[csumtin]

Correspondent banking. So say a bank in the States needs to send money to one in Spain. They may not have a relationship, so they go through an intermediary bank.

You can use a smart contract to eliminate the trust in the intermediary bank, so eliminating that counter party risk

[csumtin]

Explanation: bankA -> bankB -> bankC.

bankC creates a secret number, hashes it and sends it to bankA. bankA sends money to bankB locked to hash. bankB can't get money until they have that secret number. bankB sends money to bankC locked to hash. bankC reveals secret number to bankB to unlock that money. bankB does the same with bankA.

Tada, we eliminated the risk of bankB running away with money. This is the lightning network

[JumpCrisscross]

> we eliminated the risk of bankB running away with money

This isn't a real risk with correspondent banks. Instead, it's counterparty risk: bankB failing while it holds the funds in transfer. That risk can be mitigated with smart contracts, but it's not eliminated. (Correspondent banks also take a portion of the client bank's fraud and AML risk.)

[csumtin]

I think the bank failing risk is eliminated, if it fails the forwarded payment is unlocked so bankA gets their money back.

[JumpCrisscross]

> think the bank failing risk is eliminated, if it fails the forwarded payment is unlocked so bankA gets their money back

Bank failing in this context would be the bridge (EDIT: contract) gets hacked. Hence mitigated, but not eliminated.

[csumtin]

If bankB is hacked, bankA still gets their money back or the payment is sent to bankC. So I still think the counterparty risk is eliminated between bankA and bankB

[JumpCrisscross]

> counterparty risk is eliminated between bankA and bankB

Correct, but in its place is a new systemic risk with a real-world nonzero probability: the contract itself getting hacked. There isn't analogy for this in modern banking since the equivalent issue would either (a) get rolled back or (b) fold into the bank failing envelope. (There is analogy in pre-modern banking, though it largely revolved around debasement and invasion.)

[csumtin]

I realise that this might seem a bit niche but we can use this to create a payment network(like visa). This system is better as the nodes in the network don't need to trust each other.

Cast your mind back to 2008 and hopefully this means that one bank falling over doesn't bring down the whole system.

[trompetenaccoun]

Fair but LN is not a smart contract. Bitcoin can't do smart contracts the way a chain like Ethereum does, it's functionality is very limited.

[csumtin]

I'd argue it is a smart contract :) just not a Turing complete one

[karpierz]

How exactly does the Spanish bank get the USD that the American bank sent without trusting a third party?

[brobinson]

You don't need to trust when you can verify. The source code for the intermediary bank (smart contract) would be available for everyone to read.

[karpierz]

I'm not talking about code.

The goal of the transaction is for the Spanish bank to have access to USD. In the example given, the Spanish bank would then have to take the crypto it got and trust an exchange to give it USD in exchange for the crypto.

How do you get USD to the Spanish bank without trusting a third party?

[TimJRobinson]

There are many USD stablecoins they can use: https://www.coingecko.com/en/categories/stablecoins. The top two are the most liquid but are also centralized, many of the others are fully decentralized.

[csumtin]

USD doesn't have smart contract abilities so yes you are correct about trusting a third party to exchange crypto to USD. You could use a stablecoin but that requires you to trust the stable coin backing.

[chrisco255]

They may be willing to accept trusting the dollar-backed token issuer. In the case of USDC, it's Circle. But there's nothing stopping JPMorgan, BoA, Wells Fargo, Western Union, etc implementing their own dollar backed tokens, and I suspect we'll see more and more of that as regulatory clarity settles.

Maybe the Fed themselves will issue tokens in this way. It's also entirely possible to construct a permissioned, yet decentralized exchange of tokens among whitelisted parties.

Either way USD is never sent trustlessly.

[theamk]

Your first and last sentence contradict to each other. If you already have a third party which both sender and receiver of money can trust, what's the point of blockchain?

[chrisco255]

There are hundreds of use cases for it. We are discussing one in particular which is for international settlement of USD backed tokens with limited trust assumptions necessary. Because we are talking about USD and not BTC or ETH, there is ALWAYS an intermediary involved in any transaction that is not paper cash in hand.

The sender and receiver still benefit from a permissionless, automated, international, instant transfer of funds with a cryptographically certified audit trail. The blockchain runs 24/7 and has no downtime. A token can be fully programmed and fine tuned for whatever parameters need to be checked to authorize a transfer. Those rules are transparent and auditable to everyone involved.

The transfer goes through within seconds and the cost of the transfer does not scale with the value of the transfer.