Regulation conform DLT-operable payment adapter based on trustless - justified trust combined generalized state channels

TL;DR

This paper proposes a regulation-compliant hybrid payment system combining trustless DLT-based methods with established regulated payments, enabling flexible, efficient, and compliant decentralized transactions within the evolving Web 3.0 ecosystem.

Contribution

It introduces a novel hybrid payment solution that interfaces trustless blockchain elements with justified trust and generalized state channels, addressing regulatory and technical challenges.

Findings

Combines decentralized trustless payments with regulated means for compliance.

Enables high-frequency microtransactions with regulatory adherence.

Provides a transitional solution for decentralized operations in regulated environments.

Abstract

Open technologies, decentralized computation and intelligent applications enable the third-generation web, Web 3.0, thereby digitizing whole industries. The emerging Economy of Things (EoT) will be based on software agents running on peer-to-peer trustless networks that require a programmable, regulation conform means of payment. We give an overview of current solutions that differ in their fundamental values and technological possibilities, like e.g. private-issued stablecoins, DLT-issued electronic money and genuine cryptocurrencies. Based on this analysis, we present the concept of justified trust and propose to combine the strengths of the crypto based, decentralized trustless elements with established and well regulated means of payment, based on this concept, via a secure external re-balancing interface. Combining the advantages, e.g. lightweight, trustless, efficient high frequency micro state transfers on the one hand, and ease of use, widely spread, accepted alignment to a multitude of regulative requirements, on the other hand, while neither leading into a lock-in in any of the proposed solutions, nor undermining the basic principles of the crypto-movement or unnecessarily reinforcing the banking system provides a synergy and the necessary flexibility for further evolution alongside the regulative framework. This offers a regulation conform transitional solution that can be implemented in the short term, which enables companies to place their decentralized business operations in a regulated environment. The contribution of our work is twofold: First, we illustrate and discuss different DLT-operable means of payment. Second, our research proposes a novel hybrid payment solution by interfacing trustless with justified trust combined generalized state channels.