Regulated financial institutions are bound by clear rules and guidelines for how they must operate with one another across their existing commercial networks. These rules ensure that all institutions play fairly, do not take unnecessary risks and protect their customers from harm.

So why would that be any different in a tokenised value exchange network? Well, it isn't!

Enterprise blockchains have forever battled with the balance between decentralisation and open access versus governance and privacy. This is why institutions have been interested in private, permissioned blockchains - they are safe spaces where institutions can transact privately, but with pre-defined rules that can be adjusted by a designated authority that they trust. The trouble is they are disconnected siloes where users and liquidity are trapped and isolated.

For blockchain to be usable in production and at scale, financial institutions need clarity about the rules of the game for the networks that they are operating in.

There also needs to be clear accountability for who is responsible for setting these rules and a sensible process by which those rules can be updated over time.

And at the same time, to be viable these private networks need to connect to the broader ecosystem of traditional financial services (TradFi) and decentralised finance (DeFi).

Governance with Rayls Private Subnets

The architecture of Rayls Private Subnets has been carefully designed to give institutions exactly what they need to join and transact across tokenised value exchange networks in a compliant manner.

Each Private Subnet is set up by a trusted authority institution, which we call the Private Subnet Governor. This institution installs the Commit Chain and deploys their governance smart contracts to define the rules by which the transacting institutions within their network will be governed.

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A Subnet Governor is a regulated entity that provides a trading network for their member financial institutions. Usually a Governor is a financial market infrastructure (FMI) provider, like a Central Bank, a clearing house or a stock exchange. Alternatively they may be a global bank with many subsidiaries to manage.

This Commit Chain acts as the hub of the network, which connects the spokes of each Privacy Ledger (each transacting institution has their own Privacy Ledger). This approach has two key benefits:

First, it creates great network connectivity efficiencies, as each Subnet requires n connections rather than n^2 connections (where n is the number of Privacy Ledgers) - see Metcalfe's law. Each Privacy Ledger that joins the network only needs to connect to the Commit Chain to be able to transact with all of the other network member Privacy Ledgers (of which there could be hundreds, or even thousands).

Second, it enables network governance with privacy. As all transactions pass (fully encrypted) through the Commit Chain, governance rules can be applied to automatically permit or deny transactions based upon certain conditions.

Some of these conditions rely upon zero-knowledge to, for example, validate if a certain Privacy Ledger is trying to transact with more than their recorded balance of a certain token. If so, the transaction may be rejected and Flagged for further investigation (as it may indicate an attempted double spend).

Other governance conditions rely upon governance smart contracts that are controlled by the Governor to automatically validate if a member or a token is currently able to transact. For example, if a token has been marked as 'Frozen' by the Governor, then it cannot be teleported across the Subnet and the transaction will be rejected.

In this way, the Private Subnet Governor is able to create a network with the best of all worlds:

Clear governance rules that are automatically enforced,
Full transaction privacy and anonymity for transacting institutions, and
Seamless interoperability that combines private issuance with public chain distribution.