The totality of the new global financial architecture is one that needs to be looked at through the prism of Complex Adaptive System... Wikipedia
To understand the structure of the new complex adaptive financial system, we need to look at the patterns that emerge from the system’s various types of connections. The pattern of these connections is are often referred to as a “topology” and these patterns are often expressed and observed by looking at the system’s “network graph”
One visual hallmark of a Complex Adaptive system is, “fractal scaling” Please take at least a 30 second look at this visual representation of “fractal scaling”, with the hope that that the visual cue will help enable an understanding that a fractal pattern is unfolding with Ripple’s spearheading the assembly of a new Complex Adaptive Global Financial System. For those further interested, here is a Fractal & Scaling course to help the reader see that a fractal pattern currently forming, which is creating a new global financial network, to be called the “Internet of Value”.
For an example of fractal scaling lets look at atoms and solar systems. Atoms, have electrons that move in orbits around a nucleus. These atoms make up materials, that make up planets, which move in an orbit around a “nucleus” sun. I’m primary using this example as a mental illustration to further the visual example video in the prior paragraph. The idea is to show, how the same pattern can exist at the big macro solar system scale, while being comprised, or made up of, that exact same pattern at the micro atom system scale… Do you see the same pattern regardless of scale?
One reason I see Rippled as an acceptable base technology to enable building a global complex adaptive financial system, or ecosystem of financial networks and ledgers; is because it can have an internal on-ledger network (like being at the atom scale) of trustlines, orderbooks and UNL validators, while a bunch of ledgers can also be assembled into an external network of ledgers (like the big solar system) with ILP and Payment Channels, connecting many banking xCurrent ledgers, and Exchange orderbook ledgers. This is the crux of the rest of this write up, and I will only be trying to expand on the internal topology of each ledger, and external topology of all ledgers being inter-connected, aka “The Inter-net of Value”.
In an effort to avoid any confusion there are a few words that I sometimes use interchangeably. In the Crypto world people talk about “blockchains” as being “networks” and as “ledgers” and as “ecosystems”. I most frequently swap out the words network and ledger, and ecosystem is a word that is common focus in the Complexity Science world.
I believe that in the end, these digital assets will be valued upon their utility basis within the ecosystem upon which they exist. For XRP this basis would be the Utility Value of paying TX fees, and providing connective liquidity to the global financial ecosystem or topology upon which XRP exists. XRP is similar to a Postage Stamp’s Utility value basis, within the ecosystem of the global postal network… without the postal network to deliver a package, the stamp is a useless token and is without value. The shape of the Internet of Value’s networks of financial networks graph, is an emergent metamorphosis of the global financial system, in which XRP must find it’s place.
On any Rippled Consensus ledger: aka RCL & xCurrent ledger, one example being the XRPLedger, there are several internal “on-ledger” connection types. There are several methods of making connections on ledger that I will not touch on, such as Escrow, Multi-Signature, and Checks.
However, I do want to look at these on ledger connection types...
Validators URL – This is where and how the XRPLedger and any other RCL ledger obtains it’s nature of Distributing Trust. While this decentralized aspect is critical to the whole breakthrough in enabling trust arrangements, it is not overly critical to the financial ecosystem’s topology because the XRPLedger is only one ledger or “node” in the grand global scheme. There are plenty of other folks who are more authoritative on the technical aspects of a Rippled ledger’s UNL being distributed. For the purpose of this write up, it is sufficient to assume the XRPLedger’s UNL topology is of a Decentralized nature.
IOUs – This was the first Glaring improvement that a Rippled distributed ledger has, as a blockchain technology, made to the original Bitcoin blockchain ledger technology. IOUs enable various types of value (fiat/bitcoin/gold/securities/real estate/risk exposure/etc) to be represented on-ledger. **These IOUs are a building block for Orderbooks.
Orderbooks – Orderbooks are an old tool used for making markets. When you think of the guys on the New York stockexchange floor back in the day, shouting orders at the guy in the big Trading Desk, who is called “the Specialist” ... the tool that a Specialist is using to make the market, or act as a market maker, is an Orderbook.
By contrast the original bitcoin blockchain ledger technology, does nothing more than provide for a distributed ledger with a “single unit of account”... ie Bitcoin. The tech does not have IOUs on ledger, and therefore it cannot have this Orderbook functionality on ledger.
Requiring the orderbook functionality be performed off-ledger, which is why we see all the crypto exchanges running their own ledgers with orderbooks exchanging BTC/Fiat. From a financial engineer’s point of view, due to this broad shortcoming of other original blockchain ledger technologies are of limited use for building distributed financial applications.
To set the stage for the global financial system, and fractal scaling, lets notice that the global financial system is made up of a bunch of domestic financial systems. A few of these domestic financial systems are more interconnected with their neighbors, than they are with other non-neighbor domestic financial systems, forming clusters like the Euro zone, the Americas, and the Asian economies. Looking at this from a Network Density perspective we see a global financial system made up of several regional economic clusters, which are in turn made up of smaller domestic economies. Each of which has it’s own Government, Currency, Central Bank, and Domestic settlement system, yay!
On a stage setup like this, **How important are Orderbooks?
An orderbook will sit at every point at which these domestic economies build an on/off ramp to eachother. If you think of an economy’s network graph… orderbooks are the nodes that make up the network’s boundary. Notice the boundary nodes in this example topology graph… H, G, F, E, D.
This is very much the same overlapping boundaries idea described in Ripple’s patent by Stefan Thomas & Bob Way. 
Orderbooks therefore play an incredibly important role in the topology of RippleNet, as they sit at the boundaries where two economies intersect.
As a financial tool orderbooks function like a “weighing machine”. I imagine the scale you see Lady Justice holding, except that in finance I guess we would take the blindfold off, and call it a Valuation Machine, where the two things of value are weighed against each other, to discover what valuation of each, makes the scale fall into equilibrium of small spreads.
Cross ledger Clearing vs Cross ledger Settlement
• Clearing: Consumer level settlement, netting activity rolls up to the Clearing House level
• Settlement: Finalization of any remaining balance after Clearing has netted out all flows, and "the point at which both parties obligations are discharged". (XPRLedger is an international "settlement house").
I will get right back to Orderbooks, but lets first discuss the role of Connectors within ILP, these are the actors in the network that hold an account with provisioned liquidity capital on more than one ledger (ie: usd/eur/jpy/xrp/btc). This role of a Connector is effectively as important as the function that Orderbooks perform. These Connectors are indeed the equivalent of yesteryear’s New York Stock Exchange Specialists who were making markets between USD fiat & equities. In the RippleNet architecture with ILP, these Connectors will have wallets on all of the 2+ ledgers they connect.
It is somewhat unintuitive that the value never leaves the ledger upon which it resides. The Connectors function by using their own internal ledger, which accounts for the balances they hold on all of the fiat & crypto ledgers they connect. To facilitate a cross ledger payment, they receive fiat on the fiat ledger, and pay out crypto on the crypto ledger. With this model many ILP Connectors can be strung together, creating a multi-hop transaction through many network boundaries. However, the value never leaves the ledger or network it starts on. The value only changes ownership within each ledger along the multi-hop transaction, from upstream connector to downstream connector until the destination.
Just like yesteryear’s specialists on the floor of the NYSE who used Orderbooks as one of the ‘tools of the trade’, in the Internet of Value it is the Connectors who will use internal Orderbooks as one of the ‘tools of the trade’… although this new version of Orderbooks must function at a little bit of a higher level than the old 2 sided lady justice style of scale. The function of Orderbooks that will remain unchanged, is the use of them for the goal of seeking to minimize spreads. This is a type of arbitrage function, and reduces a market’s likelihood of mis-pricing, or incorrectly weighing the value, at the systemic level.
XRPLedger with its Pathfinding function vs Connectors with Distributed Pathfinding
Connectors are in the arbitrage business, and they use their Internal Ledger to perform this function. If a Connector is making markets in 5 assets, they can gather information from each market and perform some minimization function to find a combination of trades that have a smaller spread, than the spread found available in the public markets.
XRPLedger, as an RCL, has imbedded into it’s internal ledger the Pathfinding Function which performs a function much like the Connectors would do in the prior paragraph, albeit with a limit of 7 direct orderbook hops to find the smallest spread from Sending Wallet to Receiving Wallet… Plus it also calculates “synthetic orderbooks” to check the end-to-end spread if the value is routed through XRP.
Given that XRPLedger has this level of pathfinding functionality freely available to anyone issuing IOUs on XRPLedger, the Connectors will have to perform at a higher level than XRPLedger does if they hope to capture arbitrage profits. That said, XRPLedger only works for on-XRPLedger trading, so a Connector would not be competing against XRPLedger’s pathfinding capability if they were trading across Orderbooks at Exchanges that are off ledger. A lazy connector could probably stand up a private RCL as their Internal Ledger, and use it’s pathfinding functionality to find cross exchange arbitrage opportunities.
All that said, with many Connectors looking for arbitrage profits and each performing their own Pathfinding on their own Internal Ledgers, which stride the boundaries of domestic economic networks, the Connectors as a group are performing a “Distributed Pathfinding function” within the RippleNet global financial network topology.
XRPLedger adds in a “Centralized Pathfinding function”, with both XRP settlement (no path needed), and simply doing it’s thing as a distributed exchange performing Pathfinding across fiat.IOUs. It is housing offers on a consolidated set of orderbooks, which can act as a counterweight aginst any collusion on pricing in a corridor, that the major Connectors working in that corridor may attempt. It seems to be only recently that XRPLedger’s capability here is being more broadly recognized as a type of “Decentralized Exchange”.
Back to Clearing vs Settlement…
Consider yourself to be in the position of a Connector of two ledgers, and let’s look at flow rates.
You will start with a deposit of… 10 values on ledger A… and 10 values on ledger B.
Assuming a 1:1 exchange rate, and twice the flow from A-->B as flows from B-->A.
In this situation you can internally “clear” 100% of your B-->A flows, by using your A-->B flows.
However, you can only “clear” via netting half of your flows in the other direction.
This means that as time ticks and value flows continue, you will find yourself in an end state with all of your value denominated in, and held on Ledger B. This is when cross-ledger settlement becomes required.
Now, let’s say you are forced to exchange your value on Ledger B, through a 3rd type of value (XRP), which shares a boundary or orderbook with Ledger A and B… all because the liquidity from B-->A is not deep enough to move your position back to Ledger A fast enough, meaning you need a fast settling asset with deep liquidity to get back to your business of trading arbitrage opportunities.
There is a video with Miguel saying some crypto market makers are already using XRPLedger to unwind, reposition capital, and settle multi-leg trades because XRPLedger is so much faster than the other Exchange's ledgers or Crypto Ledgers. Time not trading is expensive, and Speed being important, and Value being as intangible as information, it will be the Connectors who can manage all of this finding cross-ledger arbitrage and rebalancing of their trading positions the fastest, who will profit the most.
XRPLedger with IOUs has set the bar at a max of 3 seconds of time per trade. This is where the HFT guys who play in the Equity markets may come into play, surly they can run their internal ledger faster than 3 seconds/trade, as can many of the hedge funds and trading houses who should be looking at becoming a Connector, if they can.
XRPLedger and RippleNet are designed as a Market for Floating value in between domestic economic ledgers with the capacity to settle into any domestic economy. This means that it is competitively relevant that XRP takes the lead on Transaction Speed vs other crypto. Speed is duly important because it involves Time, which involves the Cost of Interest on floated value... which means faster (minimizing the time required to float value) is cheaper, and cheaper means more arbitrage profits.
Another real world issue in this puzzle is a legal bridge. Via the Crypto-to-Fiat markets, with XRP or any digital asset you are additionally trading between legal jursdictions. This enables the various economic jurisdictions to apply their own desired regulatory rules to XRP.
This is where the Central Banks of each domestic economy come into play, both because they are the institution that manages Monetary Policy, and because of their role in the existing global financial network topology where they act as the final international settlement layer on any remaining imbalances not cleared through Commercial Bank Deposits, by settling up and maintaining the Balance of Payments with other Central Banks. https://www.investopedia.com/terms/o/official-settlement-account.asp , https://www.quora.com/Every-year-when-a-Balance-Of-Payment-is-settled-which-has-so-many-components-current-capital-and-financial-how-is-that-the-forex-reserve-of-the-central-bank-is-depleted-or-added-when-they-do-no-have-any-direct-contact-with-these-individual-parties
With regard to these Domestic Currency silos, the current boundaries, and their transaction costs in terms of both FX spreads, and time till settlement, they are looking like a problem persisting only by way of, “because that is how it works, that’s why”… instead of being an actual unsolvable problem.
In conclusion, what I see assembling is much like the "social graph" which facebook enabled to be assembled. Except this is in the financial domain, and spanning two differant types of topology graphs. We have the RippleNet "trust graph" which is assembled between FI's, and includes both technical and legal contractual componets. We also have an "orderbook graph" being self-assembled between cryptos and domestic economies.
As these Connectors grow in number and networks/ledgers which they connect, the system should take up a fractal scaling pattern. With some connectors using orderbooks domesticly between FI's and exchanges, doing cross exchange arbatrage, and potentially arbatrage between Commercial Bank deposits and Centeral Bank Digital Cash. Other connectors will be using orderbooks between domestic fiat to crypto, and domestic fiat to domestic fiat. Central Banks will also settle up with eachother on the sum of all these economic activities maintaining a "balance of payments" which again invokes an image of Lady Justice and her Scale.
For any discussion see the XRPChat post here
I will have to come back to the "time as leverage" aspect which all this enables in another write up, appoligies.
