Settlement challenges prevent the blockchain from serving as a golden record for asset ownership. By creating assets at the protocol layer, Polymesh is able to provide a simplified approach to transfers that provides instant settlement without prefunding, prevents unwanted airdrops through trade affirmation, and can offer deterministic finality.
For the blockchain to contain true representation of ownership, it must provide deterministic finality. Between Ethereum’s probabilistic finality mechanism, cumbersome compliance automation, and the unknown identity of block authors, it is not possible for it to serve as a golden record for asset ownership.
In contrast, by creating assets at the protocol layer, Polymesh is able to provide a simplified approach to transfers and deterministic finality. It reduces delivery failure without requiring prefunding and can provide deterministic transaction finality through the GRANDPA finality gadget, as well as stringent identity verification requirements, a comprehensive compliance validation framework, and a forkless upgrade process. In essence, settlement finality is possible on Polymesh because of how identity, compliance, and governance are woven together in the core of the chain.
In addition to ensuring that the buyer and seller both have known identities, Polymesh ensures that node operators are known and permissioned. This is critical from a finality standpoint, because otherwise the question “did the transaction happen?” may yield two different answers—the mathematical one, which says there is a transaction in a block that was verified and broadcasted, and a legal one that might not tell the same story.
Once a buyer and seller affirm a transfer, the assets are ‘committed’. This solves problems with delivery failure and prefunding— the assets can’t be spent in other transactions, but the holder doesn’t need to relinquish control in advance. Once assets are locked, compliance rules are automatically checked, and the transfer is either wholly completed (and instantly settled atomically) or wholly rejected (and the assets are immediately returned).
Polymesh relies on its Governing Council to set criteria and permission node operators. Beyond that, forkless upgrades provide critical assurance that the transaction won’t be reverted having followed the wrong fork.
Polymesh’s approach to asset transfers eliminates ongoing regulatory concerns over airdrops (tokens appearing in user wallets unprompted) and the associated AML and taxation implications. Users are required to affirm settlement instructions before tokens appear in wallets, this helps ensure assets are accounted for and transfers happen smoothly.
The Polymesh Settlement Engine reduces delivery failure risk by immediately commiting assets once a settlement instruction is affirmed so that they cannot be spent in other transactions The settlement engine is also at the protocol layer, meaning assets do not need to be sent away in advance of the transaction. The settlement engine facilitates asset transfer on an atomic basis without requiring a smart contract to hold custody of both assets for the transfer to occur.
Instructions execute completely, or not at all - another way of saying they are atomic. Both parties need to affirm that the entire instruction is agreeable and properly represents their agreement. Instructions contain other details such as when to actually execute, e.g. as soon as it’s affirmed or at a scheduled point of time in the future. Because the actual execution is atomic there is no case in which one leg of an instruction has been executed and the other has not. If the instruction had a signed receipt for an off-chain action, that receipt would be permanently marked as used.
Having to keep track and affirm instructions that are relevant to you can be a tedious business. It also doesn't map well to today's world of securities, where securities holders, or beneficiaries, are typically represented by other parties who with guidance may broadly act in the beneficiaries' interest. These other parties are called custodians, or sometimes brokers.
Polymesh provides a way to mirror this off-chain world with the use of custody on-chain. In this setup, a beneficiary account can designate another account as their custodian in one or more of their portfolios. After the custodian account accepts the responsibility, they can act on behalf of the beneficiary for matters related to settlement. Assumed in the foregoing is that the beneficiary and the custodian entered into a legally binding contract, for which Polymesh’s custodial relationship is the on-chain expression.
A custodian doesn't own the securities on-chain– the beneficiary does–and a custodial relationship can always be revoked. It is therefore incumbent on the beneficiary to partition their portfolios and assets, and designate their custodian(s), so as to reflect the desired mix of responsibilities.