Distributed Multi-Party Netting for Interbank Liquidity
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Solution Overview
Problem
Centralized payment systems for interbank transactions face liquidity bottlenecks and confidentiality concerns, leading to high operational costs and single points of failure, which can disrupt the financial system.
Innovation Solution
A fully distributed privacy-preserving multi-lateral netting method that allows parties to independently collect and publish transaction commitments on a bulletin board, enabling secure fault-tolerant multi-party computation to determine nettable transactions without violating liquidity requirements, using blockchain technology for secure information sharing.
Engineering Contradictions & Design Principles
Engineering Contradiction Analysis
1Reliability
If centralized payment systems are used for interbank transactions, then transaction settlement can be performed with centralized control, but liquidity bottlenecks and single points of failure occur, leading to high operational costs and system disruptions
Solution Approach 1:
The patent extracts the centralized control function from the payment system by implementing a distributed ledger where each participant maintains an independent copy of the transaction ledger. This eliminates the single point of failure (centralized controller) while maintaining settlement functionality through cryptographic verification and consensus mechanisms among distributed nodes.
Solution Approach 2:
The patent segments the centralized control authority into multiple independent nodes that each verify transactions autonomously. Instead of one central entity managing all transactions, the system divides verification power across multiple participants, each holding a segment of the overall system responsibility, thereby improving reliability through distribution.
2Speed
If real-time gross settlement system (RTGS) is deployed to avoid liquidity squeeze, then immediate payment settlement is achieved, but high liquidity levels are required, leading to liquidity bottlenecks and gridlocks
Solution Approach 1:
The patent enables parties to publish commitment values in advance that represent their intended transaction amounts and timing. The distributed ledger system processes and verifies these commitments beforehand, allowing the network to pre-allocate liquidity paths and identify potential gridlock conditions before they occur, thereby reducing the peak liquidity required during actual settlement.
Solution Approach 2:
The system implements feedback mechanisms where each node continuously monitors the ledger state, liquidity positions, and transaction flows. This real-time feedback allows participants to adjust their transaction submissions and liquidity management dynamically, preventing gridlock by identifying and resolving congestion issues before they cause system-wide delays.
3Productivity
If central banks operate as centralized payment queue to perform multi-lateral netting, then liquidity is increased and gridlocks are resolved, but operational costs and computing resources increase significantly
Solution Approach 1:
The patent enables each participant to independently verify transaction commitments and maintain their own ledger copy without requiring continuous centralized processing. Nodes autonomously validate transactions against the published commitments and update their local ledgers, eliminating the need for expensive centralized netting computation while maintaining settlement integrity through distributed consensus.
Solution Approach 2:
Instead of requiring all nodes to perform complete multi-lateral netting computations (excessive action), the system allows each node to perform partial verification of transactions relevant to their own positions. This selective verification approach achieves the necessary settlement functionality with significantly reduced computational overhead compared to centralized netting.
4Loss of information
If centralized systems preserve confidentiality of payment instructions, then privacy is maintained, but central banks become single points of failure and operational burden increases
Solution Approach 1:
The patent segments the confidentiality protection function across multiple distributed nodes rather than relying on a single centralized authority. Each node independently verifies transaction validity and maintains privacy through cryptographic methods, so that no single point controls all confidential information. This distribution improves robustness while preserving confidentiality through collective security.
Solution Approach 2:
The distributed ledger acts as an intermediary structure that enables confidential transaction verification without requiring any single node to access or control all private information. Cryptographic proofs and commitment schemes serve as intermediaries that allow nodes to verify transaction validity while preserving the confidentiality of individual transaction details, distributing both the privacy protection and system reliability across the network.
Data Source
AI summary
A method for a fully distributed privacy-preserving multi-lateral netting between parties is disclosed. The method comprising collecting pending transactions between at least a part of the parties, publishing a commitment of pending transactions to a bulletin board, secretly sharing de-commitments among the parties, and publishing, by each party, its determined liquidity status, to the bulletin board. Furthermore, the method comprises upon determining a failure in the publishing of any liquidity status, performing the following MPC by determining whether all pending transactions are settable maintaining positive liquidity for each party, and upon determining a failure in the determining, for each party, whether all pending transactions are nettable determining an optimized subset of transactions that are nettable without violating liquidity requirements for each party.