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 long struggled with the balance between decentralisation and open access on one side, and governance and privacy on the other. That tension is why institutions have been drawn to private, permissioned blockchains, which give them a safe space to transact privately under pre-defined rules that a designated authority they trust can adjust. The difficulty is that those chains have tended to be disconnected siloes in which users and liquidity are trapped.

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

There also needs to be clear accountability for who is responsible for setting those rules, and a sensible process by which the 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 Networks

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

Each Private Network is set up by a trusted authority institution, known as the Private Network Operator. That institution installs the Private Network Hub and deploys its governance smart contracts to define the rules by which the transacting institutions within the network will be governed.

💡### A Private Network Operator is a regulated entity that provides a trading network for their member financial institutions. Usually an Operator 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.

The Private Network Hub acts as the hub of the network, connecting the spokes of each Rayls Sovereign node, since each transacting institution runs its own. This approach carries two benefits.

First, it creates network connectivity efficiencies, as each Private Network requires n connections rather than n^2 connections, where n is the number of Rayls Sovereign nodes. See Metcalfe's law. Each Rayls Sovereign node that joins the network needs to connect only to the Private Network Hub in order to transact with every other member node, of which there could be hundreds or even thousands.

Second, it enables network governance with privacy. Because all transactions pass through the Private Network Hub fully encrypted, governance rules can be applied on the Hub to permit or deny transactions automatically according to defined conditions.

Some of those conditions rely on zero knowledge, so that the network can validate whether a given Rayls Sovereign node is attempting to transact with more than its recorded balance of a particular token. Where it is, the transaction may be rejected and flagged for further investigation, since it may indicate an attempted double spend.

Other governance conditions rely on governance smart contracts controlled by the Private Network Operator, which automatically validate whether a member or a token is currently able to transact. Where a token has been marked as 'Frozen' by the Operator, for instance, it cannot be teleported across the Private Network and the transaction will be rejected.

In this way, the Private Network Operator 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
Interoperability that combines private issuance with public chain distribution.