What is Interledger Protocol?

The Interledger protocol (ITL) is a protocol for payments across payment systems. The protocol was introduced by Ripple in October 2015.

ITL enables secure transfers between ledgers and allows anyone with accounts on two ledgers to create a connection between them. It uses ledger-provided escrow – conditional locking of funds – to allow secure payments through untrusted connectors. Connections can be composed to enable payments between any ledgers, creating a global graph of liquidity or interledger.

Interledger protocol does not rely on any global coordinating system or ledger for processing payments – centralized or decentralized. ITL lowers the barriers to facilitating interledger payments. Connectors compete to provide the best rates and speed. The protocol can scale to handle unlimited payment volume, simply by adding more connectors and ledgers.

Composing connectors into chains enables payments between any ledgers and give small or new payment systems the same network effects as the most established systems. This can make every item of value spendable anywhere – from currencies to commodities, computing resources and social credit.

“This will be something that sits on top of all the ledgers and abstracts the differences,” said Ripple’s Chief Technology Officer Stefan Thomas back in October. “We’re trying to create a global standard for payments.”

Ledger-provided escrow enables secure interledger payments by isolating each participant from the risks of failure or malicious behavior by others involved in the payment. All participants rely upon their ledgers to escrow funds and release them only when a predefined condition is met.

The sender is assured by their ledger that their funds are transferred only upon delivery of a non-repudiable acknowledgement that the recipient has received their payment. The recipient is assured by their ledger that they will be paid when they provide such an acknowledgement.

Cryptographic signature is a simple way for ledgers to securely validate the outcome of the external conditions upon which a transfer is escrowed. The sender of a payment is guaranteed a cryptographically signed receipt from the recipient, if the payment succeeds, or else the return of their escrowed funds.

“There are many different types of ledger and payment systems used by banks, corporates and others today for different applications. No single system or ledger can be expected to handle the volume of the entire world’s payments or address every need and use case. The beauty of having so many solutions is that each ledger can serve a distinct use case extremely well,” explained Stephan Thomas in the interview with PYMNTS. “The Interledger Protocol was designed to allow all of these ledgers to work in concert. It is a free, open source and neutral Web protocol that enables interoperability between these diverse ledgers to deliver infinite scalability and flexibility. This improves the ability of each ledger to customize schemes with the other ledgers with which it interacts.”

The Interledger protocol features two modes of executing payments – Atomic mode and Universal mode. The Atomic mode of the protocol provides atomicity for payment chains in which the participants can agree upon a group of notaries. The Universal mode uses the incentives of rational actors to enable practical payments between participants that do not all share trust in any institution or system.

The Ripple protocol (Ripple), released in 2012 by Ripple and built upon a distributed open source Internet protocol, consensus ledger and native currency called XRP (ripples), is often confused with the Interledger protocol.

However, the Interledger protocol bears no relation to Ripple consensus ledger. This is a common misconception because a lot of people in the payments community have preconceived ideas about Ripple and haven’t got enough information neither on ITL nor on Ripple. Besides, the Interledged protocol was released by Ripple engineers, as well as the Ripple protocol.

At its core, Ripple is based around a ledger, which uses a consensus process that allows for payments, exchanges and remittance in a distributed process. As of 2014, Ripple is the second-largest digital currency by market capitalization after Bitcoin.

When the idea of the Interledger protocol was first published, it found support of such reputable companies as Microsoft and the World Wide Web consortium. According to Stefan Thomas, the company first came across the idea of ITL when banks refused to use Ripple. They did not like the semi-public nature of the ledgers, which could make their businesses accessible for outsiders. He explained that the only thing banks could do is to “fork” the code for Ripple and create their own internal system. However, as Marly Gray from Microsoft admits, “a blockchain is essentially worthless if it’s just used within a single organization”.

As said by Stephan Thomas, nowadays corporations often need to pre-fund bank accounts in foreign nations where they do business in order to save time and money in currency transactions. This effectively forces them to tie up capital around the world in local currencies to account for the siloed payment ecosystem and several days of settlement times. As a result, antiquated payments infrastructure results in additional costs for banks and their corporate customers, and this need to pre-fund accounts leads to stagnant currency accounts and a high opportunity cost.

“ILP helps interconnect the payment ecosystem, eliminating these inefficiencies and enabling corporations to make payments as needed versus having to pre-fund accounts. This allows them to allocate that working capital elsewhere and use their capital in entirely new ways,” stated Thomas meaning that ITL can be helpful in cross-border settlements.

The concept of the Interledger protocol was developed thanks to the investment of several million dollars from Santander Group. The Spanish banking group, the largest bank in the Eurozone by market value and one of the largest banks in the world in terms of market capitalization, must have believed in Ripple’s idea.

Mariano Belinky, the managing partner of Santander InnoVentures, stated that Ripple’s technology can revolutionize the banking infrastructure. “Ripple possesses the talent, technology and momentum to address many of the scenarios and we are actively exploring where and how best to apply Ripple technology inside the bank,” he said.

According to Thomas, ITL is based on extensive customer feedback from banks across the industry — large and small, retail and commercial — who have piloted Ripple over the past year.

He believes that banks will be among the first adopters of the Interledged protocol, using it within cross-border settlement solutions like Ripple protocol that they are already familiar with, enabling them to efficiently make private transactions across borders and across different ledgers. In the same way that ITL bridges across technical differences in bank-to-bank settlement, it could bridge incompatible Web and mobile payment systems.

The company plans to release an ILP-enabled version of Ripple to bring about the key features requested by banks, such as private transactions, infinite scalability and the ability to denominate fees in any currency.