At this point of the book, you should be familiar with the concept of the letter of credit. However, let's quickly recap the concept behind it, illustrated in the following diagram:

The letter of credit is a payment vehicle whereby, on request from a buyer, a bank will issue a letter of credit to a seller, stating that provided that the terms and conditions are met, payment will be issued. While this process is very much ingrained in international trade, the use of letters of credit is a very old process that has its root in the First Crusade, where the Knights Templar needed to find a way to allow pilgrims to travel to Jerusalem without the danger of carrying money around.

Today's letter of credit process is a complex one. While examples typically involve two banks, the reality is that there will be many more participants involved in such a network. This translates into a process that is costly and constrained by the time it takes to execute it.

A blockchain network can create an opportunity to optimize the process; with a blockchain network, the letter of credit is stored on the ledger, and this guards against a double-spending scenario, whereby the owner of the letter could attempt to cash it again.

The benefit is measured by the reduction in the time delay and the cost, but it also provides the major benefit of reducing the underlying risks associated with such a transaction. Finally, banks can also now consider introducing new services, such as the ability to make incremental payments to the seller.

The fact that transactions on the ledger are final is what makes this scenario appealing to banks. It also gives us the ability to start with a smaller network, get early value, and expand as the solution becomes proven, essentially reducing the amount of early coordination required to establish the network.