Tag: smart contract

Proof of Work vs Proof of Performance

On October 25, 2014

Proof-of-work (PoW) is a cryptographic technique introduced to a transaction which solves problems of fairness or abuse. For example, a PoW would require a computer program to solve a simple puzzle before it can pass an email from sender to a receiver. Someone who sends spam emails would be burdened with an computational costs greater than the possible benefit of sending spam. A legitimate email from a single sender to a small packet of recipients would pass easily.

Proof-of-performance (PoP) refers to a condition where two parties enter into an agreement and a third party judges whether the conditions of the agreement are met. Like an escrow account, the buyer puts the money into an account and the seller puts the title into an account. If the conditions of the contract are met, a judge (adjudicator) flips the switch that completes the transfer. If conditions are not met, the switch returns the money to the buyer and the title to the seller.

Proof of Work vs Proof of Performance

PoW and PoP are substantially different in many important ways. For example, for POW the adjudicator is a computer program. For PoP, the adjudicator is a person. Ideally, the PoW is perfectly unbiased and cannot be corrupted for personal gain. The PoP however, resembles the business model of most Brokers who can be biased, if not corruptible for individual gain. Herein lies the promise of crypto currencies and so-called smart contracts that can be executed by computational algorithm rather than untrusted human agents.

On the other hand, PoW and PoP are conceptually similar is some ways as well. In the Bitcoin protocol, for example, completing a PoW results in the issuance of a new coin. Similarly PoP adjudicator is payed a fee or commission for validating the conditions of a contract. The mother of all PoPs happens in the Banking System which literally issues new dollars into existence in the form of debt as a consequence of an adjudicated contract between a buyer and seller.

While the puzzles and context may differ, the consequence is the same – money is conjured into existence as a result of a humanly intensional transaction. There really is nothing, except perhaps the deep training of an oppressed population, that says that a decentralized POP adjudicated by qualified and unbiased persona (disaggregated from the transaction) could not also result in the creation of new money. This is exactly what Curiosumé proposes can be accomplished.

In the prior post; The Conjuring of Intangible Values, The tangible value of a bridge connecting two cities and the intangible value of that same bridge are vastly different quantities. Likewise, the tangible value of Bitcoin and the intangible value of Bitcoin are also vastly different different values for the same reason as the bridge between two cities. If PoW = PoP could be assimilated in a single currency, we could build an economy whose currency is underwritten by the intangible value of infrastructure.

Ultimately, our planet would be the apex of infrastructure preservation, i.e., Humanity’s New Central Bank.

What EVERY Engineer Must Know About Bitcoin

By Admin

On April 24, 2014

In General Information

A bitcoin (lowercase b), as a currency, has several flaws that will continue to limit its ability to replace money as we know it. There are millions of words published on the subject, so I’ll leave it to the reader to assess arguments on both sides. However, Bitcoin (upper case B) as a “protocol” for the transfer of value is an extremely important innovation that engineers must not ignore.

The opportunities for the profession are sweeping and vast, but only if they take action and build this ecosystem their selves – it is so powerful, that others will gladly do it for them. I will try to explain this opportunity in this short 1125 word article, but please feel free to contact me with in-depth questions.

The Block Chain Protocol

The Bitcoin protocol is a brilliant innovation that cannot be un-invented – it is here to stay and it will appear in many forms long after it sheds the “bitcoin” moniker. Formally called the Block Chain protocol, Bitcoin was designed to solve an age old problem of double spending a currency, specifically, a virtual currency. A currency created on a computer can be easily copied by a computer and thus negates the real productivity that a currency is supposed to represent. The same is still true for money – paper currency is becoming increasingly complex so that it cannot be easily copied, etc.

Today, there are vast institutions from banks, corporations, a legal system, prison system, and unfathomable volumes of legislation (all imposing respective brokerage fees) acting on the behalf of sanctifying the dollar. However, volatility in these very institutions is what threatens the value of the dollar and all currencies upon which the World depends for very basic needs. How well is this working, really?

So, What’s the big deal?

The stakes are high. To invent a new secure and resilient means to rapidly transmit value can in one fell swoop eliminate the friction of the massive institutions on our economy, while also decreasing the volatility and economic friction imposed on society. This is the reason behind the media hype, congressional hearings, declarations of nations, billionaire press conferences, etc. They are all scared to death of the disruptive potential of this little beast. Unfortunately, bitcoin has fallen victim to many of the same deficiencies that it proposes to correct. But these will likely be corrected in the next iterations.

The Train Leaves The Station

The backbone of the Bitcoin protocol is called the Block Chain. There are now hundreds if not thousands of Block Chains in existence independent of Bitcoin. Consider the Block Chain like going down to the train station. At some predetermined time, a train arrives and the doors open. Everyone piles into the train and after a predetermined amount of time, the doors close. The corollary is that the doors cannot be opened for a predetermined amount of time and no changes, copies, or corruption can take place within that time stamp, no matter what. Only when the train reaches the next location, the doors will open. Once the doors close for a second time, they never open again and a new block is formed. Also, there is no way to retract this process, except by repeating it forward in a reverse transaction.

The protocol has a few more features that I’ll leave to the reader to research including a public ledger where all transactions are open for everyone to see; and the train gets infinitely long with each new opening. The transactions are opened and sealed cryptograpically and incentives are in place that compensates exchanges (the station masters) and well as those who solve a cryptographic puzzle that creates and maintains the integrity of the public ledger (miners).

Smart Contracts

Everyone knows that money and contracts are intimately related. In fact, money is a contract. A contract is defined as a meeting of the minds. As such, where the Block Chain protocol can efficiently transmit “currency”, so too can it transmit contracts. In fact, it is so effective for articulating contracts that it’s potential to do so far eclipses its ability to replace the existing fiat currencies. But again, money and contracts are so closely related that even this becomes a grey area – both can exist within the Block Chain. This is hugely significant.

So what’s in it for the Engineering profession?

There is a special type of contract that engineering societies such as the NSPE, ASME, IEEE, etc., should have a laser focus. These are called Oracle Contracts; also known as adjudicated contracts, (except subject to scientific judgement rather than necessarily a judgement of law). For example, a client would retain a contractor to build a structure or machinery. They would deposit funds into an escrow account managed by “smart contract” in a block chain. This means that the computer will flip the switches instead of an accountant, banker, or attorney. At certain points in contract and “oracle” – a third party vetting mechanism – will verify that the conditions or performance of the agreement have been met, then they would flip a switch that releases the funds to the contractor or back to the client (or through a predetermined decision tree), depending on objective observation.

It’s All About Efficiency

This is efficient for the contractor because they don’t have to worry about getting paid as long as they meet the conditions of the contract. The client does not need to worry about getting ripped off because they are assured that the conditions of their agreement will be met. The system is efficient because high integrity is rewarded and there is little incentive to cheat which minimizes lawyers, accountants, social dysfunction, and all manners of corruption in a public ledger that provides extraordinary analytics available for societal learning in the public domain.

For the vast majority of projects, products, or policies in the United States and the world, a licensed professional engineer and related scientific bodies are the ONLY qualified Oracles that can be deployed to vet an astonishing variety of Smart Contracts.

Smart Contracts can be written for almost any transaction, but it is inherently an intangible transaction since a “meeting of the minds” is the true nature of the value that they articulate. The implications of an abundant intangible economy vs. a scarce tangible economy are vast. Silicon Valley is pumping millions of dollars into virtual currency start-ups like Ripple Labs while companies such as Ethereum promise to make smart contracts on public ledger block chains as easy to build as dragging and dropping puzzle pieces into a web page. This is here today – it is not a theory.

Banks, insurance companies, and attorneys will be the first to adopt smart contracts because they stand the most to lose by not doing so. Meanwhile, engineers in the US and indeed the World are relegated to the contractor sweatshops or smothered under the weight of towering hierarchies. Tragedies such as the Oso landslide and global warming remind us of the absence of engineering oracles advocating for society and our planet. It is imperative, now, that engineers embrace Block Chain Protocol Technologies and the deployment of Smart Contracts to elevate the profession to the top of the proverbial food chain before there someone else does it for them.

Community Organization On The Block Chain

By Admin

On January 2, 2014

In General Information

The potential for articulating smart contracts between local business entities using the Block Chain Protocol (BCP) is truly staggering. While the BCP may not be ready for general population and would be largely unnecessary within a corporation, certain contract types and certain business structures may offer an excellent environment for widespread development.

Cooperative businesses (Co-ops) may be the “more able” organization structure to introduce smart contracts because of specialized governance that allows for the pre-sale of goods and services for the purpose of general financing. The pre-sale agreement may take the form of products, services, cash, or shares of future production. For the purpose of this discussion, let’s consider “shares” as a community commercial currency between co-ops.

Community Currency

The objective would be to circulate shares between co-ops as widespread and comprehensively as possible only converting back to dollars when necessary. The incentive would be that shares, in many cases, may be exchanged tax-free as long as certain conditions are met. Further, by eliminating transaction costs, speed and efficiency may be achieved without banks or double entry account reconciliation, until necessary for interacting with the end user.

Most people are familiar with Electronic Data Interchange (EDI) contracts from observing services such as Amazon.com, WalMart, or Zappos.com. Electronic Data Exchange can be formally defined as the transfer of structured data, by agreed message standards, from one computer system to another without human intervention. Companies have used EDI since the mid-1990s to execute orders, renew inventory, warehousing, tracking, and even merchant banking. The EDI acts primarily within the structure of the corporation and their contracted suppliers.

The trick now, would be to use EDI protocols outside the construct of the corporation. The Block Chain protocol provides an important set of tools, which may allow organizations to interact with each other in a secure form of EDI that can be articulated among a community of integrated cooperatives.

The 3 Building Blocks of Smart Contracts

There are 3 basic types of contract protocols that may be deployed through the Block Chain; these form the basis of smart contracts:

“Self-enforcing” protocol, which is like an electronic P2P handshake agreement that is fully activated between two parties.
“Mediated” contract that would include a third part intermediary such as an escrow or an oracle that would verify compliance with the agreement and pass the transaction between parties (or not).
“Adjudicated contract” which places the oracle either in front of or behind the electronic handshake to filter or check transactions based on certain conditions.

An example given by Nick Szabo (reference article) would be that of, say, keys to an automobile where the owner could selectively allow access to family members but exclude other third parties. There would be a backdoor to let in a creditor that is algorithmically switched on upon non-payment during a specific time (for repossession), or permanently switched off after the final payment is cleared.

The 3 Fundamental Particles of Cryptography:

Cryptographic keys that act in a variety of ways may activate each of these smart contract protocols.

“Secret key” encryption, which is loosely analogous to common passwords that most people use.
“Public key” encryption device acts like a one-way trap door that moves an agreement in only one direction.
“— bit key generators” create keys that unlock transactions after a task is completed.

Controls:

In order to duplicate the controls that large corporations hold over EDI processes, smart contract protocols should be structured in such a way as to make agreements:

Robust against naive vandalism such as accounting errors,
Robust against sophisticated, rational attack such as intentional fraud.

Cooperatives are quite adept at deciding how “shares” (thus, smart contracts) are activated using different types of authentication devices such as digital stamp, public signature, blind signatures, etc. Likewise, “Privy Authentication” means that certain persons have the privilege of interacting with the contract. Additionally, quorum control refers to a condition where a group of people may interact with the contract by election, threshold (like a kickstarter) or almost any quantitative function such as algorithm or time function.

Common electronic contracts (EDI’s) include the following (1):

Administrative functions:

Product code and price catalogs
Catalog updates
Forecasts and plans
Deals and promotions
Statements

Pre-purchasing:

Requests for quote (& response)
Inventory inquiry/advice Purchasing
Purchase order & acknowledgment
Purchase order change & acknowledgment of change
Material release
Point of sale/inventory on hand Shipping and Receiving
Shipment status inquiry & response
Advance shipment notification
Bill of Lading
Freight bill Warehouse
Inventory inquiry & status
Shipping notice
Receipt confirmation
Shipment order
Shipment confirmation

Customs

Declaration
Release Billing and Paying
Invoice
Payment remittance
Credit and debit memos
Receipts

Conclusion:

The Boogie man of the Co-op movement is Big Box Corporate America such as WalMart and their digital siblings such as Amazon who provide consumption value often at the cost of community resilience. Corporations have the resources to automate internal processes, suppliers, and labor. Co-operatives, and localized producers in general, are at a severe disadvantage every time they must cross the transaction gap. Large corporations can easily trade value within their systems paying taxes only when necessary.

The knowledge and technology exists today for Cooperatives to accomplish the same thing using smart contracts and the Block Chain protocol. To do so would create similar economies of scale with the added benefit of improving the distribution of wealth, manufacturing social capital, and storing value in resilient communities. Further, crypto-currencies in general still suffer from that fatal flaw where they are not backed by any form of productivity. To give the crypto-currencies a place to store value backed by community productivity would benefit all who anticipate such technologies.

Primary reference for this article is from: Formalizing and Securing Relationships on Public Networks – Nick Szabo

The Next Economic Paradigm