Jerome Powell, the Chair of the Federal Reserve Banks has encouraged commercial banks to use a blockchain based inter-bank lending rate setting platform.
“We have been clear that the [Alternative Reference Rates Committee’s] recommendations and the use of [Secured Overnight Financing Rate] are voluntary and that market participants should seek to transition away from Libor in the manner that is most appropriate given their specific circumstances,” Powell said before adding:
“Ameribor is a reference rate created by the American Financial Exchange based on a cohesive and well-defined market that meets the International Organization of Securities Commission’s (IOSCO) principles for financial benchmarks.
While [Ameribor] is a fully appropriate rate for the banks that fund themselves through the American Financial Exchange (AFX) or for other similar institutions for whom Ameribor may reflect their cost of funding, it may not be a natural fit for many market participants.”
Unlike in the crypto space where price is set in many different exchanges across the world, including many decentralized exchanges, in the traditional system the price of many commodities or facilities is set more manually through an auction model.
That creates obvious problems, with most of you probably familiar with the Libor scandal where bankers were rigging and manipulating the price of money, the price of banks lending to each other.
Ameribor doesn’t necessarily address that inherent weakness, but it appears to provide a lot more transparency and thus evidence. We quote in full a press release announcing Ameribor:
“American Financial Exchange (AFX), an electronic exchange for direct lending and borrowing for American banks and financial institutions, announced today the launch of its AMERIBOR® on the blockchain
AFX now mints two ERC-721 non-fungible tokens for each AMERIBOR transaction on the AFX platform (for each counterparty to the transaction)
The pair of tokens is automatically minted when the transaction is repaid by the borrowing counterparty to the lending counterparty. Each token contains encrypted transaction data and encrypted counterparty data. The counterparty data is normalized prior to encryption to further preserve counterparty anonymity. Tokens are transferred via secure queue to a
private, proprietary, parity-based AFX Ethereum proof-of-authority blockchain. Tokens are then written to a cryptographic ledger to each counterparty’s account and are owned by the respective counterparties
to the AFX transaction.
‘This is AFX’s first major blockchain initiative,’ said AFX Chairman and CEO Richard Sandor, ‘We learned a great deal about this new and exciting technology and believe the blockchain has the potential to transform electronic trading and financial markets. AFX is committed to remain in the forefront of this new technology.’”
Proof of Authority (PoA) is a consensus method where instead of having miners or stakers decide what transaction should be included, you just have the node itself decide so.
This can work because you can’t flood it with fake nodes as you need ‘authority’ or permission to be a validating node in these sort of blockchains.
That means you have to trust usually a consortium that through some sort of committee decides who gets and doesn’t get permission, with that consortium able to decide to change data, but only if they all agree.
So it increases quite a bit the cost of committing fraud or manipulation without being caught especially if fierce competitors are part of the consortium, and thus are validating nodes, as well as maybe the FED itself and perhaps even the whitehouse.
Ameribor doesn’t seem to like talking about the blockchain much so it isn’t clear who exactly is part of this PoA blockchain, but usually you can increase or decrease the number of nodes as wanted.
ERC-721 is what is better known as CryptoKitties. That is a unique ID that corresponds to a unique asset or event or in this case a unique transaction.
The transaction being one banker says to another they are willing to lend at x%, the other banker accepts, and so we have two tokens: one for the borrower, one for the lender, both ‘tied’ to this specific transaction.
If this was on ethereum’s public blockchain we could have gone to the explorer and could have seen the actual details, including what transactions were made, what tokens were minted, the rate, and the time, the amount.
As Ameribor is basically a blockchain as well, just without miners or stakers, if they wanted to let us, we could have also seen the above details on their explorer.
PoA Blockchains, The New Intranet?
There is actually an ethereum PoA public blockchain that acts as a testnet. That being an identical copy of the ethereum live blockchain (mainnet) but with ‘fake’ eth tokens that don’t have value so if they get lost or hacked on this testnet, no one cares.
The point of this testnet is to experiment in a live like environment as well as to find any potential bugs both in regards to the base protocol as well as in regards to any smart contract you might launch.
So just because Ameribor is PoA, it doesn’t mean the data needs to be hidden or that only the authorized nodes need to participate.
Non-validating nodes can read instead, and if wanted to they can even write but they have no say on what is included in the network, what is actually written, as the validating nodes can choose to deny them access.
Ameribor however can also choose to limit who sees the data, in this case presumably just the participating validating nodes that may include gov and/or other observing institutions.
This thus gives corporations and institutions more control with the added benefit of the participants themselves having more transparency and a higher barrier of cheating without risking easily being caught.
The risk here is the potential of being hacked, which also applies to normal databases and still the world pretty much runs on databases.
In theory however because the code for this Ameribor platform is presumably not open source, it is kind of engaging in security through obscurity which can be risky because someone may find bugs and instead of revealing them they may exploit them.
That is what has also happened on the ethereum public blockchain and a few times, but not at a protocol level because that has many eyes across the world looking at it and the thousands or more projects that depend on the protocol being iron secure.
The ethereum public blockchain therefore simply has far more resources which arguably can’t be replicated because you can buy some of the talent with money, but not all of the talent in the world, including the Chinese or the Ruskis or the Europeans and so on, all of whom have stuff running on the ethereum blockchain and therefore want it to be as secure as possible.
Smart Contracts, The New Internet?
So another way of doing Ameribor could be as a smart contract within ethereum’s public and global blockchain.
Smart contracts are still a very new thing and because of that our understanding of them at a conceptual level is evolving.
That’s because instead of seeing these as programs it is maybe best to see them as sub-networks, or city-states if you like with their own culture, rules, all however under the subject of the ethereum blockchain layer that governs it.
Within those ethereum base rules you can then have Turing complete additional rules in the smart contract, in its own mini-network.
For something like Ameribor the minting, etc, obviously all of these were invented in the public blockchain so this whole thing can probably quite easily be created within a smart contract.
Why, instead of this PoA chain? Resources is one maybe small reason. Why have all these nodes and presumably people guarding them etc when there are far more of them in the ethereum network with hugely diverse interests instead of being a super niche blockchain as this one.
Fundamentally however the main reason that has to be considered is the level of security desired.
It is practically impossible to change or hide a transaction or data in ethereum – unless you want to hide it from the public in the smart contract but that hidden data still follows network rules and still thus can’t be changed – again unless you gave yourself permission to change them.
All of those disclaimers are because smart contracts are very flexible. The network doesn’t judge what you are doing within the smart contract, it only judges whether what you are doing is within or outside the rules you have yourself written.
As ethereum is Turing complete, that means you can write any rules whatever that can be expressed in code. Once those rules are written, however, the network forces you to follow them – unless you want to change them and have given yourself this ability, in which case you then have to follow the new rules.
So since this is so flexible we have to go back to the question, with one consideration being that if your contract network is hackable, it will be hacked, and we all will know about it, and we all will know how it was done and what happened after, and therefore your contract will be strengthened.
Meaning both the public and those participating can be pretty much certain that the data in the contract has not been changed or manipulated or distorted because if it was, we’d all know about it.
With Ameribor being primarily if not solely about data, instead of asset storage etc, then presumably the highest guarantee of the veracity of these data is the point, and the public blockchain is of course the gold standard in regards to that aspect.
Within the private blockchain instead, it depends on how many participants there are presumably but arguably it can never reach the same level as the public blockchain because it simply wouldn’t have as many eyes on it.
Meaning the ethereum public blockchain operates on a security model of hack it if you can, with every hack strengthening not just the hacked contract itself but all contracts as everyone will know about it, how it was done, and therefore how it can be avoided.
Where scalability is concerned, smart contracts now do have plenty of capacity, so the only barrier may be the comfort level since these are new things with even us that cover it daily evolving our understanding, so the traditional world obviously needs a bit more familiarity.
Hence perhaps why Ameribor is more traditionally familiar with someone like Powell probably just seeing it as a better database, instead of the ‘scary’ hacker space of eth.
Which is fine for now as this is a step in the adoption process where you recreate the current methods in new tech with little apparent difference, except for some, that may seem small and can often lead to wondering ‘what’s the point?’
A question always asked when new tech arrives, but in our view the corporate world does have to bear in mind that eventually they have to transition to the proper blockchain where the capabilities are a lot more powerful and where everyone hangs out because that’s where all the innovation is happening, so eventually that’s where you’ll want to be: on the internet, not just the intranet.