Last year the BIS Innovation Hubs in Europe and Singapore announced plans for Project Rialto to explore foreign exchange (FX) for retail cross border payments. Today the BIS published a work in progress paper outlining its plans, including the involvement of the central banks of France, Italy, Malaysia and Singapore.

The Banque de France and Monetary Authority of Singapore were previously involved in Project Mariana, which also explored DeFi style automated market makers for foreign exchange.

One of the key novel aspects of Rialto is the integration of different elements. Domestic faster payment systems in each jurisdiction will link to a multinational DLT platform to support tokenization. In turn, the transnational platform provides automated FX services and hosts multiple central bank digital currencies for settlement.

The G20 has a plan to reduce the cost of cross border payments, which amount to $800 billion annually for retail payments. While the report doesn’t mention the details, research indicates that the FX costs often make up the largest piece, accounting for 50-90%+ of the cost. Apart from cost reduction, the paper outlines that the Rialto approach can also reduce liquidity, credit and settlement risk.

On-chain FX

Four different avenues for FX transactions are explored. One could go the conventional route with third party FX providers, but that won’t significantly reduce the costs. Alternatively, one could try the automated market maker (AMMs) route explored in Project Mariana that involves pools of different currencies that are available for trading based on a preset algorithm.

The reason why AMMs became popular in DeFi was order books were too expensive to maintain on-chain, because posting bids and offers came at a cost. That’s no longer such a big issue with low cost blockchains, so a third path is to have an on-chain or off-chain order book.

However, one doesn’t have to choose between the two. The final preferred option is a hybrid one, involving an AMM and an order book. A pending transaction would first check the order book to see if there’s an offer to match. If there is, the FX transaction can be executed. If not, it can fall back to the AMM.

The paper explores some of the past BIS Innovation Hub projects that have an overlap. Two newer ones also have some commonality – Project Agorá involves seven central banks and 41 institutions that are exploring a tokenized version of correspondent banking. And Project Meridian FX explores interoperability between English and EU payment systems.

Today’s Project Rialto publication outlined the policy and technical considerations for the proof of concept, which is still to be conducted.

Link

Uniswap Labs, the founder of the original decentralized exchange (DEX) Uniswap, has launched the UniChain layer 2 (L2) blockchain. Another DeFi player, the money market fund provider Ondo Finance, launched its own layer 1 blockchain last week. Fragmentation is a feature of both the permissioned and permissionless blockchain ecosystems.

While there’s a different rationale for so many blockchains in the DeFi and traditional finance (TradFi) spaces, there is some overlap. In TradFi, the goal of many institutions is to develop THE blockchain and have others institutions come and use it, which ultimately is a profit motive. For DeFi the driver is often tokenomics – new chains provide revenue opportunities for the related tokens.

Layer 2 chains in the permissionless arena offer lower transaction costs compared to Ethereum. Uniswap users already have the option for lower cost offerings on 11 other chains. Before deciding to launch UniChain, Uniswap conducted research which found it has far more transactions on other layer 2 chains than on the Ethereum mainnet. But these are much smaller transactions. A quick look at total value locked (TVL) shows almost $3 billion on Ethereum. The second largest chain is Coinbase’s Base with almost $250 million.

Given the whole point of an exchange is to provide liquidity, TVL matters.

“Unichain is built differently,” said Hayden Adams, Founder and CEO of Uniswap Labs. “We’re here to make DeFi faster, cheaper, more decentralized, which is why we launched Unichain to be permissionless from day one.”

In fact, many layer 2 blockchains end up sacrificing decentralization. Adams’ point is that Unichain is more-or-less decentralized from day 1, but not fully, just in case something goes wrong. [It’s a  Stage 1 rollup using the Optimism Superchain].

Its own L2 chain also allows it to add new features. One of them – Flashbots TEE – is interesting.

MEV and trusted execution environments (TEE)

In the traditional finance world, certain trading behavior such as front running or sandwich attacks based on insider information are often illegal. Because permissionless blockchains are public and relatively slow, it’s possible to examine queued transactions in memory. Hence, if someone can see a big buy trade that’s likely to inflate the price of a coin, they can put their own buy order ahead of that one. This frontrunning on blockchains is referred to as maximal extractable value (MEV).

One of the latest trends is to try to limit the types of MEV transactions. There’s some appreciation that traders lose out with frontrunning and sandwich attacks. Hence, there’s a move by Flashbots, the main provider for MEV technology, to use partial transaction privacy using trusted execution environments (TEE), like Intel’s SGX hardware. SGX hardware is similar to secure enclaves on an iPhone which are used to store bank card data – the data is not available to the rest of the operating system.

Flashbots doesn’t want to completely eliminate MEV. It aims to hide the transaction amount and wallet address. That prevents frontrunning and sandwich attacks.

However, It doesn’t stop backrunning. When a large transaction moves the token price, there’s often a smaller opportunity afterward. Taking advantage of that with another trade is referred to as backrunning.

So, UniChain plans to use Flashbots TEE, which will come with the handy side effect of faster transaction finality.

Link