BANKEX Proof-of-Asset Protocol

The Smart White Paper, version 0.3.1 beta

October 19, 2017

Abstract

BANKEX Proof-of-Asset protocol (PoA) is a standard that enables new generation of assets and contractscalled Decentralized capital markets. We are building Internet of Assets (IoA) on the principles of Bank-as-a-Service (BaaS), powered by Internet of Things (IoT ) and Artificial Intelligence (AI ) technologies. PoAprotocol is open for 3rd party fintech providers, AI and IOT labs, traditional financial institutions and assetowners.

Contents

1 Introduction 21.1 Disclaimer . . . . . . . . . . . . . . . . 21.2 BANKEX Proof-of-Asset Protocol . . 21.3 Specification of Examples in White

Paper . . . . . . . . . . . . . . . . . . 31.4 Game Theory Behind the Proof-of-

Asset Protocol . . . . . . . . . . . . . 3

2 Modern Financial Markets 32.1 Bank-as-a-Service (BaaS ) Business

Model . . . . . . . . . . . . . . . . . . 32.2 Decentralized BaaS Model . . . . . . . 42.3 Classical Microservice Architecture . . 52.4 Blockchain Serviсe Architecture . . . . 52.5 Complexity regulation of the

Blockchain Service Architecture . . . . 72.6 Benefits of the Blockchain Service Ar-

chitecture . . . . . . . . . . . . . . . . 72.7 Liquidity Theory in the Context of To-

kenization . . . . . . . . . . . . . . . . 82.8 Mathematical Market Making Models

for Smart Asset . . . . . . . . . . . . . 9

3 Target assets for tokenization 103.1 Types of Assets and Asset Requirements 103.2 Choosing a Role in New Economy:

Coin or Smart Asset . . . . . . . . . . 103.3 Requirements and Options for Asset

Tokenization . . . . . . . . . . . . . . 123.4 Example: Tokenizing Shares in Non-

Public Companies . . . . . . . . . . . 13

3.5 Fundamental Advantage of Tokeniza-tion for an Asset . . . . . . . . . . . . 13

4 Originator, Product Owner and Sup-plier 144.1 Schematic of the Proof-of-Asset Protocol 144.2 Originator . . . . . . . . . . . . . . . . 144.3 Product Owner: Vision . . . . . . . . 154.4 Product Owner: Certification . . . . . 164.5 Product Owner: Basic Information . . 174.6 Product Owner: Smart Asset Catalog 174.7 Supplier . . . . . . . . . . . . . . . . . 19

5 Initial Smart Asset Offering (ISAO) 195.1 BANKEX Foundation . . . . . . . . . 195.2 BANKEX Crypto-FIAT Depository . 215.3 BANKEX Crypto Fund . . . . . . . . 225.4 Initial Smart Asset Offering (ISAO) . 225.5 Open Source: Smart Asset Core . . . . 22

6 BANKEX Proof-of-Asset Protocol 236.1 Registration data & product data . . . 236.2 Creating a Smart Asset . . . . . . . . 236.3 Smart Asset Сaterpillar . . . . . . . . 246.4 Initial contract . . . . . . . . . . . . . 246.5 Validation . . . . . . . . . . . . . . . . 276.6 Audit & Legal . . . . . . . . . . . . . 286.7 Proposal . . . . . . . . . . . . . . . . . 28

7 Technical solutions 297.1 IT Architecture Scheme . . . . . . . . 297.2 Asset data compression for blockchain

record . . . . . . . . . . . . . . . . . . 297.3 Role and system access matrix . . . . 29

1

7.4 Originator/Supplier interaction in theecosystem architecture . . . . . . . . . 29

7.5 Bank & non-Bank Originator/Supplier 297.6 Use of Microsoft Azure Bank API . . . 297.7 Large data volume hashing in the Mi-

crosoft Azure Storage . . . . . . . . . 297.8 Soft and Hard Commitment assign-

ment rules . . . . . . . . . . . . . . . . 297.9 Bid & Ask records independence prin-

ciple . . . . . . . . . . . . . . . . . . . 297.10 Decentralized Order Book rules . . . . 297.11 Decentralized matching — pros and cons 297.12 Offchain Settelment Control . . . . . . 297.13 Settelment directions . . . . . . . . . . 297.14 Formula 1: saturation of request with

data in a blockchain environment . . . 297.15 Reasons for differentiation between or-

der and bid for Smart Assets . . . . . 297.16 Formula 2: solution for automated or-

der merging and separation . . . . . . 297.17 Formula 3: filter cascade system in the

Order Book . . . . . . . . . . . . . . . 297.18 Formula 4: implementation of clas-

sical stock market trade rules in ablockchain environment . . . . . . . . 29

7.19 Study of speed parameters of matchingfor Smart Assets . . . . . . . . . . . . 29

7.20 Technological differences during Sup-plier tokenization . . . . . . . . . . . . 29

7.21 Transaction execution with decentral-ized storage . . . . . . . . . . . . . . . 31

7.22 Work with order packages during con-tract initiation . . . . . . . . . . . . . 31

7.23 Order of Escrow function in the trans-action execution block . . . . . . . . . 31

7.24 Smart Asset Core v.3 . . . . . . . . . . 317.25 Smart Asset Core v.4 . . . . . . . . . . 317.26 “Plasma” protocol & Proof-of-Asset

Protocol . . . . . . . . . . . . . . . . . 317.27 The most important features of

Plasma protocol . . . . . . . . . . . . 317.28 IoT Integration Scheme . . . . . . . . 33

A Terminology 35

1 Introduction

1.1 Disclaimer

You are reading The Smart White Paper.It was developed by the BANKEX team and de-

scribes a decentralized technology for control of liq-uidity of smart assets based on the Proof-of-AssetProtocol.

We provide the description of the technology,based on our level of knowledge and development.We hope you will find it valuable. However, thereare certain commitments we are unable to make inregards to the technology of the protocol. NeitherBANKEX, nor its suppliers and distributors provideany guarantees regarding the Proof-of-Asset Protocolsoftware, aside from those mentioned in the providedand additional Terms of Use. We take no responsi-bility in regards to the contents of the protocol soft-ware, its special functional capabilities, availabilityand compliance with your requirements. All servicesare provided “as is”.

Local law of certain countries ensures guaranteessuch as vendibility, serviceability in certain fields, in-vestor protection and intellectual property rights pro-tection. Aside from situations outlined in the legalsystem, we exclude any and all implied warranties.

After reading The Smart White Paper you maydecide to take part in the development of new decen-tralized technologies, using your knowledge, time andfinancial resources. Therefore by reading this text,you assume the unconditional obligation that, in theevent of being a citizen of USA, China, Singapore,Russia or any other country, any lawsuit with anyclaimant, where your name is featured as an involvedparty, we receive a guaranteed right to charge you asa private party for the full amount of losses, includingany fines or legal costs, including in the event of yourusing software (VPN, Class Action, etc) to concealyour true country of residence.

1.2 BANKEX Proof-of-Asset Proto-col

BANKEX is an organization that unites members ofthe financial markets in order to build a communityand implement the Proof-of-Asset Protocol enablescommunity members to profit from mutual use of as-sets.

The product of BANKEX is the Proof-of-AssetProtocol, which solves the issue of non-fungible assetliquidity. Proof-of-Asset means the token released aspart of the protocol is ensured with an asset. Theknow-how of BANKEX is the Proof-of-Asset pro-tocol, in essence a combination of BaaS (Bank-as-a-Service) and blockchain technologies. We take aclient asset, primarily on the financial market, we to-kenize it, then, without waiting for the portfolio to ac-cumulate critical mass, we turn this asset into moneyfor the bank. This is made possible through forma-tion of a single pool of similar assets (e.g., pool ofbanks) thereby creating a marketplace, where banksbenefit from liquidity and investors benefit from apredictable and transparent cash flow.

2

1.3 Specification of Examples inWhite Paper

All examples and demonstrations in this White Pa-per are used only as demonstrative examples of theSmartDeal technology. The business of BANKEX in-volves manufacturing fintech products and tokenizingprimarily financial assets, although we do not thinkit impossible to apply the Proof-of-Asset Protocol inother fields, with approval from the BANKEX Foun-dation in case of non-financial Smart Assets. In ourcase, first and foremost we create liquidity for finan-cial assets.

1.4 Game Theory Behind the Proof-of-Asset Protocol

Game Theory1 is a branch of mathematical eco-nomics focusing on the outcomes of conflicts betweenplayers, and the optimality of their strategies.

Game theory is one of the prime fundamental di-rections in economics. 11 scientists specializing ingame theory have received the Nobel Memorial Prizein Economic Sciences, including John Nash [4], [5],responsible for introducing one of the key conceptsin game theory, known as the Nash equilibrium. Itis a state in which a single player cannot benefit bychanging strategy while the other players keep theirset of chosen strategies unchanged.

Analysis carried out according to game theory in-dicates that the global financial market is currentlytrapped in the sub-optimal equilibrium of the pris-oner’s dilemma. This dilemma is a fundamentalproblem of game theory, illustrating how players willsometimes fail to cooperate even if it was in their bestinterest.

We see that players in financial markets distrusteach other and keep overpaying for an inefficient setof various ratings, scores and audits, although theseare frequently wrong (as with the Enron scandal andthe subprime mortgage crisis). This inefficiency leadsto high costs and often losses, which in turn raise thecost of capital and lead to a lack of access to capitalfor decentralized small businesses or borrowers. An-other issue derived from this dilemma is the obstruct-ing cost of deployment to the public market. If thisbarrier is removed, then the market itself is cable toevaluate every asset based on the collective wisdom ofall trading participants, as the increase in volume oftransparent and authentic trade operations providesmore information that can be used by the market toverify the assets.

We offer a solution — the Proof-of-Asset Proto-col, the point of which is an instant audit of theasset. Now every investor is aware of the status ofhis investments in non-public companies and assets.Equipped with this tool, the market will force certainbusinesses to change (lawyers, accounting, auditors,and in separate cases banks and collectors). What isour plan? We will begin by modernizing the mecha-nisms of assigning and validating ratings, as the cashflow recorded on the blockchain using the Proof-of-Asset protocol is transparent, understandable, as wellas much faster and cheaper. In essence, the asset’sstate is being constantly monitored by the logic ofsmart-contracts.

In turn, the increased amount of information oneconomical operations and their authenticity grantnew opportunities for the development of an econom-ical AI, building sufficiently precise artificial intelli-gence systems for risk evaluation, making the cost ofsuch calculations approach zero. This would enablethe creation of a competitive market of economicalAI working for the good of modern society.

2 Modern Financial Markets

2.1 Bank-as-a-Service (BaaS) Busi-ness Model

Bank-as-a-Service (BaaS ) is a business model thatmakes it possible to build new financial products thatare integrated with multiple existing technological so-lutions and jurisdictions.

On one side of these platforms are originators invarious jurisdictions with various technologies, andon the other are fintech-companies wishing to launcha new product or expand to a new market. Thanksto the platform, they are able to do this quickly andefficiently, without the need to work out integrationwith the legislation of every country and every newbank from scratch. Since the platform already con-tains technological and legal integration, it can pro-vide access to a new player more cheaply and morequickly.

The originator in the BaaS model is a store-front, essentially establishing access to the end client,be it a bank, a fintech company, an internet platform,a stock exchange or an insurer. It is critical thatwhen building the BaaS business model, the origina-tor of the platform maintains his client and accessto the client under his control, but at the same timehe provides the client with the most up-to-date andcompetitive products on the market by the best tech

1 Game theory is the study of the ways in which interacting choices of economic agents produce outcomes with respect to thepreferences (or utilities) of those agents, where the outcomes in question might have been intended by none of the agents [6].

3

(fintech, IT) companies on the market. It’s an excel-lent solution to preserve and monetize clients.

How does an end client see it? Like a bank — hedoes not have to see the third party provider.

There exist several levels of integration of partici-pants of the BaaS model: from primitive analogue in-tegration, where an employee would have to re-enterdata into a separate service, to fully automated inte-gration. The originator makes the choice of whichevermodel of work with an end client is most beneficialto him, either where the end client is shown that thecompany he is interacting with provides services byoutside service providers, or where the end client seesthe entire product line under the originator’s brand.

Some researchers call this conception “The LegoBank” which owns no pieces but assembles the piecesinto different form factors. The constituent pieces areall the same. It is how you put the pieces togetherthat makes the difference. Like Lego, you can buildthe pieces into a Castle, a House or a Winnebago.It’s all about how you click pieces together [8].

As a result, the Bank-as-a-Service platform is aunified window, where corporate or retail clients canchoose and receive services that are being offered byvarious banks and tech companies in various coun-tries. This platform takes over technical and legalintegration of various players on the financial mar-ket.

2.2 Decentralized BaaS ModelAccording to McKinsey & Co., there are three maintrends in banking evolution:

• automation;

• increased regulation;

• increased pace of technological development.

Blockchain allows to automate different processesand banks can benefit from it a lot. Accounting, legaland risk parts might be automated. McKinsey & Co.states that blockchain, based on advanced cryptogra-phy, might allow doing such operations in the mosteffective, safe and transparent way in human history.

For global players, adaptation to suchtrends will become a vital issue. Enhanced fi-nancial regulation will force participants to use part-ner BaaS platforms as adaptation to new jurisdic-tions independently will become prohibitively expen-sive. Fast tech development, which many of the bankscan’t handle, will drive banks interest in using otherfintech companies’ services. It will drive a demandfor BaaS usage.

Decentralized BaaS is the future of bank-ing. Why? The world has changed and financial

streams are becoming global. They are no longereasily controlled by common tools. Regulators andcentral banks, defining the movement of the market,are responding to this with more strict regulations.In turn, banks respond by creating as many serviceofferings as permitted by their license beyond theirconfines. They aim to create innovative services, leav-ing only themselves with just the core.

This trend creates the risk of a bank evolving intosomething more similar to a telecommunication com-pany — a company with a license that no longer seesits clients.

At BANKEX we see this risk, but believe it isright for banks to preserve the status of the most im-portant key element of the world’s financial ecosys-tem. Fintech and IT companies should not be dis-rupters of the banking system. Instead they shouldsupplement each other in a mutually beneficial way.

Several years ago, banks and innovative technolo-gies existed separately, with banks expressing an in-terest in external IT products such as certain sepa-rate features. Today the market has changed, lead-ing banks of the world work more and more closelywith fintech companies, while the fintech companiesin turn ceased to see themselves as disruptors tri-umphing over banks and instead view themselves aspartners to banks. Everyone acknowledges that of-fline bank departments will remain, even if nobodygoes to them, as foundations of faith in the system.A customer must understand that the financial ser-vice he receives is that of a bank, the bank actuallyexists, it has a department in the city, to which thecustomer can go in case of an issue for assistance.This reason at least will remain. This isn’t just adomain that might close tomorrow and leave its endclient alone with their issue. On the other hand, fin-tech and blockchain companies acknowledge that themarket share occupied by their products is too small,below 10%, and in order to amplify it, they mustpartner with banks.

In other words, fintech products must end up atbanks. Clients, in turn, will purchase and use inno-vative financial products much more willingly if theycan do so under the brand of a familiar bank. It’sworth noting that some banks will remain skepticalabout integration with fintech companies. Luckily,the banking community understands that fighting in-novation will only result in market share loss.

On the other hand, FinTech innovation alone isnot sufficient to absorb the exorbitant transactionflows and and vast financial streams. One expla-nation is that banks don’t trust one another andthey don’t trust technological companies. They areafraid of losing their client-base by partnering witha stronger or more technologically advanced player.

4

They are concerned that upon close examination theirproducts will not be competitive compared to alter-natives. They are afraid regulators would penalizethem for use of innovations in their base products.Another important note is that decisions regardingsuch risks are made by top-managers, most of whomare more concerned with protecting their reputationthan introducing innovation.

Technological progress has presented us with so-lutions to such issues — organizing mutual trust ofparticipants in the system and trust in operations inthe system based on decentralized data storage andautomated smart-contracts.

Many professional market players admit that a de-centralized BaaS business-model is an optimal pathto collaboration between classic banks and financialcompanies with cutting edge IT companies and con-tinually growing decentralized technological compa-nies of the future.

Front service of clients remains in the hands ofthe banks, while products are presented by narrowly-oriented product banks or companies.

We believe that the B2B2C combination ofbusiness-models and technologies is the key toBANKEX’s success.

2.3 Classical Microservice Architec-ture

Microservice architecture is a network of module ser-vices that can be deployed independently from oneanother.

Microservice architecture is an approach to struc-turing applications whereby they are broken downinto smaller independent internal components.

Advantages of Microservice Architecture:

• autonomous ownership for different microser-vices within an application;

• agility, application micro-components can bedeveloped and tested in autonomous decentral-ized teams much faster;

• improved scalability (scaling independent ofother components, on-demand scaling);

• continuous delivery and deployment of micro-components.

A monolithic architecture is much easier in imple-mentation, control and deployment, while microser-vices require careful management, as they are de-ployed on different servers and use API.

Such architecture allows technically complicatedapplications to constantly evolve without the need towait for the release of a new version of the product tomake changes. There is no need to release an updatedversion of the product, if the changes apply only toa small part of the product. That’s why it’s possi-ble to customize for various business tasks of everyenterprise, department or person.

Notably, microservices can be fully managed bydifferent teams in compliance with different standardsand are also more available: even if one of themcrashes, it does not lead to the crash of the entireapplication. A unified architecture facilitates workin situations where multiple modules need to inter-act with one another, or where classes need to betransferred from one module to another. At the sametime microservices can guarantee that there will beno shared states between the modules. Finally, mi-croservices allow you to use multiple technologies andlanguages, depending on business needs (Figure 1).

2.4 Blockchain Serviсe ArchitectureOn an Ethereum blockchain micro-service, architec-ture is used in the implementation of external ora-cles. At the same time, the Ethereum network isitself an example of network that uses the concept ofmicro-services, since it contains all the characteristicfeatures of micro-services (Figure 2):

• excess and reservation, as each node of the net-work is autonomous;

• service discovery for automatic configuration ofnetwork topology;

• extensibility through the use of other types ofmicro-services (such as oracles, micro-servicesallowing to display statistics, etc.).

The logic of the BANKEX liquidity protocol isbased on the concept of the Ethereum smart con-tract2, and accordingly uses all of its infrastruc-ture advantages. At the same time, technically, theBANKEX protocol is a series of smart contract up-dates, however these smart contract updates are notmicro-services themselves, the micro-services are inrelation between API calls themselves. From ourside, the business tasks of the protocol, which re-quire a classical micro-service architecture, are real-ized through the creation of the oracle system. Pro-tocol oracles are designed strictly according to theprinciples of the micro-services, that is, the instancesof these oracles should be automatically added un-der the required conditions. In this case, dynamic

2 The phrase “smart contract” was coined by Nick Szabo initially in [10] and later in [9].

5

Microservice Architecture

DB

Monolythic Architecture

DB DBDB

UI

UI

Business Logic

Data Access Level

Microservice A Microservice B Microservice C

Microservice D

Figure 1: Monolythic vs. Microservice Architecture

Ethereum Network

Client Node

Miner

Client Node

Client Node

Client Node

Miner

...

Client Node

Miner

Client Node

Miner

Client Node

Miner

Client Node

Client Node

...

...

Oracle

Web3j

Oracle

Web3j

Node Management Data

Figure 2: Blockchain Microservice Architecture

6

balancing of the number of oracle instances is used.Part of the BANKEX oracles is implemented on thebasis of Microsoft Azure cloud technologies, since it’sone of the most bank friendly platforms. An exampleof the protocol logic was realized through the interac-tion with the signals from Internet of Things sensors.

But for the description of the BANKEX Proof-of-Asset protocol the definition of the micro-servicearchitecture is not entirely correct. BANKEX teamcalls it the Blockchain Service Architecture.

Blockchain Service Architecture is a sequenceof smart contracts, every step of which can be cus-tomized by a predetermined pool of actors validatedfor the particular step of the included smart con-tracts, while the contents of contracts in a step andthe number of steps are embedded in the businesslogic necessary to tokenize the Smart Asset.

It is an asset tokenization constructor, but onethat only works in a sequence of smart contracts cor-rectly arranged after one another, supplemented withoracles connected as micro-services.

This allows to tokenize an asset with maximumprecision and transparency for all participants of themarket, while also working in line with the opensource BANKEX Proof-Of-Asset protocol.

2.5 Complexity regulation of theBlockchain Service Architecture

We often hear from technical experts: Your protocolis too complicated. Other technical gurus say — yourprotocol is too simple. Yes, they are correct. Thecomplexity of the BANKEX protocol, which is basedon the Blockchain Service Architecture, is regulatedby the increase/decrease in the number of smart con-tracts in the tokenization logic (Figure 3).

The creation of a smart asset of a certain typedoes not necessary use all the steps that are laid outin the Blockchain Service Architecture, only the stepsof the smart contract chain that are required by a par-ticular Smart Asset are used. The simplest Smart As-set consists of three steps: initialization, validation,and valuation. And in this case the Smart Asset willfulfill its mission — make the asset liquid. It’s notcomplicated at all.

At the same time, BANKEX is an old companyin the sphere of financial technologies, classic fintech.We know very well how complex financial tools canbe, and how difficult it is to properly formalize them.Our solution is the Blockchain Service Architecture —exactly what you need. You can add any level ofcomplexity to the asset tokenization chain which willresult in a Smart Asset.

Moreover, the Smart Asset retains all the featuresof a blockchain Smart Contract — everyone is able tosee what value is behind it and how truthful it is.

You can add your own logic block to theBlockchainService chain — Proof-of-Asset Protocol,because it is an open source code. To do that — youwill need to address the BANKEX Foundation com-munity.

2.6 Benefits of the Blockchain ServiceArchitecture

Why would the service architecture of the fu-ture use blockchain? In the existing infrastruc-ture, a large application or product consists of a largenumber of modules which are almost always devel-oped by different teams, and, even if the teams workwithin the same bank, they still requires a large num-ber of cash flows between different participants in thesystem and a large amount of agreements and inspec-tions. It is costly, time consuming, and very likely toresult in mistakes, including system errors.

Blockchain helps automate the chain of transac-tions, increasing reliability, transaction transparencyand removing inefficiencies and bureaucratic hurdles.It lowers the risk of human mistakes and for manyoperations completely removes the need for humanintervention. This will make your business faster,lower your costs and increase the market’s trust inyou.

Finally, Blockchain Service Architecture will allowyou to build, in the best way, a product line fittingwith the trend of personalization and to offer uniquesolutions to consumers exactly when they really needit.

Blockchain technologies are perfectly suited forthis task, as they provide an infrastructure with anopen register of immutable operations. The first re-lease of the Proof-of- Asset protocol relies on the es-tablished technology of open blockchains, most im-portantly Ethereum. Technologies for the creationof private blockchains are currently on their way tobecoming established and accepted by the industry.Thus the first release focuses on the tokenizationof open assets. In the future, the algorithm willbe adapted to private blockchains in line with theirreadiness for industrial application.

We see the current issues with financial instru-ments from within; we see how many inefficienciesexist between market participants. Our mission isto provide technologies that market participants willlike, that will improve upon the current market struc-ture, and that will enable the same people — the samemarket participants, to interact more efficiently and,above all, more profitably.

7

SmartContract

1.1

SmartContract

1.2

SmartContract

2.1

SmartContract

2.2

SmartContract

2.3

SmartContract(N-1).1

SmartContract

N.1

SmartContract

N.2

SmartContract

N

SmartContract

N-1

SmartContract

2

SmartContract

1

Verification IoT IoT

AdditionalInformation

InitialInformation

Asset Owner

Smart Contract

ExternalData Sources

...

...

Figure 3: Blockchain SA Smart Contract Chain

2.7 Liquidity Theory in the Contextof Tokenization

Liquidity of an asset is the ability to sell or buy theasset quickly without significant change in its price.Higher liquidity alleviates the trade-off between theprice of an asset it can be sold/bought for and thespeed of its sale. People have preference for liquidity,such a theory was first introduced by John MaynardKeynes [3]. Many theories and empirical studies sug-gest that lower liquidity results in underrated valuestored in assets [1].

Making these assets more liquid will help unlockthe value.

Protocol of liquidity is a derivative of what we re-fer to as The BANKEX Proof-of-Asset protocol. Wecall it that because today, unless it possesses a cer-tain description of characteristics, it is fairly difficultto sell an asset, even if at first glance it appears liq-uid. For instance, a new consumer good, as an asset,is fully liquid — all one needs to do is list it in an on-line store, making it possible for an end client to buyit. But not all types of assets and even not all of thesimplest consumer goods have deliberately truthfulcharacteristics and a capacity for digitization. Themost common example, a used consumer good, re-quires at least a description of changes to its basecharacteristics, and then the buyer needs to be con-

vinced that the description of the good is truthful.This, as a result, requires the buyer to check the de-scribed characteristics in order to make a purchasingdecision. This happens because this “asset” is notdigitized at the outset, so the mechanics of selling itbecome more complicated, compared to the sale of asimilar new asset.

To address this problem, various niche technolog-ical services emerged that assist in making an as-set more liquid, while also facilitating trust betweeneach sides of the deal. Services do this in differentways, from simple announcement boards, to complexinternet-services with risk insurance included. Theseservices make an asset “understandable” to the mar-ket, after which said asset becomes significantly moreliquid than it initially is.

This is an example of digitization of an asset giv-ing it liquidity.

But tokenization is different from digitization:digitization is about creating descriptions, its con-sumer characteristics, photographing etc. Tokeniza-tion, beyond the aforementioned steps, adds financialcomponents — automated smart contracts for deal ex-ecution, commands for automatic transactions, for-mulas for calculation of the asset price, automaticvalidation of the initial data and much more.

So, digitization is about asset description and its

8

publishing on the market. Tokenization is about assetdescription, validation by oracles, asset price calcula-tion, automated audit, calculation of cash flows basedon its price, execution of the SmartDeal.

One of the major reasons for tokenization of anasset is the possibility to avoid fraud that may bepresent in the case of classic digitization. A good canbe digitized but might also contain false informationin its description. Often it is difficult for an assetowner to see the real information about cash flowseven if there is no intention to hide them. BANKEXProof-of-Asset Protocol provides the proof that anasset and its cash flows are authentic.

We remind you that this BANKEX White Paperuses examples and demonstrations only as demon-strative examples of the SmartDeal technology. Thebusiness of BANKEX involves manufacturing fintechproducts and tokenizing primarily financial assets,although we do not think it impossible to applythe Proof-of-Asset Protocol in other fields, with ap-proval from the BANKEX Foundation in case of non-financial Smart Assets.

2.8 Mathematical Market MakingModels for Smart Asset

What is market making?

Market maker is a player on a market for a good orsecurity who provides both buy and sell opportuni-ties for traders, thus making this market more liquid.Market makers hold both the security/good and cashin inventories in order to be able to take the oppo-site side of trading order volume to fix imbalance inbuy and sell orders. Market-makers earn on bid-askspreads, but bear the risks of price decline of theirinventories.

Key players:

• traders: responsible for creation of purchas-ing/sell orders;

• market makers (specialists): display public buy& sell quotations for a guaranteed number of se-curities/goods to traders and fulfill orders fromtraders at these quotations;

• dealers: buy and sell securities/goods fromtraders but do not disclose quotes publicly;

• brokers: carry out orders on behalf of theirclients.

Liquid trade is of great importance for the stabil-ity and effectiveness of financial markets.

Market making is an established trading practice,which has inspired much research, both theoretical

and empirical. Most of the theoretical research pa-pers model market maker as a single player withwhom other market players can trade, with no trad-ing activity apart from that. On the other hand,there are some research papers where market mak-ers compete with middlemen (dealers/brokers). Inthis model, the author introduces market-makers toa model by D. Spulber with buyers, sellers and deal-ers.

A number of researchers have focused on the op-timal behavior of a market maker (specialist). Somepapers examine the effect of risk aversion and inven-tory on the pricing policies of a market maker. Inanother paper, the authors study the profitability ofmarket making strategies. Other researchers modelbid-ask spread as a need to compensate for losses dueto adverse selection problem: traders who engage intrade with a market-maker might know informationthat the market maker does not know.

Recent papers have focused on combining finan-cial market maker model with the field of artificialintelligence; high frequency trading has made a sig-nificant footprint in market-marking models. For ex-ample, Abraham Othman combines two concepts —automated market making from the artificial intelli-gence literature and risk measures from the financeliterature. In another paper, the author studies theimpact of high frequency market making on liquidity,price discovery and institutional traders’ returns.

Benefits of market making:

• liquidity provision (buyers and sellers do notneed to make orders simultaneously);

• reduction in dealers’ bid-ask spreads due to MMpublicly quoting prices;

• less uncertainty due to market maker displayingquotes publicly;

• lower search costs because traders do not needto search other traders or dealers to sell at goodprice;

• market maker can tax and subsidize transac-tions by changing bid and ask prices;

• lower transaction costs for all players due tocentralized exchange;

• lower market volatility because fluctuations ofdemand and supply are smoothed.

9

Examples of market makers today

They also play a major role in stock exchanges, andhistorically exchanges have often appointed tradingfirms to act as official market makers for specific eq-uities:

• market makers typically either own or are mem-bers of an exchange such as the New York StockExchange or the Chicago Board of Trade;

• NYSE designates a single market maker foreach stock, known as the specialist for thatstock. In contrast, NASDAQ allows severalmarket makers for each stock;

• HFT firms buy and sell simultaneously profit-ing from spreads, thus they are market makers,however, without formally being designated so.They forecast increases in buy orders volume,buy before other buyers and then sell to themat a higher price.

The BANKEX Proof-of-Asset Protocol includesSmart Asset Exchange, support of liquidity ofSmart Assets being traded within the protocol is animportant task for BANKEX. It’s important to notethat market making to support liquidity of Smart As-sets in OrderBook is a more complex task than it is ona classic stock market. This is due to certain types ofSmart Assets having more characteristics that affectprice, than the classic balance of supply and demand.

Another significant note is that the BANKEXProof-of-Asset Protocol is based on the Ethereumblockchain, meaning Smart Asset tokens issued in theecosystem of BANKEX can be traded on any marketsupporting the ERC20 standard.

3 Target assets for tokenization

3.1 Types of Assets and Asset Re-quirements

Everything in our world is relatively liquid. The Fig-ure 4 is taken from a report [7] by Blockstone — oneof the biggest equity funds in USA, demonstratingthat everything is liquid and has a duration of sale.They mention that investing into assets that couldseem insufficiently liquid at first may in fact result ingreater profitability than other assets.

We see that selling public equities takes severalseconds, bonds can be sold within a day, municipalbonds would take weeks or months. Private equi-ties — 10 years, real estate — 5–10 years, objects ofinfrastructure such as bridges, roads or factories –tens of years. Works of art may wait for their buyermore than 50 years.

In this situation, blockchain tokens which can bebought and sold on a decentralized blockchain in lessthan 10–30 minutes, are an opportunity to tokenizeeverything that currently takes longer than that tosell.

The potential tokenization market includes every-thing that sells over days, weeks or years. Mean-ing potential for the tokenization market is enor-mous. The issue currently being addressed by thebest blockchains in the world — Ethereum and Bit-coin, the issue of having to wait several minutes toreceive several transaction confirmations, is no issueto us.

Asset Tokenization does not work on the marketof assets liquid enough to be sold in seconds. TheMarket Opportunity of BANKEX Asset Tokenizationstands to the right of Tokens on Figure 5.

We therefore do not compete or fight for the as-sets that take seconds to sell. This is the market ofRipple3 — the world’s only enterprise blockchain so-lution for global payments. To them, instantaneoustransactions are key, unlike liquidity of Smart Assetsduring tokenization, where a few seconds don’t mat-ter.

In our opinion, target assets for tokenization caninclude classes of assets with summary capitalizationexceeding 100 million USD.

3.2 Choosing a Role in New Economy:Coin or Smart Asset

We receive hundreds of requests: can our business inthe real sector be tokenized and how? Many businessowners see an opportunity to fund their business us-ing crypto economics via ICO or ITO. Experiencedbusinessmen understand this capital to them is sig-nificantly less costly compared to classical sources ofcapital and is also associated with less administrativerisk, as the business decision making center stays inthe hands of the owner. In crypto economics therecan be no board of directors with members who arenon-amicable to you.

3 Ripple provides global financial settlement solutions to enable the world to exchange value like it already exchanges infor-mation — giving rise to an Internet of Value (IoV). Ripple solutions lower the total cost of settlement by enabling banks totransact directly, instantly and with certainty of settlement. Banks around the world are partnering with Ripple to improvetheir cross-border payment offerings, and to join the growing, global network of financial institutions and market makers layingthe foundation for the Internet of Value. https://ripple.com/xrp/

10

Figure 4: Everything Is (Relatively) LiquidBased on [7], source: [2]. For illustrative purposes only

Figure 5: Realizing the Value of Liquid Assets Takes Time

11

In terms of forming a new economy, BANKEXsees a solution to real business funding in separat-ing technological and infrastructure projects fromprojects in the field of business operating industrialand manufacturing assets. Technological and infras-tructure projects that can help decentralized econ-omy develop and become bigger, more convenient, aswell as expand usage of technology over the globe candefinitely receive funding via ICO. But what aboutprojects in the real economy segment that require to-kenization, but lack strong technological teams, ex-perienced IT founders, financial evangelists?

We all know the crowdsale mechanism will onlywork with influential founders, powerful ideas and afully transparent vision of the project’s technologicalrealization.

The answer is obvious: use the technology andinfrastructure of core projects in decentralized econ-omy, including ones utilizing an open source protocol.The BANKEX Proof-of-Asset Protocol is preciselythis kind of solution.

We present to you the procedure of creating aSmart Asset — ISAO (Initial Smart Asset Offer-ing) based on decentralization protocols, such as theBANKEX Proof-of-Asset Protocol. Your asset, evenif it’s an offline business, will be able to attract re-sources by tokenizing its assets using already madepowerful technological protocols. You don’t need anICO procedure, instead you can perform Asset Tok-enization of your business using ISAO.

It’s simple. Use Smart Asset.Businesses (farms, stores, manufacturing enter-

prises) referred to as Smart Assets in our White Pa-per can be tokenized as part of the ISAO procedure,subsequently forming anAsset Community and re-ceiving returns via Smart Deal.

3.3 Requirements and Options for As-set Tokenization

Over the years, working in classic fintech, we have be-come accustomed to always seek situations that havesome sort of problem. Today, we realize that in eachof these searches, we would also effectively seek outa problem that prevented an asset from being trulyliquid.

Below are several problems, causing a decrease ofan asset’s liquidity, and the more of the below quali-ties your asset has – the more attractive tokenizationof such an asset would be.

Tokenization of assets gains the greatest value un-der the following conditions:

(a) Presence of a large number of asset owners.This means the asset has multiple owners whocan have difficulty reaching a consensus.

(b) Distributed asset. You own several office build-ings that are rented out several rooms at a time.You can easily see the authenticity of cash flowfrom the entire asset, but you may find it verydifficult, even downright impossible, to figureout the authenticity of cash flow from a singleoffice room.

(c) Standardized end product. This would allowus to identify meta-information when creatinga Smart Asset. It’s important for us to be ableto bring it to a single basis.

(d) Fungibility (tradability). The possibility oftrading one for another. One asset for anotherasset, since you as an owner are not concernedwith what the asset is. What matters is thecash flow provided by this asset.

(e) Use of token as a mean of payment for end-product. An option that would allow the ISAOtoken released not to be too similar to a pay-ment obligation. A Smart Asset token insuresreceiving payment, but it can also be used asa means of payment. For example, it can bebought to finance construction of a building,but then this same token can be used to rent aroom in this building. As a result, it becomesa utility token, which is important.

(f) Use of the token to own a large asset by ahigh number of investors and easy means fora buyer to exit co-ownership of a large asset.If an asset can simultaneously be owned by alarge number of owners, then it’s makes entryinto asset ownership easier. A classical exam-ple is shared ownership of large real estate ornon-public company shares. Entering such as-sets with a small share is very complicated atthe time.

(g) Ability to automatically and unambiguouslymeasure characteristics that directly or indi-rectly indicate a potential quantity and qual-ity of end-products. The ability to integrateregular IoT audit of an asset significantly in-creases the quality of Smart Asset monitoring.It’s a significant competitive advantage over au-diting or rating agencies, whose annual surveysbecome inferior to real-time IoT audit.

(h) Possibility to withdraw an asset from the ownerif the terms of the contract are not fulfilled.This means that, aside from auditing a contractand tokenizing with an escrow module, there isthe option of trading the asset, receiving collat-eral or different contract conditions in the eventof a breach of terms.

12

(i) Control of end-product sales and minimizationof the possibility of sales that are not accountedfor. This feature does not suit all cases. Whatthis means is that the end product that is tok-enized and funded is traced. In the event of tok-enizing an agricultural asset such as strawberry,IoT sensors need to be installed that would cal-culate the number of grown berries to deter-mine whether all of the manufactured berrieshave brought the appropriate cash flow. TheseIoT sensors must detect the entire lifetime ofan asset up to the generation of cash flow.

(j) Assets the transfer of which require high legaland accounting expenditures. Early investorsfrequently want to sell their assets at the peakof profitability, while other investors are sim-ilarly interested in entering ownership of saidassets. Tokenization will make such deals sig-nificantly simpler and cheaper.

3.4 Example: Tokenizing Shares inNon-Public Companies

To give an example of high suitability for tokeniza-tion, let us examine late stage private shares thathave yet to go public. These are assets that requirevery high legal, accounting and administration costs.

There are many investors in non-public companieswho, early ones in particular, are ready to sell theirshares, while other investors are interested in enter-ing. But such companies are not public and theirshares cannot be traded on the public stock market.Furthermore, they frequently can’t be resold withoutthe approval of company board, since company man-agement must control who their private shareholdersare, and prevent their number from exceeding a cer-tain quantity, because otherwise they would breachthe limit of investors and become a public company.

These limitations, born from the inefficiency of ahistorically established system, are an inconvenienceto everyone involved — both the investors and thecompany board. In particular, this inefficiency mayoften lead to disagreements among shareholders andthe stalling of company development.

Blockchain technologies allow the necessary de-tails on shares to be recorded in a Smart Contract.Part of the company share, intended for early in-vestors or investors with a miniscule share, is tok-enized as an asset in a Smart Asset. Its nominalholder can be any entity permitted by the legislationof the company’s location, such as an SPV.

After that, from the nominal token-holder’s per-spective, they can easily change upon reaching con-sensus among themselves, as buyers or sellers of to-

kens of this Smart Asset. At the same time, share-holders are essentially not changing. All presencerights of token holders are passed to the SPV. Fornon-public companies that don’t want changes intheir board of governing shareholders, obtaining liq-uidity of their capital via tokenization of part of theirequity into a Smart Asset is essentially the only mutu-ally acceptable option for all sides involved. For earlyinvestors this method of investment becomes a newstep to decreasing investment risks, and as a resultincreases the possibility of investment into formerlyunavailable assets.

3.5 Fundamental Advantage of Tok-enization for an Asset

The analytical block of BANKEX, gathering and an-alyzing financial technologies from all over the worldfor several years, is seeing an interesting trend thathas been forming around financial tools during thelast few years.

If we take apart the basic needs of a person or acompany in terms of movement of funds, it would beeasy to discover that every person or company doesnot have that many basic financial needs, namely:

• spending money;

• moving money;

• storing money;

• earning money.

By correlating these basic financial needs with thecurrent range of financial technologies it turns outthat today there is a strong leaning towards satura-tion of certain needs with financial technologies:

• spending money — the need that is most sat-urated and easiest to digitize. There are cur-rently thousands of companies that help a per-son or a company to easily and quickly spendtheir money;

• moving money — similar in terms of satura-tion, but this basic need has several unresolvedissues, including ones currently being addressedby our colleagues at Ripple;

• storing money — the need for people andcompanies to keep their money in their pock-ets is virtually non-existent today, having fullybeen digitized and moved to plastic cards anda whole range of innovative solutions.

The BANKEX Proof-of-Asset Protocol allowspeople and organizations to fulfill an important, vitalneed — the need to earn money. By becoming partof the Asset Community you will have the option of

13

earning, and thus realizing yourself in fields of yourchoosing.

Cryptocurrencies solve the global issue of digitiza-tion of the human need to earn money, and altogetherthe emergence of cryptocurrencies is a technologicalresponse, solving this fundamental issue.

SmartDeal based on open source Smart Asset bythe Proof-of-Asset Protocol is the next step. You willbe able to build your future with your own hands.

4 Originator, Product Ownerand Supplier

4.1 Schematic of the Proof-of-AssetProtocol

In previous sections we have examined the Bank-as-a-Service product model and the concept of SmartAsset Tokenization. These are two big entities, soyou may want to know just how BANKEX combinesthem in its protocol.

The Proof-of-Asset Protocol is the technology forinteraction of multiple sides that normally take partin financial deals, but the most important, system-forming sides of the protocol are these three:

• originator;

• supplier;

• product owner.

Let us examine them using the schematic depictedon the Figure 6.

4.2 Originator

On the left side of the schematic is the asset. Theoriginator is the owner of the asset that is being to-kenized. The BANKEX protocol allows for the orig-inator to have different roles. On the schematic, forexample, the Originator is marked as an end client.

As we’ve already said, the originator is the ownerof the asset tokenized. But despite the originator be-ing the owner of the asset being tokenized, he can alsoserve as the storefront for products of other origina-tors (types of tokenization - types of Smart Assets).This is something we’ve discussed while examiningthe BaaS model.

Normally the originator for financial assets is aBank, but even today it can be an internet-platform(ecosystem), ecommerce, a fintech platform, a stockexchange, a broker, an insurance company. Mean-ing this is the company the end client goes to, theowner of a client. Anyone can see this almost daily,

the simplest example being an IT-company or ecom-merce offering their clients more and more new ser-vices, including financial ones. They are originators.

It is also fair to assume that there is the optionof tokenizing an end client’s assets without the par-ticipation of a product storefront. That’s why, basedon the methodology of processing data in blockchainsystems, we define two different types of originators(Figure 7).

Originator Agent — an organization (such as abank), which serves as a storefront for an end client,is the owner of client data or searches for clients wish-ing to conduct tokenization.

Originator End client — an end client wishingto create a Smart Asset in the BANKEX ecosystem,which will be backed by an provided asset.

Several important notes

Both roles can be filled by one and the same organiza-tion simultaneously. For instance, a bank tokenizingassets that the bank itself owns.

From a technological standpoint it is also possi-ble to omit the Originator Agent role in the eventof, for example, an end client owning a large assetthat they can tokenize themselves. To that end anOriginator End client asset needs to have sufficientcapitalization.

For small end clients, work through an OriginatorAgent is the only possible method to create a liquidSmart Asset. This will be discussed further, as we willexamine this very situation in the form of merging re-quests into portfolios and, possibly, securitization.

It is also easy to see that tokenization is no threatto Originator Agents, such as banks that are ownersof storefronts or end clients, but rather an opportu-nity for them to provide their end clients with newservices and benefits in merging client requests (alsosimilar to securitization).

Thus the Originator in the protocol has the fol-lowing characteristics:

• role: creator of the Smart Asset;

• function: providing asset for tokenization, ini-tiating Smart Asset creation.

Here’s a simple example: a small business enter-prise (SME ) Originator End client comes to a bankOriginator Agent wishing to receive a small businessenterprise loan Product (Smart Asset Type). Thebank has a product: small business enterprise loanProduct Instance 1, and receives the enterprise’s re-quest. Next the bank has its scoring procedure forthis enterprise in order to make a decision on the loan,but the results of scoring mean that the loan cannot

14

Figure 6: Asset — BANKEX — Exchange — Capital

Originator

Originator End Client(customer, fund,

portfolio)

Originator Agent(bank, ecom, fintech,

IT-ecosystem, etc.)

Smart Asset Type(choose product,tokenization type)

Figure 7: Asset Originator

be given according to the bank’s rules Product In-stance 1. The bank automatically checks other avail-able product instances fitting the request and findsan alternative, such as small business crowdfundingProduct Instance 2, the requirements of which arewell suited for Originator End client. Then the dealcan be made.

As a result, the bank gives the client the productthey require, while also keeping their client and satis-fying them, instead of turning them down and forcingthem to look for a different bank, which may lead toirreversible loss of a client for the bank.

4.3 Product Owner: Vision

Product Owner — a company that creates various fin-tech products. In the future it will become somethingmore - both the company and the community thatcreate product technologies together.

It’s a Solution provider, Product provider and fi-nally Technology Provider. Mainly it is a companythat owns the technology of Smart Asset creationbased on the Blockchain Service Architecture and it

creates new types of Smart Assets for the Originator.

At the time of Summer 2017 the BANKEXProof-of-Asset Protocol ecosystem has two function-ing Product Owners — daughter company Findeliv-ery4 (founded in 2015) and BANKEX Lab (foundedin 2016). It was BANKEX Lab that createdthe Smart Asset Types that you can try outtoday by using the tokenization demo https://dev-web-prototype-bankex.azurewebsites.net/

Obviously the mission of developing and creat-ing all types of SmartAsset the world needs neithercan nor should be undertaken by the fintech team ofBANKEX Lab alone. That’s why it’s important to usthat more and more smart contract developers frombanks and fintech companies, as well as blockchaincommunity specialists join the Proof-of-Asset Proto-col ecosystem.

BANKEX is creating the protocol architecturewith the goal of creating various types of Smart As-sets and in our ideal vision of the future, every type ofasset will come to have an Asset Community formedfor its development, support and audit.

4 Findelivery (for Google: Findostavka) — fintech company on russian market. The company provides services: delivery ofbank cards, remote conclusion of contracts, remote offline KYC clients of the bank. The company has an operating profit.https://findostavka.online/en

15

We must note that, for differing locations and ju-risdictions the same Smart Asset (Product) wouldhave a differing Product Instance, because for themoment different countries have different laws and le-gal conditions for transaction processing. This meansan enormous number of tasks for developers, for pro-grammers who will be working on the Smart Assetcode that will change the way deals are made in thewhole world.

Realization of this task is upon the BANKEXFoundation. Every Product Owner can become partof the BANKEX Foundation and make his own con-tribution to the tokenization of deals worldwide. Animportant function of the Asset Community in theBANKEX Foundation is support of Product Ownersby providing access to product expertise and secu-rity audit of the written smart contract code. CEOof the BANKEX Foundation Petr Korolev5, success-fully worked with the BANKEX Lab team to developone of the Product Instances of the protocol in Au-gust 2017 at a hackathon. BANKEX’s Ethereumstorage of mortgage securities earned BANKEX firstprize6 of the blockchain hackathon from the handsof Ethereum Foundation Council’s Vitalik Buterin.During development the Blockchain Service Architec-ture methodology was used, which allowed the cre-ation of a superior quality Product Instance fromscratch both significantly quicker and more efficientlythan other competitors.

It’s important to remember that Product Owner,just like separate Product Instances, is a business. AProduct Owner can issue Smart Asset tokens, andsubsequently provide product expertise, offer auditservices or technical support for his Smart Asset Typetogether with the BANKEX Foundation.

4.4 Product Owner: Certification

Obviously, both Product and Product Instances cre-ated by the Product Owner based on the Proof-of-Asset Protocol must be certified. This is particularlyimportant for financial Smart Assets. That’s why theecosystem includes the Smart Asset CertificationCenter (SACC ).

The mission of the certification center is to en-sure the security of Smart Assets created. Todaywe can see an industry paradox, which is that theblockchain, created as a technological solution to en-sure, first and foremost, the security of transactions,is frequently attacked, and such attacks are occasion-ally successful. We understand that this is the issue ofblockchain technology’s rapid development and new

solutions must stand the test of time.To solve this issue BANKEX utilizes the con-

cept of the Smart Asset Certification Center. Itskey mission is a synergy of interaction between classi-cal financial institutions and the newest decentralizedcommunities.

This concept is already functioning today. De-spite being an innovative approach, we have alreadyturned to it in reality several times. Here’s how itworks. On the one hand, BANKEX is a classicalfintech company, known and valued in many classi-cal banks and financial institutes.On the other hand,founders of BANKEX are all fairly experienced mem-bers of the blockchain community.

This allows synergy when evaluating the Solidityof open source code of new Smart Assets. Here’s howit is done currently:

• first, the Product Owner creates the Smart As-set code and the code goes to BANKEX Lab;

• next, BANKEX Lab conducts code analysis us-ing in-house programmers;

• next, even after the brilliant technical exper-tise of BANKEX Lab’s inhouse team, the pro-gram code is sent for audit to our partners withold school global technology consultancy, re-ceiving feedback on code quality from top levelIT specialists working with leading technologi-cal brands in the world;

• next step, the updated code is sent tobe checked by programmers from severalblockchain communities. Their experience ispriceless. Almost all of them have had a chanceto learn the price of Smart Contract bugs ontheir own wallets;

• as the final step of the code audit, the code isvalidated together with all suggested fixes fromall sources by members of the BANKEX Foun-dation together with the Asset Community andother friendly blockchain foundations.

This process may at first glance seem to take moretime to validate the Smart Asset code’s quality, butwhen you are steeped in the atmosphere of blockchainresearch and development, you come to realize that ingreenfield smart product development experience ofprogrammers with various training backgrounds al-lows to achieve impressive results and optimal codequality as quickly as possible.

5 GitHub of Petr Korolev: https://github.com/skywinder6 GitHub of the winning solution: https://github.com/BankEx/Blockchain-Hackathon-Kazan

16

Resulting from the work of the Smart Asset Certi-fication Center, you receive a guarantee of the SmartAsset code’s safety from Bankex, a company wellknown and recognized by the global financial commu-nity and listed among the top 50 fintech companiesworldwide7.

It can be added that the BANKEX team, being apioneer on the market of legally valid audit of SmartAssets, understands that audit of blockchain-basedsmart contracts is a new and enormous industry thatwill augment and possibly replace the existing orderof business consulting. We are ready to work in thisdirection with all players interested in smart contractsecurity, from community teams to consulting lead-ers.We have no agreements with consulting on paper,but we are negotiating these matters with virtuallyall the world leaders of consulting and audit, such asMicrosoft, E&Y, PWC, Deloitte and others. Theirinterest in this topic over the last year has greatly in-creased and that is the correct approach for everyone.

4.5 Product Owner: Basic Informa-tion

In the last few segments we have determined the mis-sion of the Product Owner — it’s a company that cre-ates various products, meaning types of Smart Assetsbased on the Proof-of-Asset Protocol.

The Product Owner has the following character-istics in the protocol:

• role: technology owner;

• function: to provide technology to Origina-tors in order to tokenize assets. To createvarious Products and Product Instances onthe BANKEX for members of the BANKEXecosystem. Every Product Owner is a mem-ber of the BANKEX Foundation. Productsand Product Instances that come from Prod-uct Owners must be certified using the SmartAsset Certification Center.

Let us examine the Product Owner from an initialdata standpoint using the schematic on Figure 8.

A new Product Owner joining the Smart Assetecosystem must provide basic registration info. Tobecome a member of the BANKEX Foundation thisneeds to be a company with a registered legal entityand a bank account.

Code of products created by the Product Ownercan go not only through a BANKEX audit, but alsoaudit of other organizations and community teamsvia the Smart Asset Certification Center.

Product — a Smart Asset Token, consisting of achain of smart contracts, based on the BlockchainService Architecture methodology and the rules ofthe BANKEX Proof-of-Asset Protocol. The method-ology gives the option of creating a Smart Asset onany blockchain, but currently all Smart Assets are be-ing created by the BANKEX team on the Ethereumblockchain.

Formulas written into the product set the rulesfor product info that has to be digitized by the Orig-inator and Supplier during tokenization, determiningthe interconnection between three of the main entitiesof the protocol.

We call this “Smart Asset initialization data”.

4.6 Product Owner: Smart AssetCatalog

After examining the entity of the Product Owner,we now understand that the Proof-of-Asset Proto-col is able to realize a multitude of product solutionsand Product Instances depending on application, lo-cation and legal conditions. The number of ProductInstances is not limited, so to introduce the Productin a new country or account for a change in currentlegal conditions, the Product Owner needs only up-date the Smart Asset formulas and releases a newProduct Instance.

With time a large number of Product Instances isgoing to form for every Smart Asset Type and thisnumber will form a product catalogue that the pro-tocol’s ecosystem will interact with. The BANKEXteam calls this the “Smart Asset Catalog”.

Let’s examine how members of the BANKEXecosystem interact with the Smart Asset Catalog us-ing a schematic.

As you can see, we have the BANKEX Lab Prod-uct Owner 1, which, for instance, has created a SmartAsset — Blockchain KYC Product. This technologyis going to be listed in the Smart Asset Catalog Prod-uct Catalog of the Proof-of-Asset Protocol catalogue.This is very similar to Product Containers utilized inclassical banking development.

Let’s say that next two companies came to theecosystem: Company A from Japan and Company Bfrom USA with the intention to sell the BlockchainKYC technology Product in their countries. For thesecompanies and, more importantly, together withthem as they have better understanding of the partic-ular traits of business in their country, the BANKEXLab Product Owner 1 develops a Blockchain KYCProduct solution for the Japanese market Product In-stance 1 as well as a solution for the US market Prod-

7 According to “Top 50 Financial IT Pathfinder Ranking” [11]

17

Product Owner (bank, fintech)

Product

Productregistration data

Setup Originatorproduct data

Product audit by BankExFoundation adn other Escrow

Setup Supplierproduct data

Product

Smart Asset Tokenization and Other Magic

Figure 8: Product Owner

uct Instance 2. Next let’s imagine some time afterthe above a fintech lab called Another Lab ProductOwner 2 develops a Smart Asset for the BlockchainKYC technology Product, which gives this technol-ogy new consumer features, which could be eithersuperior or inferior to the predecessor. In order tointroduce this new technology to the Proof-of-AssetProtocol ecosystem, Another Lab Product Owner 2chooses the country and jurisdiction where they wishto apply their solution, and they find an integrator,Company D.

Company D is, for instance, a company on themarket of Singapore, where it realizes its solutionProduct Instance 3, which updates the product cata-log for the Blockchain KYC technology Product witha new instance.

It’s important to note that Smart Asset pioneerswho hold the role of Product Owners of their tech-nologies can realize Product Instances for the first so-lutions on their own, without the need to involve thirdparty integrators. Decentralized Product technol-ogy allows to perform integration in the most efficientway possible, skipping steps that would not apply toa particular situation.

Now let’s examine the Smart Asset Catalog froma competition standpoint. Obviously instances onmarkets of different countries will have little to nocompetition amongst themselves. They are locatedin different countries the markets of which are, fornow, developing independently. But it’s also obviousthat Product Owners who harness the technology ofbuilding Smart Assets will begin to expand to newerand newer markets, utilizing new integration part-ners. With the technology developing further therewill come a day when several Product Instances formin the same country and the same legal field. This

will serve as the push to technological competitionbetween Smart Assets.

There will come a future age of competition be-tween Smart Asset Tokens dedicated to the sameSmart Asset Type. In this competition of fully digi-tized and tokenized assets, the main competitive ad-vantage would be the actual performance of the as-set, as well as the outstanding algorithms and valuecalculation formulas of Smart Assets and subsequentSmart Deals. Competitive advantages of the oldworld that are achieved through a different kind ofbenefits will become a thing of the past. This isan enormous quality increase for people in the wholeworld, as they will have access to assets distinguishedby their performance.

On the side of the BANKEX Proof-of-Asset Pro-tocol ecosystem the Instance Switcher block comesinto play, responsible for switching between ProductInstances within a single product container. Withinthe Instance Switcher, Product Instances are pro-cessed and arranged, filtered based on various pa-rameters, competing among themselves for buyer re-quests. Inside the Instance Switcher every productcontainer has its own Instance Trigger that selectsoptimal Product Instances out of those available fora product based on the criteria set by the client.

Until now we have observed the Smart Asset Cat-alog top to bottom, from the Product Owner to theProduct Catalog, but with the emergence of compet-ing Product Instances the logic of analysis changesinstead and we go from bottom to top, seeing thepicture of product choice in its entirety. As competi-tion emerges, it’s the consumer who determines whichProduct Instance he will choose, and that is exactlyhow the process of bidding begins within a single typeof Smart Assets. The Instance Switcher can therefore

18

be viewed as an analogue of the classical order book.A buyer’s request falls into this order book followingthe client’s product choice.

This is how a decentralized product exchange be-gins — the Smart Asset Exchange.

4.7 Supplier

On the right side of the schematic presented in section4.1 of the Smart White Paper we see the Supplier.

The supplier is the owner of the tokenized prod-uct.

BANKEX engineers have conducted research ofentities and characteristics of resources presently usedin various financial and internet ecosystems and havereached amazing results. We have discovered thatour typical perception of the resource taking part indeals as financial resource only is too limited.

Perhaps we as a fintech company should be com-pelled to state here that resource equals money, butour research and development on the matter showsthat within the protocol’s ecosystem when creatingvarious types of Smart Assets there will sometimesbe Smart Deals with a different resource.

That is why we give the following definition of aSupplier End Client — it’s an end client in posses-sion of financial or other resources wishing to use hisresource in a chosen Smart Asset to create a SmartDeal with a tokenized cash flow or other goods.

The BANKEX protocol accounts for the possibil-ity that the Supplier may also have various roles, asshown on the schematic on Figure 9.

Supplier Agent — an organization (e.g. bank),representing a portfolio of end clients who wish totake part in a Smart Asset using their resources.

There is a significant difference here from the sim-ilar structure of an originator, because in the situa-tion where a Supplier End Client enters the ecosystemwithout a Supplier Agent, he has no way of access-ing a Smart Asset deal directly, instead BANKEXserves the role of a Supplier Agent in this case. Fre-quently the Supplier will be represented by financialresources, and in order to allow them to enter theSmart Asset Exchange, they will require, at the veryleast, a KYC procedure of the Supplier End Clientbased on the requirements of the country where theparticular Product Instance functions. That is ourcurrent method for our active fintech products.

For some Smart Assets the BANKEX team devel-ops special procedures of Accreditation. This hasto do with the complicated matter of acceptable risklevels for a resource and not all end clients are ableto evaluate it accordingly. One of our advisors re-garded the development of the Supplier Accreditationprocedure as a potential limit to the technology’s po-

tential.We are aware that in order to create a globaltechnology, the participants of said technology mustnot be limited, so the Supplier Accreditation proce-dure is not a limit. Is it merely one of the smart con-tracts within the chain of Supplier tokenization and,in the event where a resource is unable to pass Sup-plier Accreditation, this merely means the ProductOwner of this particular Smart Asset needs to deter-mine the ensuing path of the resource tokenized withthe new parameters received. This includes determin-ing special legal conditions for it where necessary, ifit is required by the country where the Product In-stance of the particular Smart Asset functions. Thisallows to bypass limitations of usage for the Proof-of-Asset Protocol on a low technological level stemmingfrom the particularities of local legislation — they aresimply included into the tokenization formulas of thecorresponding Product Instance.

It is also important to note that, as with the Origi-nator, work through a Supplier Agent is a very simplemean of investing their resource into previously inac-cessible types of assets for smaller end clients. Endclient resources are easily merged into portfolios dur-ing tokenization, granting them access to profitableand secure asset types. Never in history have suchtypes of assets been accessible to a simple end clientwith a moderate amount of resources. Blockchain-based tokenization gives these opportunities to prac-tically any person regardless of accumulated richesor social status. It is a true evolution of liquidity ofassets and their accessibility.

So, the characteristics of the Supplier in the pro-tocol are as follows:

• role: Smart Asset consumer;

• function: taking part in the Smart Asset andcreation of Smart Deal using his resource.

5 Initial Smart Asset Offering(ISAO)

5.1 BANKEX Foundation

BANKEX Foundation is a non-commercial self-regulated organization with a community the mem-bers of which are engaged in work and developmentof smart contracts for new Smart Assets and ProductInstances created with its participation. It includesblockchain technology experts, programmers as wellas product providers and product experts.

The BANKEX Foundation as a non-profit orga-nization is an important element of the BANKEXProtocol ecosystem, which allows coordination of theactions of various other elements of the system.

19

Supplier

Supplier End Client(investor, people,

infrastructure element)

Supplier Agent(bank, fund, investor,infrastructure owner)

Smart Asset Type(choose product, KYCaccreditation token)

Figure 9: Asset Supplier

We must note here that while other sections ofThe Smart White Paper BANKEX describe processesand technologies in various states of readiness but ex-isting in the real world, this section is going to presentthe model of a concept not yet existing in the world,but aimed at solving issues.

When creating prototypes of various Smart Assetsat the BANKEX Lab we have encountered a situationwhere many business owners from various countriesstarted coming to us, wishing to tokenize their assetsvia the ICO procedure. Our vision of tokenization,which we have already discussed in this White Pa-per earlier, concludes that issuing your own coin is apoor solution for assets belonging to the real sectorof economy where rocket science technologies don’texist. Nonetheless, the necessity and even inevitabil-ity of the tokenization of their assets in the futureare obvious. We suggested the procedure of SmartAsset emission to these clients, some of the resultingOriginators were accepted by the BANKEX Lab aspilot designs. These assets will be prepared for theInitial Smart Asset Offering (ISAO) in the Proof-of-Asset Protocol ecosystem. But we turned down themajority of them.

How do we see the possibility of providing thesebusinesses with the option to tokenize, regardless ofthe centralized initiator-company of the Smart Asset?

The BANKEX team assumes the Market willform more and more such requests as time passes.These requests will come from owners of businessesor assets, meaning Originators with No token Asset.The BANKEX Lab is receiving such requests now,but subsequently they will be addressed to multipleProduct Owners in the ecosystem. Those requeststhat the Product Owners can tokenize they will pro-cess, creating Product Instances. Of course, they willalso turn down many incoming requests. The reasonis not so important at this point.

Such requests for tokenization of a new type ofassets are directed by acting Product Owners to theBANKEX Foundation (Figure 10).

Now let’s examine the schematic to see how theBANKEX Foundation coordinates actions:

Asset Community — as the request for creationof a Smart Asset came from the Market, there

is clearly an individual or group of individualswho are pioneers and enthusiasts of this prod-uct. These are the people the BANKEX Foun-dation forms a product community from for thecreation of a new type of Smart Asset. Thisproduct community then takes over the busi-ness development of the aforementioned SmartAsset. The initiator of the request for such aSmart Asset Type may become the founder ofsaid Asset Community. Such communities arealso needed by the ecosystem for two more im-portant functions - product expertise and pro-viding Proof-of-Asset evidence in the event ofSmart Deal disputes. It’s important that in theAsset Community we do not require identifica-tion of all the members — they take part in theecosystem only with their knowledge and expe-rience.

Foundation Community — this is a communityof programmers and business developers, whoare fans of the decentralized Blockchain ServiceArchitecture. They are the people responsiblefor creating the world-changing chains of SmartContracts for various No token Assets.

New Smart Asset Type — is a program code fullyready for initiation. As we see on the schematicthe Asset Community, Foundation Communityand the BANKEX Lab with participation fromthird party experts takes part in the creationof this code. The quality of the code is guar-anteed by the BANKEX Smart Asset Certifica-tion Center.

So the BANKEX Foundation in the protocol hasthe following characteristics:

• role: community built around the protocol;

• function: creation of new types of Smart Assetsand the development of the protocol that willbe in-demand by the community, as well as thegrowth of the community that is going to usethe protocol.

20

Figure 10: ISAO Structure

5.2 BANKEX Crypto-FIAT Deposi-tory

One of the existing and not yet solved issues in assettokenization is the impossibility for legally significantorganizations to purchase tokens. There is a long se-ries of details relevant for different locations.

Let us pause on the most important and definetheir common features.

First, banks and organizations are able to investinto companies, using stocks and equities. In banks,classical funds and large financial groups there arespecial departments that invest into corporate secu-rities and other financial instruments on stock ex-changes. These departments are able to invest intosecurities, but lack the ability to invest into crypto-graphic coins and tokens, as they have no commontools for that.

Second, banks and organizations must place pur-chased assets on their balance upon investment, forthat they require legally relevant documents that con-firm purchase of the asset. Token purchase providesno such documents.

Third, banks and organizations lack the technol-ogy to follow their existing security regulations whenstoring cryptoassets. As we all know, should the pri-vate key be compromised, that would be enough tolose access to the crypto wallet, and it doesn’t matterwhat amount is stored on the wallet, if a malignantparty obtains the private key it can vanish in an in-

stance. Banks are unable, or rather they cannot per-mit assets to be stored with such security parameters.

In the BANKEX ecosystem solution of these prob-lems is handled by the BANKEX Crypto-FIATDepository. This is a legal organization and a tech-nology for cryptoasset storage. The Crypto-FIATDepository works as any classical depository with theonly difference being that it grants its classical clientsthe ability to store cryptoassets.

We see this as the Depository forming a legalagreement with a bank or organization to give theDepository permission to store clients’ cryptoassets.After that the client registers a wallet in the Deposi-tory for the cryptoassets he requires. If it’s an ERC20token then an Ethereum Wallet is registered. Afterthat the client does not receive the private key to thewallet - instead it’s instantly conserved in the deposi-tory’s storage until the client closes the account. Theclient receives a regular depository receipt in returnfor his cryptoasset.

The technology to store coins and tokens in theCrypto-FIAT Depository allows a client to conductoperations with cryptoassets on his balance, andwhat’s more important, it lets him do this in a waythat he’s used to. He sees these cryptocurrencies inthe same way he would see classical assets. This isthe very technology that FIAT and Crypto marketsare waiting for.

21

5.3 BANKEX Crypto Fund

5.4 Initial Smart Asset Offering(ISAO)

Initial Smart Asset Offering (ISAO) — is the initialSmart Asset offer with the goal of tokenizing finan-cial assets or real economy sector assets in the formof emission and sale of Smart Asset Tokens to buyers.

An ISAO can only be carried out with an as-set present, in other words either a functioning orplanned cash flow. A technological startup or RnDcannot be tokenized via the ISAO procedure.

On the schematic (Figure 10) we can see the re-quest for an ISAO comes from an Originator, i.e.owner of a financial or manufacturing asset. ThisOriginator does not need to create the tokenizationtechnology – instead the best programmers from var-ious teams coordinated by the BANKEX Foundationcompete for its creation.

It would be fair to state that a first-time Origi-nator with the desire to create a new type of SmartAsset and an Originator initiating an Initial SmartAsset Offering can be one and the same person, whichis what we are striving for. But at the same time thisschematic does not permit centralization of the pro-gram solution, as the Originator neither influencesthe actual writing of the Smart Asset code, nor con-trols the programmers, the Originator is only able totake part in the development via product expertiseusing the Asset Community mechanism.

In the BANKEX Proof-of-Asset Protocol ecosys-tem the following can take part in the initial purchaseof Smart Asset Tokens on a technological level:

• buyers originating from the market;

• banks and classical funds via the BANKEX CFDepository and “Co-Fund” systems;

• members of the product community interestedin development of assets of this particular type.

If the buyer originates from the market or the As-set Community and he needs to make a purchase us-ing FIAT currencies, he has the ability to do that viathe Crypto-FIAT Depository. If the buyer wants tomake a purchase using ETH — he can do so directly.

The buyer of Smart Asset Tokens — in termsof entities present in the Proof-of-Asset Protocol, asoutlined in the previous chapter — takes the role ofthe Supplier.

5.5 Open Source: Smart Asset Core

BANKEX Foundation presents a platform for col-laborative work with an open source code, createdto promote technologies in the banking and financialsectors.

An Open Source approach to development basedon collaborative use of software can ensure trans-parency, stability and support needed to implementblockchain technologies. The main task of organiza-tions is the development of a global cooperation andsupport of leaders and entrepreneurs in the field offinances, banking, Internet of Things and decentral-ized technologies.

We welcome all who take part in the developercommunity of the Smart Asset Protocol regardless ofmembership status. Additional information on thetechnical details and methods of collaboration can befound on the community page https://github.com/BankEx.

Open Source Protocol — Smart Asset Core(https://github.com/BankEx/smart-asset-core)is the base structure to tokenize and securitize assets.It contains all the necessary modules for integrationof third party information providers and tools forwriting specialized smart contracts.

Open Source Proposal:

• development of the blockchain community inorder to support the Proof-of-Asset Protocol;

• establishing partner connections and their sub-sequent technical support;

• formulation of the direction of technologicaldevelopment and establishing interaction withProduct Providers;

• creation of the protocol’s core architecture withsubsequent increase of functionality by involv-ing specialists from the open source community;

• ensuring protocol security, including by meansof involving third party white hat hackers &developers;

• organization of a tight cooperation with solu-tions of other open source communities, suchas the Consensus Foundation, Ethereum Foun-dation, Symphony Foundation, Hyperledger

Open Source Finance part:

• tech support for partners;

• bounty program for developers (expenses) —guarantee of security.

22

6 BANKEX Proof-of-AssetProtocol

6.1 Registration data & product data

The our first step in researching the liquidity protocolis data. BANKEX as a classical fintech company iswell aware how many different existing banking sys-tems there are, many with an architecture that wasestablished many years ago.

That’s why in order to build the protocol technol-ogy we have begun our research from scratch, ratherthan basing it off of any existing IT infrasctructureof a bank. This may be an unexpected decision tosome IT specialists of the banking segment, but wehave decided to separate all the information we workwith during initialization of Smart Assets into justtwo parts: registration data and product data. Wesee no reason to overcomplicate this.

Registration data — data that allows the identifi-cation of a client. Modern registration data containsan intrinsic fundamental controversy. On the onehand, internet platforms have evolved to the high-est level of simplification for this data - most of themrequest nothing but a client’s e-mail upon initial reg-istration. On the other hand, in order to work withfinancial information in global economy, it is neces-sary to receive the most extensive registration datafrom the client - this is a matter of public security.

In the blockchain network technology there is,in essence, only one vitally important identification,which is the address of one’s wallet. As we are build-ing the financial asset tokenization protocol, we findthis information insufficient. Here is our solution.The registration data that allows client identifica-tion is taken beyond the tokenization cycle. When aSmart Asset is created on the Ethereum blockchain,we retain the technological capability to perform to-kenization using only the Ethereum Wallet number,but at the same time we also create a connection be-tween the Ethereum Wallet used in tokenization andthe other registration data using the BANKEX KYCAdapter. This is imperative as different banks mayhave completely different assortments of client regis-tration data and, what’s more important, these arepersonal details that are protected in many countries.It would be unwise to create a Smart Asset reliant onthem.

On a technological level the Proof-of-Asset Pro-tocol allows the BANKEX KYC Adapter to be in-tegrated with any KYC provider functioning in thecountry. BANKEX has a subsidiary with a work-ing product of this type. This is not rocket science.All we can say is we are followers of the technologyof client identification via blockchain-stored hash, re-

ceived from client data initially verified by a reliablesource.

The most important consequence of the decisionto take registration data beyond the tokenization cy-cle using the BANKEX KYC Adapter, is that variousOriginators, including banks, can now be integratedmore comprehensively and with minimal effort. TheOriginator defines identification parameters and theProof-of-Asset Protocol adjusts to suit those param-eters, creating a link between client data and theSmart Asset blockchain wallet.

What about the data that goes into the Smart As-set? That’s product data - an arrangement of datanecessary to tokenize the client’s asset, with parame-ters and contents defined exclusively by the ProductOwner separately for every Smart Asset Type.

On the schematic you can see, along with the pro-tocol entities you have already become familiarizedwith, that the Product segment includes blocks thatdefine product data for both the Originator and theSupplier.

The quantity and types of product data fields arenot limited in any way — it is decided entirely bythe Smart Contract logic necessary for a particularProduct Instance.

As a brief summary, the ecosystem of the protocolgenerally allows for various other registration data —the principle of work with them is always going toremain unchanged, they are technically impossible tostore in a Smart Asset. In any event where any entityneeds to be identified, the process of identification it-self is always going to be beyond the logical cycleof the Smart Contracts included in the Smart Asset.The protocol only interacts with such data on thelevel of confirmed or unconfirmed registration datahashes that come from external oracles.

The only possible exception to this rule is whenthe Smart Asset Proof-of-Asset Protocol is fully real-ized on the Microsoft Azure Bank API server withinthe bank’s security network.

6.2 Creating a Smart Asset

As we have already discussed the Blockchain Ser-vice Architecture allows formation of various chainsof smart contracts based on the protocol. Let’s ex-amine the order in which a typical Smart Asset iscreated.

We see five desired logical steps in the Proof-of-Asset Protocol to be able to call a token a SmartAsset (Figure 11). These steps are:

• initial contract;

• validation;

23

• audit;

• legal;

• proposal.

We first initialize the contract, selecting a typeof Smart Asset. The Smart Asset’s type determinesproduct data required for the token and the logic bywhich that data is processed. Next the Originatorfills in General Information, which can happen bothmanually and automatically. Data entered by theOriginator is what we presently call digitalization.The information is there, but its value is unknown asthe filled in forms have no function and, more impor-tantly, have no validity - we have no way of knowingif that information is genuine. The next step is Vali-dation. This is where Smart Contracts are executedthat validate the information entered by the clientusing various trusted sources. These can include In-ternet of Things Sensors, Eternal Oracle, Crawlersand others. It is crucial that the contract is satu-rated with data from sources independent from theOriginator, which allows for an accurate assessmentof the authenticity of General Information provided.

Next the result is audited, always by an outsideparty. This is the part of tokenization where a 3rdparty gets involved. Primarily this is BANKEX,comparing hash totals of the current Smart Assetcode with certification data from the BANKEX Foun-dation. Only a verified SACC code can get theBANKEX Verifed mark. These can also be account-ing services or any other services that can check theprocess of tokenization based on Smart Asset logic.

It is also important that at this point classicaloffchain organizations can also get involved, if thatis supported by the issuing conditions of the SmartAsset.

Legal is the step where every Product Instancecan set up legal conditions specifically required forboth it and the country where it’s located. This isalso where the Smart Assets intended for global liq-uidity establish the norms of governmental and cus-toms regulations. The Blockchain Service Architec-ture allows any existing legal regulations to be writ-ten into Smart logic. If the government of your coun-try demands that you must receive an official doc-ument from the town hall for your asset, then youdo just that. You head to the town hall, receive theofficial document, scan it and add it into the SmartAsset with your signature or that of a certifying of-ficer. After the government implements tokeniza-tion to their algorithms you can simply change theone corresponding Smart Contract included in yourSmart Asset.

Proposal — Smart Contracts that fix the baseprice of a Smart Asset and define the type of opera-tion that will be performed with the taken asset onthe Smart Asset Exchange. From a stock exchangeperspective, the result of this step is the creation ofa bid. From a blockchain perspective — the issuingof a token.

6.3 Smart Asset Сaterpillar

The BANKEX team named this tokenization princi-ple the Smart Asset Caterpillar, although it was notour first choice of name. It was picked up when werealized that in order to achieve true value of a SmartAsset, which means proving that it is ensured by anactual asset, it was imperative that smart contractsin the chain were to flow from one to another in anuninterrupted sequence. If you were to cut an earth-worm in half, its parts will survive for a time. Butif a caterpillar is cut in half or even if it loses anysegment of its body — it dies. This principle is truefor the Smart Contract chain in a Smart Asset. Ifyou interrupt the chain or either of the links becomesinvalid then the Smart Asset formula will result ina value of zero for the asset. Any link of the SmartAsset Сaterpillar being insufficiently validated wouldhave a detrimental effect on the resulting value of theentire Smart Asset.

A second important consequence of the Smart As-set Caterpillar tokenization principle is that every sig-nificant step on the chain that affects the Smart As-set’s value is recorded on the blockchain. You enteryour General Information during step one and pressnext - the Blockchain Service Architecture asks if youwish to record your commitment on the blockchain(Figure 12), after which you will receive details ofthe transaction on blockchain (Figure 13).

This is not just digitization — it is tokenization,an imprint of your commitment and, the further alongthe Smart Asset Caterpillar you are, the more validyour commitment is to other members of the ecosys-tem.

It’s worth noting here that the BANKEX Proof-of-Asset Protocol technology supports several techni-cal solutions for the recording of the aforementionedimprints on the blockchain, including industry-specific know-how.

6.4 Initial contract

The exact way in which every contract is initialized isdefined by the Product Owner when calculating theProduct Instance (Figure 14). Let us note severalsignificant steps for the majority of Smart Assets.

First, initialization will require the registration

24

Figure 11: Proof-of-Asset Protocol

Figure 12: Step 1 — Asset Initialization

Figure 13: Step 2 — Asset Validation

25

Figure 14: Initial Contract

Figure 15: Example of Asset Initialization

26

data of the Originator End Client, and as we operatein the technological stack of the blockchain network,we have agreed not to store registration data — wemust receive a Wallet address. For the demo ver-sion of our product we used a web interface with theMetamask Ethereum Wallet plugin (Figure 15):

With this iteration the Ethereum wallet addressis automatically taken from the plugin. In other iter-ations or on other blockchains this may work differ-ently.

Why do we need a wallet address? By using itwe receive the ability to perform client identificationthrough the BANKEX KYC Adapter or any otherKYC provider. Additionally, the demo shows it’s pos-sible to request an optional field as well, such as ane-mail.

Second, when initializing the contract data is en-tered into General Information fields. General in-formation is entered either manually by the client orautomatically, but its accuracy is decided only by theperson inputting it. It would be fair to state that to-kenization does not rely on accuracy of the GeneralInformation entered. We take it as it is, whereas theauthenticity required for the Smart Asset is going tobe determined by the logic of subsequent contractsin the chain. It’s interesting that not all true infor-mation may actually be required by the Smart Asset,and an Originator End client who doesn’t know howto determine a code’s Solidity may not even knowhow important the fields he is filling in are. Whenthe BANKEX team hears talk about the need foreach and every person in the future to have program-ming skills, we immediately recall our Smart AssetCaterpillar.

Third, in the General Information block of thedemo we show that information fields may be of anytype, depending on the habits of a programmer. Atype-bar, a file, a catalogue, digits — any type of fieldat all.

Fourth, part of the General Information block’sfunction may be carried outside the blockchain logicand outside the logic of external oracles, instead be-ing based on the UI alone. Our RnD showed thatthe simplest but sometimes necessary function of thelogic, such as checking hash totals in specific fieldscan easily be diverted to web-based or any other pro-gramming logic used in a particular Product Instance.

The results of the Initial contract steps are:

• creation of a Smart Asset entity;

• assigning the Smart Asset with a unique ID forsubsequent connection IoT and Oracle;

• may involve the creation of a legal Soft Com-mitment;

• a data record on the blockchain.

6.5 Validation

The Validation step (Figure 16) of a Smart Asset isthe most fascinating for Research and Development,this is where various means and methods for the val-idation of the General Information can be built.

Let us define the following terms.Internet of Things (IoT ) will be the main con-

dition for the validation of Smart Contracts, and thiswill come much sooner than we can imagine. Verysoon our world will become filled with myriads of vari-ous sensors and transmitters for smart contracts, justas it has already become filled with smartphones andsurveillance cameras.

IoT Sensors can come in any number of differentcombinations. BANKEX is not an IoT company, andyet our lab already has more than 50 different sensorswith different purposes. In the demo application weused three of them - an accelerometer, a location pinand a photo camera that any smartphone is equippedwith. Let us remind you here that cell phones are al-ready used as tools for payment.

Many companies today are trying to create Smartsensors, outfitted with an internal logic, but the de-cisive potential is definitely held in a combination ofIoT Sensors and the logic of Smart Assets.

The second element are External Oracles,which are the obvious choice for data validation to-day, and which are used by many companies world-wide. You can check a person’s information using hisPass ID or request information on an organizationusing its Registration Number. You can request in-formation on rates and constants being developed bypublic organizations or institutes. Or you can simplyperform crawling of information from a chosen web-site. Everything you need for your Product Instance.Using External Oracles it’s possible to implementalmost any logic you could need on the Ethereumblockchain even today, it’s not complicated.

Use of the oracle technology to examine imagesor videos captured by IoT sensors deserves additionalmention. Soon enough you will not have to pay forthe recognition of your car license plate. The SmartContract would be able to send a fine from your bankaccount on its own.

Smart Asset creation logic may include any num-ber of External Oracles and each calculation will haveits price, but even today there are technical solutionswhich allow them to be cheapened on the Ethereumblockchain. It would be safe to assume that in thefuture there will likely be even more such solutionsavailable.

Internal checks are simplest logical flags or hash

27

Figure 16: Validation Step

totals that nonetheless may greatly impact the priceof a Smart Asset, for instance a flag showing whetheror not there is a supporting document uploaded alongwith the request to the Microsoft Azure cloud.

The results of the Validation step are:

• additional information input into the Smart As-set entity;

• formula determining the importance of con-cluded validation;

• operation saved on blockchain.

6.6 Audit & LegalIn terms of technical implementation, interactionwith third party audit organizations, jurisprudenceor government is also dedicated to an External Ora-cle.

We initially called this section Global DeliveryConditions because in order to make an asset as liq-uid as possible, it must achieve global liquidity. Itis similar to Amazon.com in the field of digitizedgoods. Global liquidity of various assets is our fu-ture, now the most important task is the embeddingof the Smart Asset ecosystem into existing nationallegislation and state regulations.

We are often told that the implementation ofSmart Assets is extremely complicated due to the im-possibility of giving them legal significance. It’s truethat it’s a complicated task, but offchain legal condi-tions are not at all difficult to write into the chain ofSmart Asset contracts, even if one of the Smart Con-tracts requires action to be taken offchain or evenoffline. Does something need to be done and thenmarked with a tick? Good - we include this condi-tion into the logic of the Smart Asset’s function and

mark it with the tick, then the Smart Asset becomesvalid and, consequently, gains value.

Obviously, the implementation of Smart Con-tracts is only a matter of time for any efficient nation,since the volume of inefficiencies in any large organi-zation, including nations, is enormous. It is both ben-eficial and sensible. Once a nation’s work conditionsare modernized, you need only update your contractchain to the latest Product Instance. In fact, if youare the Originator, you won’t even have to do that —it will be done by the BANKEX Foundation.

Cost of delivery estimation and automatic cus-toms tax of the exported asset based on data fromthe location sensor could also occur during this block.Which, we may add, opens the way for export/importof cash flow associated with various types of assetsbetween nations.

6.7 Proposal

Logically and technically this is the most difficult stepof the Smart Asset Сaterpillar. It’s where the magichappens:

• trading rules are set for the chosen type ofSmart Asset;

• asset authenticity rate is calculated;

• the asset’s base price is calculated;

• the asset’s intended use is specified;

• Hard Commitment parameters are set;

• cash flow distribution is defined according toSmart Deal.

28

Actually everything is much simpler, with com-plicated deals that we make in the offchain world be-coming significantly easier once they are given an al-gorithm with the Smart Asset logic. You can find thisout yourself by simply breaking down any deal thatinterests you to its basic elements. Now do the samething again while also removing human error and youget a Smart Deal (Figure 17).

The result of this step is the issuing of a token andformation of a bid for the Smart Asset Exchange.

7 Technical solutions

7.1 IT Architecture Scheme

IT architecture scheme is presented on Figure 18.

7.2 Asset data compression forblockchain record

7.3 Role and system access matrix

7.4 Originator/Supplier interaction inthe ecosystem architecture

7.5 Bank & non-Bank Origina-tor/Supplier

7.6 Use of Microsoft Azure Bank API

7.7 Large data volume hashing in theMicrosoft Azure Storage

7.8 Soft and Hard Commitment as-signment rules

7.9 Bid & Ask records independenceprinciple

7.10 Decentralized Order Book rules

7.11 Decentralized matching — prosand cons

7.12 Offchain Settelment Control

7.13 Settelment directions

7.14 Formula 1: saturation of requestwith data in a blockchain envi-ronment

7.15 Reasons for differentiation be-tween order and bid for SmartAssets

7.16 Formula 2: solution for auto-mated order merging and sepa-ration

7.17 Formula 3: filter cascade systemin the Order Book

7.18 Formula 4: implementation ofclassical stock market trade rulesin a blockchain environment

7.19 Study of speed parameters ofmatching for Smart Assets

7.20 Technological differences duringSupplier tokenization

29

Figure 17: SmartDeal Proposal Step

Figure 18: IT Architecture Scheme

30

7.21 Transaction execution with de-centralized storage

7.22 Work with order packages duringcontract initiation

7.23 Order of Escrow function in thetransaction execution block

7.24 Smart Asset Core v.3

Version 3 of Smart Asset Core is presented on Fig-ure 19.

7.25 Smart Asset Core v.4

7.26 “Plasma” protocol & Proof-of-Asset Protocol

A “Plasma” protocol was proposed recently, thatis universal extension of any Turing-completeblockchain (such as Ethereum) and allows creation of“daughter” blockchains that are governed by higher-level (“parent”) blockchain. These “daughter” chainscan have different consensus rules, functionality (ex-tensions to EMV, for example) and underlying basetoken.

Such extension naturally fits Proof-of-Asset pro-posal with Bankex token (BKX) being an underlyingcurrency used to pay for manipulations with assetrecords. If functional requirements for some typesof assets or operations would impose a need of ex-tended functionality, such type of assets can be movedto separate chain. These “daughter” chains can beviewed as side-chains for ease of understanding prop-erties, but strongly governed and penalized by “par-ent” chain for any sign of misbehavior of fraud. Suchapproach and further extension of “daughter” - “par-ent” relation to the whole tree of chains would al-low participants of Bankex protocol to effectively dotransactions with minimal trust and be able to beminimally exposed to potential fraudulent actions ofother participants, especially ones not even related totheir current transaction, in contrast to traditionalsingle level chain, where potential attack affects allusers immediately (DAO hack, for example).

7.27 The most important features ofPlasma protocol

One of the most important features of Plasma pro-tocol is an ability to extend EMV and add requiredfunctionality, that is now only possible by use of ex-ternal oracles. One of such examples would be adevelopment of JWT (JSON Web token) like mes-sage exchange format with mandatory cryptographicsignatures, that would allow some form of replaya-bility and authentication of requests to external re-sources. Such exchange format and use case can beillustrated as following: Over the lifetime of smartasset some data from external service (External APIrequest) Traditionally it’s solved by use of externaloracle (such as oraclize.it), that performs a requeston your behalf, provides some proof of authenticity(TLS Notary) and performs a callback. Such oper-ation is expensive and requires few roundtrips. TLSNotary is not possible in modern versions of TLS pro-tocol.

Our proposed approach would be to build a stan-dard requests protocol that would start with pre-signed (by smart-contract itself or other way) pay-load, that can be used to perform a request to exter-nal resource at some timeframe and requiring a re-sponse to be signed by private key of external resource(with public key also known upfront). Also, standardwould require that ANY request with such payloadwould return THE SAME response, so it would allowto perform distributed computing and easy verifica-tion for including information into the blockchain.

Another interesting extension would be possibil-ity to perform “delayed calls” — requests to a smartasset functions that should be performed either atknown date or regularly. For now such action wouldalso require an external oracle, while such informa-tion can potentially be saved inside a blockchain, soevery participant could trigger a function executionfor an incentive in a form of fee (similar to the gasprice).

At some point an extension of EMV can be re-quired to facilitate new requirements or have back-ward compatibility with older systems. Such func-tionality can be RSA functions (for old systems),Schnorr signatures (can be extended already as con-venience method) or post-quantum cryptography.We see a need in having a degree of backward com-patibility to connect existing systems to blockchain.

But the most tedious questions to be solved forwider applications of blockchain, where computationsare transparent, are, in our opinion, random num-ber generation and homomorphic cryptography. Firstone is the cornerstone of cryptography in general anda way of obtaining a random number of appropri-

31

Figure 19: Smart-Asset Core, Version 3

32

ate quality will be a major breakthrough in a field.The latter is, for now, the only known possible wayto achieve privacy and computation transparency atthe same time. We think that extensive developmentand experimenting in this field should start as soon aspossible, with choice of currently known candidatesand implementing them in a “subchain” to which datacan be transferred, manipulated and returned to theparent chain without disclosure of nature of underly-ing data.

7.28 IoT Integration SchemeOne of the necessary steps for IoT-enhanced assets isthe procedure of integrating them with the IoT devicecontrol infrastructure. The procedure is shown on theFigure 20. There are four major layers of back-endapplications involved:

The backend consists of four primary server ap-plications:

1. web3j-compatible connector to the Ethereumnetwork node;

2. TLS-secured web server for serving HTTPS-requests for both API and frontend;

3. secured WebSocket server (wss://);

4. DeviceHive8 server for IoT device management.

Let us describe the full process of integration inthe case of a web-application (with a MetaMask ex-tension installed) and the Android IoT App

1. The asset owner selects one of the types pro-vided.

2. Initial data on the asset is filled in by its owner.After all the information is filled in, the user ini-tiates the procedure of publishing the asset ona blockchain by using the contract function viaMetaMask. On this stage we learn the newlycreated asset’s unique identification, which theclient receives following a successful transac-tion.

3. After receiving the asset ID, the web interfacemoves on to the next step. The first thing thatis required is a backend connection between theongoing web-session and the ID of the newly

created asset, which is done using a WebSocketconnection. Until this step only the client andthe blockchain are aware of the asset, and un-less it is taken backend won’t be able to sendevents from the server, if they are linked to thecurrent asset. A WebSocket connection solvesthis problem.

4. To connect the asset to IoT devices, the webpage displays a specially generated QR-code,containing a link to the asset ID http://iot.bankex.com/ASSET_ID.

5. The user scans this code using the BANKEXIoT App. If it’s not installed, the code can al-ternatively be scanned by any QR-code scannerapplication, which is going to open the link ina browser, automatically redirecting the user toApp Store or Play Market to download the ap-plication. Deep-linking support allows the ap-plication to be launched with additional param-eters, including the asset ID, immediately afterinstallation, which helps prevent scanning thesame QR-code twice.

6. BANKEX IoT App is now ready to connect theasset ID to the ID of the device, which the appli-cation already knows at this point. In a simplercase, the BANKEX IoT App already supportsthe phone’s sensor identification, which requiresno additional tools to demonstrate capabilities.External sensors can also be added using thisapplication.

7. The device contacts API, sending two key pa-rameters: asset ID and device ID. This informa-tion is also shared with the DeviceHive, wherethe new data is automatically registered, as wellas WebSocket to inform of the client’s newlyadded device.

8. At this stage, the device ID is not yet addedto the smart asset, although it is visible in theweb client in the list of devices available to beadded. To finish the integration, the user mustconfirm the device using the function in Meta-Mask. This transaction can charge additionalEther or BKX-tokens to credit the oracle’s IoTevent execution expenses.

8 https://devicehive.com/

33

Figure 20: IoT–Asset Integration: the User Story

34

A TerminologyBlockchain — a cryptographically secured database containing the history of all transactions performed on

the platform. It works the following way:

1. Transaction info is sent into the blockchain network

2. This transaction together with other transactions forms a block. Every block has its number andholds encrypted information about preceding blocks.

3. The block is sent in to be checked by all members of the network

4. If there are no discrepancies, every member adds the new block to the chain of previous blocks andthe transaction is executed.

Node — a blockchain network participant storing information on past transactions (blockchain), checks infor-mation on new transactions for authenticity and is able to add in new transactions (adding blocks). Allthe nodes are connected to one another forming a single network.

A public blockchain is a decentralized system where the information on transactions is stored and checkedin many multiple locations. This kind of synchronization between millions of locations consumes largeamounts of electric energy and is significantly more expensive than a private blockchain. The system alsobecomes slower. However, a public blockchain may prove preferable for industries where decentralizationis necessary.

A private blockchain is centralized, making it similar to traditional centralized systems, however it exceedsthem in terms of efficiency and security.

ICO (Initial Coin Offering) — a method of invitation to finance a campaign/project. Tokens/coins areissued that grant the right to receive a share/service/good now or in the future, or else they grant apercentage of future profits. After the start of sales, tokens can be resold to other investors. Trade isconducted on a blockchain.

Cryptocurrency — digital money without a physical analogue. It is supported by the complexity of itsdevelopment — mining. Today we are able to identify “classics” such as Bitcoin or Litecoin, and newercurrencies such as Ether, which act as platforms for the creation of new assets - tokens.

Ethereum — the most popular platform for issuing of tokens and smart contracts.

Gas — a unit used to measure the price of calculations done on Ethereum. More difficult calculations arerewarded with higher amounts of Gas. This works the following way: the originator of a smart contractsets a price in gas. Miners, whose PCs handle the calculations, make the choice whether or not to performthese calculations. If the price offered is too low, then neither the calculations, nor, as a result, the contractwill ever be concluded.

Smart-contract a set of pre-programmed tasks that the program automatically carries out upon certain con-ditions being fulfilled, then forms a deal. That’s why it requires no trust between sides, nor a middleman:the contract has a strict logical structure and the computer executes it automatically. Smart-contractsallow for inclusion of a large number of conditions and states and for a correlation between their everypossible combination and various outcomes.

Ditigal tokens — croptygraphic assets issued using specialized blockchain platforms. An analogue would bea record in a register. A token has an address and may also contain a smart-contract that defines itsfunction and also acts as a separate execution mechanism.

Tokenization — the process of transforming rights into a digital token, which is then traded on a blockchainwith low transactional costs. Tokenization is an analogue of securitization on a blockchain.

Smart Asset — an asset that has gone through tokenization using the BANKEX Proof-of-Asset Protocol.

ISAO (Initial Smart Asset Offering) — a method of fixing businesses (farms, stores, manufacturing plants)using tokenization of their assets based on the BANKEX PoA protocol.

35

Product instance — an iteration of a fintech-product owned by a BANKEX product provider. For instance aproduct provider can customize his product for various regions, thus creating a product instance for eachcountry.

Blockchain-agnostic protocol — an application level protocol that does not depend on the exact blockchain-technology utilized and can be implemented on any existing open source blockchain.

References[1] Y. Amihud, H. Mendelson, and L. H. Pedersen. “Liquidity and Asset Prices. Foundations and trends in

Finance”. In: Wordsworth Editions Limited 4.1 (2005), pp. 269–364.

[2] A. Ilmanen and C. Asness. Expected Returns: An Investor’s Guide to Harvesting Market Rewards. TheWiley Finance Series. Wiley, 2011. isbn: 9781119990772. url: https://books.google.ru/books?id=WqFf6imwTsUC.

[3] John Maynard Keynes and Mark G. Spencer. The General Theory of Employment, Interest and Money;The economic consequences of the peace. Wordsworth Editions Limited, 2017. Chap. 13.

[4] John Nash. “Equilibrium Points in N-Person Games”. In: Proceedings of the National Academy of Sciences36.1 (1950), pp. 48–49.

[5] John Nash. “Non-Cooperative Games”. In: The Annals of Mathematics 54.2 (1951), pp. 286–295.

[6] Stanford Encyclopedia of Philosophy.Game Theory. 2017. url: https://plato.stanford.edu/entries/game-theory/.

[7] Avi Sharon. “Patient Capital, Private Opportunity: The Benefits and Challenges of Illiquid Alternatives”.In: Alternative Investment Analyst Review Fall (2015). url: https://www.caia.org/aiar/access/article-930.

[8] Chris Skinner. Lego Bank is Here, but It’s not Built with Lego. 2017. url: https://financialit.net/blog/bank/lego-bank-here-its-not-built-lego.

[9] Nick Szabo. “Formalizing and Securing Relationships on Public Networks”. In: First Monday 2.16 (1997).url: http://firstmonday.org/ojs/index.php/fm/article/view/548.

[10] Nick Szabo. “Smart Contracts: Building Blocks for Digital Free Markets”. In: Extropy 16 (1996). url:http://www.fon.hum.uva.nl/rob/Courses/InformationInSpeech/CDROM/Literature/LOTwinterschool2006/szabo.best.vwh.net/smart_contracts_2.html.

[11] “Top 50 Financial IT Pathfinder Ranking”. In: Financial IT April-May Issue (2017), pp. 36, 49. url:https://financialit.net/pdf/view/17419.

36