INTRODUCTION

Connectors are the nodes on the Interledger network that act as decentralized exchanges or market makers for currencies and tokens. Connectors enable cross-ledger communication and transactions by applying currency exchange and forwarding packets of value.

Connectors are not trusted intermediaries or central authorities. They are simply nodes that provide a service and charge a fee for it. Connectors compete with each other to offer the best rates and routes for cross-ledger payments. Connectors also cooperate with each other to ensure the security and reliability of the network.

Connectors use two main mechanisms to facilitate cross-ledger payments: liquidity pools and hash time-locked contracts (HTLCs). Liquidity pools are reserves of currencies or tokens that connectors use to exchange and transfer value across different ledgers. HTLCs are conditional transfers where the condition is enforced by the ledger. The condition is a hashlock, or the digest of a cryptographic hash function, such as SHA-256. The contract stipulates that the recipient may claim the funds by presenting a valid preimage of the hash digest before a given timeout. After the timeout, the funds are automatically returned to the sender.

The process of routing packets of money across independent networks using connectors and ILP is as follows:

- When a sender wants to send a payment to a receiver, the sender constructs and sends a Prepare packet as a request to the first connector. The Prepare packet specifies the amount, the expiry time, and the condition of the payment. The condition is a hashlock, or the digest of a cryptographic hash function, such as SHA-256. The sender also generates a secret preimage of the hashlock, which is shared only with the receiver.

- The first connector receives the Prepare packet and decides whether to accept or reject it. If the connector accepts it, the connector deducts a fee from the amount and applies an exchange rate to convert the amount to the currency of the next hop. The connector then forwards the Prepare packet to the next connector, and so on, until it reaches the receiver. Each connector locks a portion of the payment until the expiry time or until they receive a Fulfill or Reject packet from the next hop.

- The receiver receives the Prepare packet and decides whether to accept or reject it. If the receiver accepts it, the receiver returns a Fulfill packet as the response. The Fulfill packet contains the preimage of the hashlock, which proves that the receiver has received the payment. The receiver also sends the preimage to the sender through a separate channel, such as an email or a text message.

- The last connector receives the Fulfill packet and verifies that the preimage matches the hashlock. If it does, the connector unlocks the payment and sends the Fulfill packet to the previous connector, and so on, until it reaches the sender. Each connector uses the preimage to claim the payment from the previous connector or the sender. This way, the payment is either executed atomically or not executed at all.

The benefits of using connectors and ILP to route packets of money across independent networks are:

- They enable fast and cheap cross-ledger transactions, as they use a separate network that can have higher throughput and lower fees than the individual ledgers.

- They enable secure and trustless cross-ledger transactions, as they use cryptographic protocols and smart contracts to ensure the accuracy and authenticity of the data and assets that are transferred across different ledgers.

- They enable interoperable and scalable cross-ledger transactions, as they can support any type of currency or token, and handle large volumes of transactions without congesting the network.