The Interledger protocol (ILP) facilitates payments across at least two payment networks, aiming to boost direct transactions while also supporting the involvement of intermediaries where needed. It is a payment protocol boosting interoperability among diverse financial networks.
By smoothly linking ledgers from multiple institutions, the open-source Interledger protocol strives to simplify inter-bank transactions, reducing processing times and costs for participants. Just like the internet routes information packets, Interledger works as a network of computers that supports the transfer of value across multiple payment networks.
Within the Interledger network, nodes fulfill different roles: connectors work as bridges between the receivers and senders, senders initiate value transfers, supporting currency conversion and forwarding value packets, and the receivers accept the transferred value. While Ripple’s XRP (XRP) token can be utilized for settlements in the protocol, other settlement options are also available.
Ripple, a cryptocurrency and payments solutions company, played a key role in developing the Interledger Protocol (ILP). This initiative began in 2015, with notable contributions from Stefan Thomas, who served as Ripple’s former chief technology officer.
Traditionally, cross-border transactions mostly encounter challenges because of the fragmentation of payment protocols, making it hard for these protocols to communicate through connectors.
How The Interledger Protocol Works
The Interledger Protocol (ILPv4) lies at the Core of Interledger, highlighting how nodes transfer value across the network. It features a request/response paradigm, using compact ILPv4 data packets as its units of exchange.
One payment from a source to a destination is broken into multiple ILP packets. Each ILP packet features transaction details that are safeguarded by the participating nodes. The protocol defines three packet classifications: which include prepare, fulfill, and reject.
The sender sets up the prepared packet and sends it to the connector, who will then relay it until it reaches its required recipient. The recipient can accept or reject the packet by responding with a fulfil or reject packet. Interestingly, the connector then relays the receiver’s response back to the sender. Upon receiving a fulfilled packet, the sender confirms successful delivery and keeps sending prepared packets until the full value transfer is complete.
Nevertheless, a reject packet can be sent by the receiver in case they refuse the transfer or by a connector in case they fail or cannot forward it. Furthermore, the payments can expire. In such a scenario, no balances change, guaranteeing there is adequate security within the Interledger Protocol.
To execute value transactions efficiently, Interledger works independently of all payment networks. Value transmission in small data packets guarantees inexpensive, secure, and quick transactions.
In that context, ILP works independently of any particular crypto, including XRP. The protocol works as a flexible infrastructure that facilitates smooth transactions across many ledgers, irrespective of the digital asset involved.
Related:How PassimPay is Revolutionizing Digital Transactions
Benefits Of The Interledger Protocol
The main advantage of the Interledger Protocol is the promotion of interoperability across different payment networks, facilitating smooth cross-border transactions. It has executed international payments quicker, more efficiently, and financially feasible.
On that note, the Interledger Protocol’s infrastructure empowers the developers to introduce innovative financial products, helping leverage its decentralized design to develop reliable and highly secure platforms. Interestingly, ILP supports micropayments, enabling users to make small payments globally and offering a unique benefit over traditional payment strategies.
In the case of decentralized finance (DeFi), ILP has emerged as an integral facilitator. It lets users transfer assets across blockchain networks without any hindrance, enhancing liquidity and simplifying the management of many wallets.
Moreover, the ILP can handle a massive volume of transactions over many networks due to its highly scalable design. Due to its modular infrastructure, it is straightforward to blend with existing infrastructure and networks and can rapidly adapt to the dynamic demands of consumers and organizations.
Scalability is important to support the growth of global payment networks and meet the needs of various users, from individuals who execute microtransactions to large firms that execute high-value transfers.
