INTRODUCTION.

The Interledger Protocol (ILP) is an open protocol suite for sending payments across different ledgers. Like the internet, connectors route packets of money across independent networks. The open architecture and minimal protocol enable interoperability for any value transfer system.

ILP was inspired by the Internet Protocol (IP), which is the standard for transmitting data packets over the internet. IP enables interoperability for any information transfer system, regardless of the underlying hardware or software. Similarly, ILP aims to enable interoperability for any value transfer system, regardless of the underlying currency or ledger.

ILP is not tied to any specific company, payment network, or currency. It is an open and neutral protocol that anyone can use and implement. ILP also supports any type of currency or token, including fiat currencies, cryptocurrencies, stablecoins, and non-fungible tokens (NFTs).

ILP consists of three main components: packets, connectors, and protocols. Each component plays a vital role in enabling cross-ledger communication and transactions.

Packets

Packets are the basic unit of information and value transfer in ILP. Packets contain transaction information, such as the amount, the expiry time, and the condition of the payment. Packets are private to the nodes participating in the transaction, and are encrypted and authenticated using cryptography.

ILP has three packet types: Prepare, Fulfill, and Reject. The sender constructs and sends a Prepare packet as a request to the connector. The connectors forward the packet until it reaches the receiver. The receiver then accepts or rejects the packet by sending a Fulfill packet or a Reject packet as the response. The connectors relay the response from the receiver back to the sender. When the sender receives a Fulfill packet, it knows that the packet was successfully delivered to the receiver. The sender then continues to send the remaining Prepare packets until the value is fully transferred.

Connectors

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.

Protocols

Protocols are the rules and specifications that govern how nodes communicate and interact with each other on the Interledger network. Protocols define the format, structure, and semantics of the packets, connectors, and transactions.

The core protocol of ILP is the Interledger Protocol version 4 (ILPv4), which is a request/response protocol for sending packets of value across different ledgers. ILPv4 is simple, minimal, and extensible, and can be implemented on any ledger or platform.

ILPv4 is complemented by various subprotocols and extensions that provide additional features and functionalities for the Interledger network. Some of the subprotocols and extensions are:

- Interledger Quoting Protocol (ILQP): This is a protocol for obtaining exchange rates and routing information from connectors before sending a payment.

- Interledger Transport Protocol (ILTP): This is a protocol for establishing a secure and reliable end-to-end connection between the sender and the receiver, and for sending application data along with the payment.

- Interledger Payment Request (IPR): This is a protocol for requesting a payment from the sender, and for providing a proof of payment to the receiver.

- Interledger Payment Pointer (IPP): This is a protocol for identifying and locating the receiver's payment account, and for simplifying the payment process for the sender.

Use cases and benefits of ILP

ILP enables various use cases and benefits that can benefit from cross-ledger communication and transactions. Some of the use cases and benefits are:

- Decentralized finance (DeFi): DeFi is a movement that aims to create open, permissionless, and transparent financial services on the blockchain, such as lending, borrowing, trading, and investing. ILP enables DeFi users and providers to access and offer a wider range of financial products and services across different ledgers, and leverage the best features and functionalities of each ledger. For example, users can borrow ETH on Ethereum, swap it for BTC on Bitcoin, and lend it on Compound, all in a seamless and trustless manner.

- Non-fungible tokens (NFTs): NFTs are unique and indivisible digital assets that represent ownership and provenance of various items and collectibles, such as art, music, games, and sports. ILP enables NFT users and creators to transfer and trade their NFTs across different ledgers, and access and offer a larger and more diverse market and audience for their NFTs. For example, users can create NFTs on Ethereum, transfer them to Binance Smart Chain, and sell them on OpenSea, all in a frictionless and secure way.

- Web monetization: Web monetization is a movement that aims to create a fair and sustainable way for content creators and consumers to exchange value on the web, without relying on ads, subscriptions, or donations. ILP enables web monetization by allowing content creators to receive micropayments from content consumers, and allowing content consumers to access and support content creators across different platforms and currencies. For example, users can stream money to their favorite content creators using Coil, which is a web monetization provider that uses ILP to send payments across different ledgers.