At the Tel Aviv Stock Exchange (TASE), May 31st, 2023, twelve prominent international and domestic banks witnessed the implementation of Project Eden — a proof-of-concept (PoC) digital government bond issued by the Israeli Ministry of Finance.
The initiative showcased the potential of blockchain technology and tokenization in transforming the traditional financial landscape. Let’s take a look at the technical aspects of Project Eden and its architecture.
Creating Project Eden
At the helm of the project is Fireblocks — an institutional-grade infrastructure and services provider for secure storage and management of cryptocurrency and other digital assets. Fireblocks’ founders have previously worked in the team investigating the Lazarus Group hack.
Fireblocks focuses on addressing security challenges faced by institutional investors in the digital asset space by providing custody and transfer infrastructure.
Designing Project Eden
The core requirements of Project Eden focused on three key aspects: tokenization of fiat, tokenization of government bonds, and instructions for asset exchange. To fulfill these requirements, the project employed three distinct smart contracts, each responsible for specific functionalities.
Smart Contract 1: Minting the Payment Token
The payment token served as both a payment medium and a core component of settlement for the issued bonds. Representing 1 Israeli Shekel (NIS) within the Eden ecosystem, this token was designed to support other digital currencies such as USD and EUR in future implementations. The smart contract for minting payment tokens was deployed from a Fireblocks wallet, and the ERC-20 tokens were minted using the Fireblocks API.
Smart Contract 2: Minting the Security Token
The security token acted as a digital representation of the government bonds issued by the Israeli Ministry of Finance. For Project Eden, a dedicated decentralized application (dApp) built on VMWare, a permissioned blockchain, was used to mint the ERC-1155 tokens representing a single series of government bonds. The minted tokens were securely stored in the Ministry’s Fireblocks wallet, accessible only to permissioned users for transfer.
Smart Contract 3: Initiating Bilateral Settlement
After the issuance of the tokens, pre-approved dealers, represented by the participating banks, simulated the deposit of fiat into TASE accounts through the Bloomberg terminals. Payment tokens were then minted on-chain based on the amount of fiat deposited. Once both security and payment tokens were minted, permissioned users initiated the bilateral atomic settlement (DvP) through the Blockfold UI. This process ensured that payment to the issuer was made using approved payment tokens, and the relevant security tokens were transferred to the primary dealers.
The Architecture of Project Eden
Project Eden integrated various components to establish a comprehensive digital financial infrastructure. The following components seamlessly interacted within the system:
- EVM-Compatible, Private, and Permissioned Blockchain: The distributed ledger and smart contracts for minting and bilateral transfer of tokenized assets were hosted on an EVM-compatible, private, and permissioned blockchain.
- Decentralized Application (dApp): The dApp acted as the user interface, facilitating interaction with the distributed ledger for all system participants.
- Tokenized Bond (ERC-1155): The government bonds were tokenized as ERC-1155 tokens, allowing for efficient management and transfer on the blockchain.
- Tokenized Fiat (ERC-20 and CBDCs in the Future): Fiat currencies, including Israeli Shekel (NIS), were tokenized as ERC-20 tokens. The system was designed to accommodate central bank digital currencies (CBDCs) in future implementations.
- Custody Solution: A custody solution was implemented to ensure the secure storage and management of digital assets, protecting them from unauthorized access.
- Asset Transfer Network: The system facilitated the seamless transfer of tokenized assets among participants through an integrated asset transfer network.
- Delivery versus Payment (DvP) Mechanism: The DvP mechanism ensured simultaneous settlement of security tokens against various digital currencies, providing a secure and efficient transaction process.
- Fiat and Bond Tokenization Interface: The system incorporated an interface that facilitated the tokenization of fiat currencies and government bonds, enabling their integration into the blockchain ecosystem.
- Integration with Bloomberg Terminal: The integration with Bloomberg terminal, a traditional trading system, allowed the participating banks to bid for the bonds and participate in the tokenization process.
Project Eden aims to push forward digital transformation of the traditional financial sector, hoping to maintain TradFi’s relevance through issuance and management of government bonds. Leveraging blockchain technology and tokenization just enough to infuse financial markets with more efficiency, the implementation of PoC of the digital government bond in Israel is a comparative opposite to the paths taken by other countries, like El Salvador and Portugal, when it comes to adopting the blockchain industry on a legal level, highlighting the ongoing challenges of governments clinging to maintain the pre-blockchain financial status quo.
