issuer. In the case of USDC, it's Circle. But there's nothing stopping JPMorgan, BoA, Wells Fargo, Western Union, etc implementing their own dollar backed tokens, and I suspect we'll see more and more of that as regulatory clarity settles. Maybe the Fed themselves will issue tokens in this way. It's also entirely possible to construct a permissioned, yet decentralized exchange of tokens among whitelisted parties. Either way USD is never sent trustlessly.
- theamk 3y ago
  Your first and last sentence contradict to each other. If you already have a third party which both sender and receiver of money can trust, what's the point of blockchain?
  - chrisco255 3y ago
    There are hundreds of use cases for it. We are discussing one in particular which is for international settlement of USD backed tokens with limited trust assumptions necessary. Because we are talking about USD and not BTC or ETH, there is ALWAYS an intermediary involved in any transaction that is not paper cash in hand. The sender and receiver still benefit from a permissionless, automated, international, instant transfer of funds with a cryptographically certified audit trail. The blockchain runs 24/7 and has no downtime. A token can be fully programmed and fine tuned for whatever parameters need to be checked to authorize a transfer. Those rules are transparent and auditable to everyone involved. The transfer goes through within seconds and the cost of the transfer does not scale with the value of the transfer.

csumtin 3y ago

Explanation: bankA -> bankB -> bankC. bankC creates a secret number, hashes it and sends it to bankA. bankA sends money to bankB locked to hash. bankB can't get money until they have that secret number. bankB sends money to bankC locked to hash. bankC reveals secret number to bankB to unlock that money. bankB does the same with bankA. Tada, we eliminated the risk of bankB running away with money. This is the lightning network

csumtin 3y ago
I realise that this might seem a bit niche but we can use this to create a payment network(like visa). This system is better as the nodes in the network don't need to trust each other. Cast your mind back to 2008 and hopefully this means that one bank falling over doesn't bring down the whole system.
JumpCrisscross 3y ago
> we eliminated the risk of bankB running away with money This isn't a real risk with correspondent banks. Instead, it's counterparty risk: bankB failing while it holds the funds in transfer. That risk can be mitigated with smart contracts, but it's not eliminated. (Correspondent banks also take a portion of the client bank's fraud and AML risk.)
- csumtin 3y ago
  I think the bank failing risk is eliminated, if it fails the forwarded payment is unlocked so bankA gets their money back.
  - JumpCrisscross 3y ago
    > think the bank failing risk is eliminated, if it fails the forwarded payment is unlocked so bankA gets their money back Bank failing in this context would be the bridge (EDIT: contract) gets hacked. Hence mitigated, but not eliminated.
    - 3y ago