Purpose Bind Currency: Universal Digital Money Interaction Protocol

Introduction

Digital assets are a digital representation of value, such as ownership of financial assets or real economy assets. The digital asset ecosystem has the potential to facilitate more efficient transactions, enhance financial inclusion, and unlock economic value. Central bank digital currencies, tokenized bank liabilities, and well-regulated stablecoins, along with carefully designed smart contracts, can serve as exchange mediums for the new digital asset ecosystem.

Although preliminary trials show potential, these new forms of Digital Money still need to prove their practicality beyond existing electronic payment systems. One major advantage of Digital Money is its support for programming capabilities, but this remains a topic of discussion. Operators need to ensure that programmability does not undermine the ability of Digital Money to serve as a medium of exchange. The singularity of the currency should be maintained, and programmability should not restrict the circulation of the currency.

This article outlines the concept of purpose-bound currency (PBM), which allows for the specification of currency use without programming the currency itself. PBM uses a universal protocol that can work with different ledger technologies and forms of currency. Through a standardized format, users can access Digital Money using their chosen wallet providers. This article will describe how to expand the previously introduced PBM concept to a broader range of application scenarios.

Background and Motivation

In recent years, significant progress has been made in digital initiatives aimed at improving operational efficiency and user experience. However, the digitization efforts in the financial sector also face challenges.

Market Diffusion and Fragmentation

The increasing number of payment solutions and platforms has added complexity that users may face when adopting digital financial services. For example, payment operators often run distribution channels with different characteristics for different solutions. Incorporating merchants into proprietary platforms consumes a lot of resources. At the same time, integrating with other platforms increases the operational burden on merchants.

Private independent efforts are attempting to integrate these plans into a single platform to simplify the user experience. However, these efforts need to further ensure openness and interoperability across all plans. These platforms should not be limited to users within their ecosystem. Interoperable payment systems will provide greater flexibility, offering businesses and consumers a seamless payment experience.

The programmability and substitutability of money

Unlike traditional account-based ledger systems, Digital Money allows unique characteristics to be programmed into individual assets and determines how the Digital Money is used. However, directly implementing programming logic on Digital Money alters its properties and acceptance as a medium of exchange. While this approach expands the functionality of Digital Money, it can limit its use as a viable medium of exchange if the conditions for use are diverse and dynamic. It also requires reprogramming all circulating Digital Money each time new conditions or use cases are needed.

Another approach is for digital money issuers to provide multiple versions of digital money, each with different programming logic. However, this method may not be practical, as these digital money cannot be exchanged for one another, leading to market liquidity fragmentation. To understand how to maintain the substitutability of digital money, this article examines different programming models.

programming model

Programmable payment refers to the automatic execution of payments once predefined conditions are met. For example, spending limits can be defined daily or payments can be scheduled regularly, similar to direct debits and recurring orders. Programmable payments are typically implemented through setting up database triggers or API gateways, positioned between the accounting ledger and client applications. These programming interfaces interact with traditional ledgers, adjusting bank account balances based on programmed logic.

Programmable money refers to embedding rules within the value storage itself, defining or restricting its usage possibilities. For example, rules can be defined so that the value storage can only be sent to whitelisted wallets, or transferred after completing transaction-level filtering. The implementation of programmable money includes tokenized bank liabilities and central bank digital currencies. Unlike programmable payments, programmable money is self-contained, containing programming logic and serving as value storage. When programmable money is transferred, the logic and rules are also moved.

The advantage of programmable payments lies in the ability to define a set of programming logic or conditions that can be applied to various forms of currency. Programmable money has self-containment, allowing for the point-to-point transfer of conditional logic between parties. As central banks, commercial banks, and payment service providers worldwide explore different Central Bank Digital Currencies, tokenized bank liabilities, and stablecoin designs, the financial landscape is expected to become more diverse in the future. Therefore, a universal framework is needed to interact with different forms of Digital Money and ensure interoperability with existing financial infrastructure.

The third model - purpose-bound currency ( PBM ) was explored in the initial stages of a certain project. It is based on the concepts and capabilities of programmable payments and programmable money. PBM refers to a protocol that stipulates the conditions under which the underlying digital money can be used. PBM is an anonymous tool that can be transferred peer-to-peer. PBM includes digital money as a store of value, as well as programming logic that identifies its use based on programming conditions. Once the conditions are met, the digital money is released and becomes unconstrained again.

This can be illustrated using PBM as an example of a Digital Money coupon. The coupon comes with a predefined set of usage conditions. Coupon holders can provide it to participating merchants in exchange for goods or services ( programmable payment functionality ). In some cases, the terms of the coupon scheme allow for transfers between individuals ( programmable currency functionality ). Therefore, consumers can purchase PBM-based gift vouchers and transfer them to another person who might use it at a participating merchant.

However, unlike regular coupons, PBM restricts how the payer can use PBM, but there are no restrictions on the payee. When consumers use PBM to pay for purchases, if the usage terms are met, Digital Money will be released from PBM and transferred to the merchant. Thereafter, the merchant can freely use the Digital Money for other purposes (, such as paying suppliers ).

Purpose Binding Coin

This section examines the lifecycle of PBM and the different components that make up PBM. It outlines the key entities and their interactions, emphasizing their roles in the PBM lifecycle.

System Architecture Overview

The PBM protocol references a four-layer model to describe the technology stack used in digital asset networks. The network components can be divided into four different layers: access layer, service layer, asset layer, and platform layer. The programming logic of PBM can be viewed as a service, while digital money is located in the asset layer. When digital money is bound as PBM, it spans across the service layer and the asset layer.

The design of PBM is technology-neutral and aims to work across different types of ledgers. It is expected that PBM can be implemented on both distributed and non-distributed ledgers.

The access layer is the layer where users interact with different services through various interfaces.

The service layer provides various services related to digital assets. It typically runs above the asset layer, allowing users to manage and utilize digital assets.

The asset layer supports the creation, management, and exchange of digital assets.

The platform layer provides the underlying infrastructure for executing, storing, and reaching consensus on transactions.

component

PBM consists of two main components: a wrapper that defines the intended use; and the underlying value storage that serves as collateral. This design allows existing Digital Money to be deployed for different purposes without altering their native properties. Once PBM is used for its intended purpose, Digital Money can be utilized without any conditions or restrictions. The issuers of Digital Money maintain control over the Digital Money, preventing fragmentation and ensuring ease of maintenance.

PBM Wrapper

The PBM wrapper implemented in the form of smart contract code specifies the conditions under which the underlying Digital Money is available. The PBM wrapper can be programmed so that PBM can only be used for its intended purposes, such as being valid within a specific time frame, at specific retailers, or for a predetermined denomination. Once the conditions specified in the PBM wrapper are met, the underlying Digital Money will be released and transferred to the recipient. For example, the PBM wrapper can be implemented as an ERC-1155 multi-token smart contract.

Digital Money

The underlying digital money bound to PBM serves as collateral for PBM. When the conditions of PBM are met, the underlying digital money is released, and ownership is transferred to the target recipient. The digital money must fulfill the functions of money, namely as a good store of value, unit of account, and medium of exchange. Digital money can exist in the form of CBDCs, tokenized bank liabilities, or well-regulated stablecoins. For example, digital money can be implemented as an ERC-20 compatible fungible token smart contract.

Roles and Interactions

Roles, as a flexible abstraction, can be implemented in various ways. An entity can hold multiple roles, or a role can be performed by different entities.

PBM Creator

This entity is responsible for defining the logic within the PBM, minting and distributing PBM coins.

PBM holders

This entity holds one or more PBM coins. The entity can redeem unexpired PBM coins.

PBM exchanger

When the PBM token is transferred, this entity will receive the underlying Digital Money.

life cycle

Regardless of the programming language or network protocol used, the design of PBM has a consistent lifecycle phase that ensures compatibility across different technological implementations. This section outlines the expected functions of PBM and the associated lifecycle phases.

issue

The PBM lifecycle begins at the issuance stage. Here, the PBM smart contract is created, and PBM tokens are minted. The ownership of the Digital Money is transferred to the PBM smart contract. The Digital Money is now bound by the PBM smart contract, which can be implemented using ERC-1155 or its equivalent. The use of the Digital Money is constrained by the conditions specified in the PBM smart contract, and it will only be released once all conditions are met.

distribute

After the PBM tokens are minted, they are distributed by the PBM creators to the intended entity (, that is, the PBM holders ) for use. PBM holders receive the PBM tokens in their packaged form and can only redeem the tokens according to the original conditions set by the PBM creators.

Transfer

At this stage, the PBM token can be transferred from one entity to another in its packaged form according to its programmed rules. The transfer stage is optional and depends on the use case. In government-issued (, for example, in learning grants ), PBM tokens may not be transferable to other citizens. However, in commercial vouchers (, for example, retail mall vouchers ), PBM tokens can be transferred to other consumers.

Exchange

After all the conditions specified in the PBM are met, the exchange phase will occur. At this point, the PBM tokens are unpacked, and the ownership of the underlying digital money tokens is transferred to the receiving entity. The entity can freely use the digital money tokens, and its use is only constrained by the conditions set by the digital money issuer.

Expired

The expiration phase refers to a specific condition specified in the PBM that has been explicitly violated or expired (. For example, in the case of an expiration date ), it renders the PBM tokens permanently unusable for PBM holders. Expired PBM tokens can be aggregated and destroyed or "burned" to return the underlying Digital Money to the PBM creators. Alternatively, the PBM can be indefinitely suspended to prevent PBM holders from further interacting with expired PBM.

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