@TBD54566975
Abstract: tbDEX is a protocol for discovering liquidity and exchanging assets (such as bitcoin, fiat money, or real world goods) when the existence of social trust is an intractable element of managing transaction risk. The tbDEX protocol facilitates decentralized networks of exchange between assets by providing a framework for establishing social trust, utilizing decentralized identity (DID) and verifiable credentials (VCs) to establish the provenance of identity in the real world. The protocol has no opinion on anonymity as a feature or consequence of transactions. Instead, it allows willing counterparties to negotiate and establish the minimum information acceptable for the exchange. Moreover, it provides the infrastructure necessary to create a ubiquity of on-ramps and off-ramps directly between the fiat and crypto financial systems without the need for centralized intermediaries and trust brokers. This makes crypto assets and decentralized financial services more accessible to everyone.
Introduction
We are at a crossroads in our financial system. The emergence of trustless, decentralized networks unlocks the potential for a future where commerce can happen without the permission, participation, or benefit of financial intermediaries.
Globally, 1.7 billion adults lack access to the banking system, yet two-thirds of them own a mobilephone that could help them access financial services [1]. The reasons for their exclusion vary, butthe common threads are cost, risk, and lack of infrastructure. Decentralized and trustless systemscreate a world that empowers individuals — one in which the right to engage in payments isneither subject to proving creditworthiness and the ability to pay account fees, nor subject tocensorship when an intermediary’s values do not comport with the payer or payee. It’s also a worldwhere internet access is the only fundamental infrastructure required to participate.
An open, decentralized financial system will enable all people to exchange value and transact with each other globally, securely, and at significantly lower cost and more inclusively than what traditional financial systems allow. Beyond reinventing money itself, smart contracts also have the ability to fundamentally reshape how the financial infrastructure of the future can work.
tbDEX was formed out of a desire to enable everyone to realize this vision of the future. The current state of Bitcoin and other crypto technologies is still beyond the reach of everyday people. For instance, gaining access to your first cryptocurrency generally involves going through a centralized exchange. Accessing decentralized financial services then requires multiple asset transfers and transaction fees each step of the way. Aside from gatekeepers and cost, the complexity and sheer unintelligibility of this process today is a prohibitive barrier to entry for most. Important work is being done to overcome current drawbacks with layer two solutions, such as Lightning. But deficiencies remain. It is still prohibitively difficult for the average person, starting with traditional fiat-based payment instruments, to directly access on-ramps and off-ramps into and out of the decentralized financial system. We need a better bridge into this future. The tbDEX protocol is directed at this problem.
The protocol provides a framework for creating on-ramps and off-ramps from systems of fiat to cryptocurrency, without the need for going through centralized exchanges. The protocol affords for the secure exchange of identity and mechanisms for allowing participants to comply with laws and regulations.
At its core, the tbDEX protocol facilitates the formation of networks of mutual trust between counterparties that are not centrally controlled; it allows participants to negotiate trust directly with each other (or rely on mutually trusted third-parties to vouch for counterparties), and price their exchanges to account for perceived risk and specific requirements.
Foundational Concepts
Trust
The tbDEX protocol approaches trust differently than other decentralized exchange protocols in the sense that it does not utilize a trustless model, such as atomic swaps. At first blush, this is not optimal, especially when considering the end goal of providing access to a trustless asset like bitcoin. However, the reality is that no interface with the fiat monetary system can be trustless; the endpoints on fiat rails will always be subject to regulation, and there will exist the potential for bad behavior on the part of counterparties. This means that any exchange of value must be fundamentally based on other means of governing trust — particularly reputation.
The tbDEX protocol borrows heavily, if not completely, from well-established models of decentralizing trust, such as the public key infrastructure (PKI) that is used for securing the internet today.
Building on top of Decentralized Identifiers (DID) [2], this specification lays out a trust model in which trust is governed through disparate verifiers of trust; this is ultimately in the control of individuals, implementers of cryptocurrency wallets, and/or delegates of trust established by either group.
The protocol itself does not rely on a federation to control permission or access to the network. There is no governance token. In its most abstract form, it is an extensible messaging protocol with the ability to form distributed trust relationships as a core design facet. The protocol itself has no opinion on what an optimal trust relationship between an individual wallet and a participating financial institution (PFI) should look like.
The nature of this trust relationship will never be universal: different jurisdictions are subject to different laws and regulations; and different individuals and institutions will have varying levels of risk tolerance, influenced by price and other incentives. It would violate the principle of trying to achieve the maximum amount of decentralization if the negotiation of trust was dictated at the protocol layer, as that would necessarily involve some form of permissioned federation.
Decentralized Identifiers (DIDs)
Decentralized identifiers (DIDs) [2] are a new type of identifier that enables verifiable, decentralized digital identity. A DID refers to any subject (e.g., a person, organization, thing, data model, abstract entity, etc.) determined by the controller of the DID. In contrast to typical federated identifiers, DIDs have been designed so they may be decoupled from centralized registries, identity providers, and certificate authorities. Specifically, while other parties may be used to help enable the discovery of information related to a DID, the design enables the owner of a DID to prove control over it without requiring permission from any other party. DIDs are Uniform Resource Identifiers (URIs) that associate a DID subject with a DID document, allowing trustworthy interactions associated with that subject.
DIDs are linked to DID Documents, a metadata file that contains two primary data elements:
1. Cryptographic material the DID owner can use to prove control over the associated DID (i.e. public keys and digital signatures)
2. Routing endpoints for locations where one may be able to contact or exchange data with the DID owner (e.g. Identity Hub personal data storage and relay nodes)
DID Methods may be implemented in very different ways, but the following are essential attributes of exemplar Methods (e.g. ION):
● The system must be open, public, and permissionless.
● The system must be robustly censorship resistant and tamper evasive.
● The system must produce a record that is probabilistically finalized and independently, deterministically verifiable, even in the presence of segmentation, state withholding, and collusive node conditions.
● The system must not be reliant on authorities, trusted third-parties, or entities that cannot be displaced through competitive market processes.
Verifiable Credentials (VCs)
Credentials are a part of our daily lives: driver's licenses are used to assert that we are capable of operating a vehicle; and diplomas are used to indicate the completion of degrees. In the realm of business, there exist signed receipts for payments, consumer reviews of products, and countless assertions made between individuals and non-governmental parties. While all these credentials provide benefits to us within apps, platform silos, and isolated interactions, there exists no uniform, standardized means to convey generalized digital credentials that are universally verifiable across domains, federation boundaries, and the Web at large.
The Verifiable Credentials specification provides a standard way to express credentials across the digital world in a way that is cryptographically secure, privacy respecting, and machine verifiable. The addition of zero-knowledge proof (ZKProof) [3] cryptography to VC constructions (e.g. SNARK credentials) [4] can further advance privacy and safety by preventing linkability across disclosures, reducing the amount of data disclosed, and in some cases removing the need to expose raw data values at all.
Identity Data Storage & Relay Nodes (Identity Hubs)
Most digital activities between people, organizations, devices, and other entities require the exchange of messages and data. For entities to exchange messages and data for credential, app, or service flows, they need an interface through which to store, discover, and fetch data related to the flows and experiences they are participating in. Identity Hubs are a data storage and message relay mechanism entities can use to locate public or permissioned private data related to a given DID. Identity Hubs are a mesh-like datastore construction that enable an entity to operate multiple instances that sync to the same state across one another. This enables the owning entity to secure, manage, and transact their data with others without reliance on location or provider-specific infrastructure, interfaces, or routing mechanisms.
Identity Hubs feature semantically encoded message and data interfaces that provide inferential APIs any party can interact with simply by knowing the semantic type of data they wish to exchange. A diverse set of interactions and flows can be modeled within these interfaces by externally codifying sets of message schemas and processing directives to form meta-protocols.
