Let’s begin with a simple case, in which a custodian for regular currencies uses a private blockchain for itself and its clients, instead of a regular database combined with customer facing APIs. This use
29 Bob can also use an input containing more than £10, including other assets. In this case he includes any remaining funds in the second output which is sent back to him, and the transaction remains valid.
30 Blockchain explorers such as blockchain.info are based on the same principle.
of a blockchain does not change the custodian’s business model but rather serves to reduce IT
costs and settlement delays.
In this scenario, the custodian acts as the sole administrator, miner and issuer for the blockchain, but distributes these functions across several AITCA nodes for robustness and redundancy. The mining diversity parameter is set to zero, since all mining is controlled by a single trusted entity, and there is no problem if just one of that entity’s nodes mines all the blocks, perhaps due to other nodes failing.
After creating the network, the custodian begins by granting its clients the permission to connect and transact on the blockchain. It then creates tokenized assets for the different currencies to be transacted. These tokens are sent to clients in exchange for a corresponding deposit of cash in the custodian’s bank account, and represent the right to redeem that cash from the custodian at any time. The clients can then send cash directly to each other using transactions which move the corresponding tokens. Changes in ownership represented by transactions are finalized (“settled”) once those transactions are confirmed on the blockchain by one of the custodian’s mining nodes.
As well as straightforward payments, this blockchain could also be used as a mechanism for transparent peer to peer currency exchange, with the custodian being responsible for settling the exchange transactions. As discussed earlier, a client could create a partially signed transaction representing an offer of exchange, perhaps between dollars and euros, and distribute it across the network. Any other client could then accept the exchange by providing the missing input and output and transmitting the completed transaction.
Despite this being a centralized system, there are several advantages to using a blockchain over a regular database. First, the blockchain provides a single unified view of the state of play, so clients have no need to maintain separate records. Since there is no possibility of disagreement over the nature of a transaction, no reconciliation is required and trading breaks cannot occur. In addition, settlement times are drastically reduced to the time that it takes to mine a block. A further advantage is that the system is highly fault tolerant, with dense peer to peer connectivity between nodes and many custodian miners providing redundancy.