[csumtin]

Correspondent banking. So say a bank in the States needs to send money to one in Spain. They may not have a relationship, so they go through an intermediary bank.

You can use a smart contract to eliminate the trust in the intermediary bank, so eliminating that counter party risk

[csumtin]

Explanation: bankA -> bankB -> bankC.

bankC creates a secret number, hashes it and sends it to bankA. bankA sends money to bankB locked to hash. bankB can't get money until they have that secret number. bankB sends money to bankC locked to hash. bankC reveals secret number to bankB to unlock that money. bankB does the same with bankA.

Tada, we eliminated the risk of bankB running away with money. This is the lightning network

[JumpCrisscross]

> we eliminated the risk of bankB running away with money

This isn't a real risk with correspondent banks. Instead, it's counterparty risk: bankB failing while it holds the funds in transfer. That risk can be mitigated with smart contracts, but it's not eliminated. (Correspondent banks also take a portion of the client bank's fraud and AML risk.)

[csumtin]

I realise that this might seem a bit niche but we can use this to create a payment network(like visa). This system is better as the nodes in the network don't need to trust each other.

Cast your mind back to 2008 and hopefully this means that one bank falling over doesn't bring down the whole system.

[trompetenaccoun]

Fair but LN is not a smart contract. Bitcoin can't do smart contracts the way a chain like Ethereum does, it's functionality is very limited.

[karpierz]

How exactly does the Spanish bank get the USD that the American bank sent without trusting a third party?

[brobinson]

You don't need to trust when you can verify. The source code for the intermediary bank (smart contract) would be available for everyone to read.

[chrisco255]

They may be willing to accept trusting the dollar-backed token issuer. In the case of USDC, it's Circle. But there's nothing stopping JPMorgan, BoA, Wells Fargo, Western Union, etc implementing their own dollar backed tokens, and I suspect we'll see more and more of that as regulatory clarity settles.

Maybe the Fed themselves will issue tokens in this way. It's also entirely possible to construct a permissioned, yet decentralized exchange of tokens among whitelisted parties.

Either way USD is never sent trustlessly.