Lykke (LKK) ICO Review
Lykke is a decentralized social networking platform that is putting users privacy and satisfaction as its first priority. It is an innovative approach towards transparent and independent means of user data ownership, reward on ads and free of speech. It is the first get paid to content creation and sharing ecosystem that leveraged OCR token payments for its reward system.
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Lykke is building a global marketplace for the free exchange of financial assets. By leveraging the power of emerging technology, our platform eliminates market inefficiencies, promotes equal access from anywhere in the world, and supports the trade of any object of value. The Lykke Exchange is fast and secure. Richard Olsen, founder and CEO, is a distinguished pioneer in high frequency finance. He has been laying the conceptual foundations for Lykke for most of his professional life. The company was established in Switzerland and received initial seed funding in 2015. Company shares are issued as colored coins redeemable on the Lykke Exchange. Our software is open-source and non-proprietary.
Lykke Corp is a FinTech company based in Zurich that has launched the first global marketplace for all asset classes and instruments, using the Colored Coin protocol on blockchain. The paper explains the architecture of the exchange and first use cases. We discuss how the exchange will evolve over time. We explore the macroeconomic benefits of the new distributed ledger technology (DLT). The Lykke exchange operates similar to JAVA in the sense that it is compatible with any type of blockchain; marketplace was first developed on blockchain of Bitcoin, but is currently being expanded to Ethereum.
Every financial instrument can become a listed security on the blockchain in the form of a digital token, through the so-called Colored Coin protocol. Colored coins follow the idea of ”coloring” a specific Bitcoin – the issuer guarantees to hand out the underlying assets to the person, who returns the colored coin. For example, the Federal Reserve (FED) can issue a colored coin in the same way as it prints paper money; it would take a fraction of a Bitcoin and then insert the ”I Owe You” statement of the FED, like a regular bank note. The same mechanism can be used for any other financial claim. Colored coins are different in nature than cryptocurrencies, because they have a specific issuer and are backed by a real financial asset.
Reporting of colored coins in traditional banking software systems, such as bookkeeping and risk management is straightforward, because every colored coin can include an International Securities Identification Number (ISIN), thus can be treated as any other financial instrument, fully compatible with existing back-office systems. Financial institutions can create colored coins for existing financial products and gradually move business processes to blockchain. They can operate the old and the new systems in parallel and switch over to the new system at their own pace. In the new system, interest rate payments are second by second, improving liquidity provision.
Lykke has launched the exchange initially for the main currencies, the Lykke coin (shares of Lykke) and started two innovative projects: colored coins for music rights and colored coins for CO2 certificates. Perspective asset classes include futures & options on digital assets, crowdfunded loans for retail and private equity financing for Small and Medium-Sized Enterprises (SME), contracts for difference, zero coupon bonds and other fixed income, natural capital bonds and more.
Lykke Exchange and all its tools and services are open source; the transparency of technology is ideal forresearch. The paper provides a high level overview of the DLT, exchange architecture and reports on initial experiences. The paper concludes with a research agenda and technological roadmap.
The financial system architecture has grown organically. Over the past forty years, individual steps of the workflow of financial transactions have been computerized; the business process remained unchanged, as if processing continued to be manual. Delivery and settlement of transaction is batch based and occurs with a time delay of two and more days and does not happen at the time of the trade. The outcome is a convoluted banking architecture, a pile of spaghetti. Every bank has its own bookkeeping system and is an island from an audit point of view, where verification of trades is cumbersome and prone to errors. This regime contributes to a high degree of fragmentation and uncertainty in the market, multiplication of risk factors, high transaction costs for financial assets and lack of liquidity and transparency in financial markets.
In attempt to rewire the current financial system Lykke builds a global Internet exchange, where all financial instruments will be traded and exchanged against each other, whatever their asset class or the size of transaction. Every financial instrument will be a listed security in the form of a digital token (a so-called colored coin1) and all transactions will be logged in a universally accessible distributed ledger, a decentralized notary service that ensures immediate global consensus about completed transactions and asset ownership. Like the Internet itself, the ledger is not controlled by a single entity, but an emergent phenomenon consisting of its participants. Trades will be settled and validated immediately; processing will be digital and transaction costs will be minuscule. The ledger includes a wallet, so every owner of a digital coin has his own private key protecting his ownership. There will be an intraday interest rate market and yield curve. Market participants will be able to buy and sell colored coins of different issuers and change counterparty risk at any time. The number of traded financial instruments will grow exponentially, transaction volumes will skyrocket and liquidity will be ample.
Lykke aims to become the global marketplace and establish itself as the backbone of a new and highly sophisticated banking architecture that is not plagued by the deficiencies of the present system. This paper introduces the architecture of Lykke Exchange and provides the details on the first 2 months of trading in a beta mode.
Distributed ledger technology overview
This chapter provides an overview over what distributed ledger technology can and cannot do in comparison to a traditional software architecture. It also compares different variants of DLT and compares them to Bitcoin, which is the oldest and most popular implementation.
What is DLT?
In abstract terms, distributed ledger is a way to find a consensus among a multitude of servers in the absence of mutual trust. Most DLT variants follow a proof-of-work protocol, which provides strong economic incentives for contributing to the network security (mining). The largest distributed ledger currently in operation is the Bitcoin blockchain. The hardware cost to match the computing power that currently secures the Bitcoin blockchain is likely in the triple-digit millions, if not higher.
A distributed ledger is fundamentally based on publicly announcing every transaction, thus allowing anyone listening to verify and track the balances of every other network participant. Whenever Alice wants to transfer 3 Bitcoins (or whatever currency that ledger supports) to Bob, she creates an according transaction, signs it and publicly announces it. From now on, everyone knows that Alice has 3 Bitcoins less and Bob has 3 Bitcoins more. This is all there is to it. All other complications such as mining stem from the problem of ensuring the existence of a reliable public transaction archive and that everyone agrees on which transactions have actually happened in what order.
Bitcoin itself and most Bitcoin clones rely on proof-of-work to secure their blockchain. The idea behind proofof-work is to increase the cost of an attack by letting the majority of the computing power in the network build the blockchain. A sustained brute-force attack would require a majority of computing power in the Bitcoin network. As proof-of-work comes with an immense amount of “wasted” computing power, “proof-of-stake” has been proposed as an alternative. However, some argue that this approach is fundamentally flawed and so far, attempts at creating proof-of-stake based ledgers have had mixed success.
When measuring security as the USD-cost of an attack, the most secure distributed ledger currently in existence is the Bitcoin blockchain. There are alternative cryptocurrencies that add security in principle thanks to certain tweaks. Litecoin, for example, uses a hashing algorithm that makes it harder to create specialized mining chips. Ethereum follows a plan to discourage a professionalization in mining and switch to the Proof-of-Stake consensus model. But the sheer amount of computing power securing the Bitcoin blockchain dwarfs the effect of those tweaks. One cannot rule out that other cryptocurrencies succeed at taking the lead security-wise in the medium term future, but for now, the Bitcoin blockchain remains the most secure platform to build on.
DLT vs. Distributed database
Open distributed ledger is a great platform to build other services on top, as it is an independent technology without any vendor lock-in or other entity behind it that might abuse it one day to further their strategic agenda. Examples of other such decentralized technologies that serve as a platform for others to build on are Linux, Email, or the Internet. A distributed ledger should be the technology of choice for projects that benefit from high inter-operability and versatility in use.
As soon as the involved parties can be trusted, there are usually more efficient solutions than a distributed ledger. When the main issue is unreliable hardware that can otherwise be trusted, the Paxos algorithm is typically used. This is what Google does in order to provide reliable services with commodity hardware. Then, there are a number of database solutions that can be the most efficient in principle but require highly reliable hardware and also complete trust in the operator. Decentralization comes at a cost.
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