Distributed Ledgers: Design and Regulation of Financial Infrastructure and Payment Systems by Robert M. Townsend

Author:Robert M. Townsend [Townsend, Robert M.]
Language: eng
Format: epub
Tags: Bitcoin; blockchain; distributed ledgers; distributed ledger technology; DLT; decentralization; smart contracts; tokens; currency; cashless economy; e-money; payment system; Encryption; proof of work; proof of stake; Ethereum; Libra; Ripple; Stellar; Algorand; central banks; mechanism design; algorithmic digital reserve bank; Townsend Thai project
ISBN: 9780262539876
Google: NA38DwAAQBAJ
Publisher: MIT Press
Published: 2020-07-15T00:33:55.458013+00:00

Table 7.2

Colored coins and partitioned private ledgers.

These ideas in economics have tight links to cryptography and the idea of colored coins. The discussion here draws on Narayanan et al. (2016). As an example, ordinary Federal Reserve bank notes can be given bar codes so they can be used as purchased tickets to Yankee baseball games. The team signs a message that includes a specific game date, seat number, and serial number of the bill, with the signature of the issuer, all stamped on the bill. The advantage of using preexisting bank notes is that they cannot be easily counterfeited, so there would be no need to print new tickets. And such a system is decentralized. The message is written on the token, so to speak. Alternatively, the stadium could check a central database for information when a “ticketholder” enters the gate with a note having a certain serial number. The serial number links back to the primitive transaction, the purchase of the ticket. Either way, metadata is being attached to the note.

The point is that coins have publicly verified histories to trace ownership. This history can be made meaningful and put to other uses. Coins that “originate” in certain transactions can have associated extra metadata that behave like a color. The colors can also be considered as a metaphor, of course, as they could simply be bit strings. It is important, of course, that all participants understand the rules of this payment system so they know how to interpret the colors.3

To summarize simply, and to link back to the economics, distributed ledgers could keep track of messages as a part of the execution of a multi-period, multi-commodity, multi-agent smart contract, and thus optimally allocate underlying risk while facilitating trade and exchange. The “money” here, or more generally the payment system, is not separated from the motives for trade, intertemporal exchange, and insurance.

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