Interledger Protocol: What You Need to Know

While a streamlined and cohesive payment system is everyone’s dream, transferring money between nations or accounts on different ledgers or networks is easier said than done. At a time when digitalization is taking over the world, most available services are mainly manual, sluggish, and costly. The solution is a service that guarantees the sender and recipient that the intermediary will perform its function correctly. That’s where Ripple’s interledger protocol(ILP), a secure transfer service that helps route payments across digital asset ledgers, comes in.

What is the interledger protocol?

Interledger refers to a suite of protocols designed by San Francisco-based Ripple Labs, the cryptocurrency startup associated with the popular Ripple (XRP) token. It uses the system to facilitate a seamless transfer of money from one payment system to another. The tool supports a worldwide web of networks for different forms of value, but specifically connects bank systems across borders, primarily where banks use XRP to settle cross-border payments. The system links senders and receivers to expedite money transfers via secure multi-hop payment and intelligent routing.

How it works

The interledger protocol, currently in its fourth development stage (ILPv4), refers to an entire stack of protocols containing three packet types: Prepare, Fulfill, and Reject. The protocol functions by routing the packets through the interledger network and transmitting encrypted payment information from a sender to a receiver.

Since ILP is a set of rules that define how nodes send value over the network, the packets carry private transaction information to the participating nodes.

The rules are divided into four categories: payment setup, payment, interledger, and settlement/ledger. The person initiating a transaction constructs and sends a Prepare packet to request a connection to the router. The router receives and forwards the packet to the receiver, who can accept or reject it by sending a Fulfill or Reject packet as their response.

Once the packet is successfully delivered to the recipient, the sender receives a Fulfill packet and sends all remaining Prepare packets until they transfer the total amount. According to the whitepaper, connectors can amend all fields apart from the encrypted data field that contains payment between the sender and the receiver.

The ultimate goal of this tech is to enable hosts to route money transfers over different interconnected ledgers, allowing payments to pass from one ledger module to another until they reach the intended recipient. The participating modules belong to hosts and connectors within the system who constantly communicate. The protocol leverages assets within the underlying ledgers to safeguard senders and receivers from failed transfers, especially when routing large payments through a system with a trust deficit between connectors and intermediary ledgers.

How the system is executed

The interledger protocol is designed to be executed in two different modes: atomic mode and universal mode.

Atomic mode: Transactions executed in this mode use notaries, referring to a provisional group of individuals that authenticate and confirm transactions occurring between banks or participating financial service companies that might be linked.

Universal mode: Transactions executed in the universal mode don't require notaries and can be used between untrusted connectors. The transfers are facilitated using XRP, Ripple's native cryptocurrency. Since time constraints accompany such transfers, transactions that don't occur within the specified timeframe become null and void.

Benefits of ILP

The following are some reasons you may choose the interledger protocol:

• Easy to use over different networks.

• Faster than traditional methods.

• Lower prices when compared to the competition.

• Trustworthy transactions that can be tracked easily.

• Large transfers split into smaller packets to increase efficiency, security, and interoperability.

The Bottom Line

The ILP has wholly transformed the utility of the Ripple network. Any entity using XRP can benefit significantly from this protocol due to its infinite scalability and high-level transaction secrecy. All these are additional benefits to the advantages some banks already enjoy from Ripple’s blockchain financial technology.