Interledger Protocol: What It Means and How It Works

What Is the Interledger Protocol?

The Interledger Protocol is a suite of protocols programmed to create a decentralized and universal network for sending money regardless of its type. Interledger lets participants send and receive money in the currency of their choice and automates currency exchanges.

Its design allows anyone anywhere to connect to send and receive payments through a network of connecting nodes. It is not a blockchain and doesn't have any tokens, but it can be used to send and receive them.

Why Was the Interledger Protocol Created?

The traditional process for cross-border transfers between banks involves navigating multiple payment protocols used by digital ledgers to process transactions. The protocols communicate using connectors, but the tools and standards used in such systems are fragmented and siloed, which is inefficient and expensive.

The Interledger Protocol (ILP) suite was created to make payments faster, easier, and cheaper and to allow users to exchange currencies of all types. Digital fiat currency, cryptocurrencies, or anything else of value that can be digitally transferred can be sent and received using the ILP.

The most significant advancement the ILP made was to allow anyone to send value anywhere using a system similar to sending files or email over the Internet—you select an amount to send and a recipient, and the system initiates the transaction. It verifies there is money to send, validates that it is received, and only transfers it if both parties receive the proper hashed information. This system uses packets, similar to the internet protocols, that make information transfer work. This technique reportedly makes it reliable, fast, and secure to send value to anyone, anywhere.

How Does the Interledger Protocol Work?

The ILP requires applications to be built outside of its protocols. These applications can be no different than a program with an interface you might use to select who you want to send money to and how much you want to send.

The ILP network has the following participants/nodes:

• Senders: A party wanting to send money
• Receivers: A party wishing to receive money
  
• Connectors: Parties with two or more accounts are called connectors. They can charge fees for payment forwarding services and compete with each other for fees by offering the best speed, reliability, cost, and coverage.

The Interledger Protocol consists of four layers that work together:

• Application: A layer where apps reside that interfaces with the protocol and gathers information about the transactions to initiate them
• Transport: This layer uses STREAM (Streaming Transport for the Real-time Exchange of Assets and Messages). This layer determines exchange rates, encodes packets, acknowledges packets and frames, establishes connections, and controls information flow.
• Interledger: A layer that finds paths for senders and receivers and monitors whether payments arrive in time or expire.
• Link: Provides a way to communicate over WebSocket

The Protocol serves as a way for settlement systems to connect. The Interledger Foundation refers to all settlement systems as ledgers, which include banks, blockchains, automated clearing systems, and more.

These ledgers (the settlement systems) must settle payments according to their agreed-upon terms, such as time limits and the amount owed. The ILP doesn't do this for the parties involved in a transaction; the protocol only facilitates the transactions by transferring the amounts and tracking them.

Transaction Speeds

The ILP is reportedly able to handle much more traffic than blockchain networks and traditional payment systems—up to 1 million transactions per second. This is due to the way it handles sending transactions. Using a technique similar to transmission control protocol/internet protocol (TCP/IP), the ILP breaks information into small packets, sending them to a web page that automatically receives payments.

The Bottom Line

The Interledger Protocol is more of an intermediary payment method than a blockchain service or payment protocol. It allows users to route payments through an existing and fast network using protocols similar to those used by the Internet.

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