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XRPL - On IOUs

A topic that we often get asked about is the quantity & quality of non-native currencies, also known as IOUs moving across the XRP Ledger. The XRPL supports sending and receiving any quantifiable asset (fiat currencies such as USD & EUR, crypto-currencies such as BTC & ETH, physical assets such as gold & silver, and pretty much anything else) across the network so long as there is an institution known as a gateway or a custodian backing that asset. It is the responsibility of the custodian to manage the real world assets which back the on-ledger IOUs and to provide the services used to issue and redeem those tokens, exchanging the digital value for physical.

xrp1ntel is known to report a wide variety of currencies being sent across the ledger. Last month alone, 21T USD, 512M BTC, 100B XLM, and much more was moved across the network. Obviously not all of this currency is backed by actual real-world assets (in the case of USD, we know for a fact that the 21 Trillion was issued / transferred to prove this point) and unless the issuer is a known/reputable institution is it hard to determine the legitimacy of these funds. That being said, for all practical purposes and from an operational perspective this doesn't matter a whole lot as we will discuss below.

The process of issuing an asset on the XRPL, whether fiat currency, an external crypto currency, or a new token allogther, transpires in the exact same manner. A client account extends a Trust Line to the issuing account for the maximum amount of currency which they trust the gateway to manage for them. In the case of real world assets such as USD or BTC, the client would then send the amount they would like to withdraw on the XRPL to the institution via the traditional payment network, and then invoke the mechanism requesting the withdrawl on-ledger. In the case of tokens solely issued on the XRPL, with no corresponding off-ledger backing, the first deposit step is replaced with whichever signup / on-boarding process the gateway requires, perhaps a new account being created, or an authorization process validating the user is part of some other network. After this point the process is exactly the same, the user specifies their XRP account address where they would like the funds to be issued to.

The onus of trust is always held by the client, it is up to each individual user to only extend trust to the institutions which they know will honour IOUs for off-ledger issuances when it comes time to redeem them and will honour the scarcity of the tokens in accordance to the stated issuance/governance policy. If this trust is misplaced, and the gateway is shown to be misallocating IOUs, the consequences will not be systematic, and the ramifications will be limited to those accounts that extended trust to the unreputable gateway.

Now with the context being established, lets explore some specifics of why it's important to not cast judgements either way pertaining to IOUs unless factual information is explicitly known:

  • Unless the issuer account explicitly states what their IOUs are, we can only assume they represent well known currencies. Perhaps BTC doesn't refer to Bitcoin but rather Bolivian Transfer Coin or perhaps USD doesn't refer to the United States Dollar but rather Universal Service Denomination. There are no guarantees and we don't know unless expressely stated.
  • Until we have more advanced tooling, metrics pertaining to tracking transferred tokens is cumulative. Lets say Alice Sent Bob, 5 BTC and then Bob sent that same 5 BTC back to Alice or to another user, the analytics will register this as 10BTC being transferred. While both metrics are valuable (discrete and cumulative values), the former will require much more advanced and resource-intensive state tracking than is currently available (Dev Null Productions is working on this!)
  • Assuming real-world IOUs, such as for BTC, is backed, the transfer of currency on the XRP ledger has the same effect as the transfer of currency on the BTC network, namely the value is being moved from one account to another (with the additional benefit that the former network is faster and cheaper than the later). "IOU" is meaningless in this context as the end result is the same. The same principle can be applied to fiat currencies which by large exist solely as digital representations in modern banking networks (the additional benefit to using XRPL in this case is the decentralization and transparency that it affords)
  • Backed or unbacked transactions look exactly the same on the XRPL. If the BTC being transferred is backed by actual Bitcoin or it is not, the XRPL transaction would manifest in the exact same manner. It is important to not lose sight of the forest for the trees.
  • Finally until proven otherwise, we shouldn't assume that transactions are not legitimate. Why not give the network the benefit of the doubt?

We hope this clears up some misconceptions pertaining to IOUs & tokens and clarifies our stance on representing them the way we do. We are in the process of expanding our metrics to provide additional intelligence pertaining to issuances & transfers from known/reputable institutions but this is one of many items on the backlog and we don't have a delivery date for this feature at the current time. In the end Dev Null Productions is committed to providing high-quality, factual intelligence and metrics to our clients and the XRP Community, and are eager to continue doing so in the years & decades ahead.

Until next time... Keep Zerping!