Common space for smart contracts and smart laws

Electronic Government as a Service (eGaaS) is an international blockchain platform for organizing the economic, state and social activities of citizens and their communities on the basis of smart law and smart contract system. Unlike the variety of existing blockchain projects which are mostly aimed at accomplishing specific tasks, eGaaS offers a comprehensive solution to transfer all tools needed for state and business management to the blockchain platform.

The advent of Blockchain

Blockchain combines the benefits of several technologies — decentralized networks, distributed databases and cryptographic algorithms. The main advantage of the blockchain technology is that data integrity and safety cannot be compromised. This is achieved through the use of special cryptographic algorithms and placement of the full version of the database on all the network nodes. An additional benefit of the blockchain is that any electronic asset can be exchanged in its environment without intermediaries, while preserving privacy. After years of successful use as a software backplane for the Bitcoin cryptocurrency, the blockchain technology predictably attracted the attention of developers as a possible effective solution for implementation of many projects that are not connected with virtual money. Many major financial institutions and multinational corporations such as IBM, Microsoft, Goldman Sachs, BarclysmBNY Mellon and others have started to invest in research and development of blockchain technology.

Distributed digital asset registries became the first projects that used blockchain systems. These are databases designed for secure storage of records on real estate property, stocks, copyright and so on. At that, it is assumed that hosting any document in blockchain is equivalent to notarization of its content at a fixed time point. Attempts are being made to create blockchain-based electronic document management systems within organizations or territorial entities. There are projects that use such blockchain advantage as exchange transactions without intermediaries. Some of such projects include all kinds of decentralized exchanges (NXT Asset Exchange, Bitshares, OpenLedger), crowdfunding sites and p2p lending systems. Blockchain has attracted the attention of banks and other financial institutions, as it enhances security against cyber attacks, guarantees data integrity, and reduces operational costs. Some of the interesting financial projects include Ripple, which combines a distributed payment system and currency exchange. Having assessed the benefits of the new technology, major banks (Bank of America, Bank of England, Reserve Bank of India [1]) and their associations (for example, R3 blockchain consortium, which includes banks, such as Goldman Sachs, JP Morgan, Credit Suisse, Barclays, UniCredit and others [2]), announced they will work on financial blockchain platform projects.

An important step in blockchain development was taken by the Ethereum project, which offered a universal blockchain platform for creation of applications based on smart contracts — software modules that execute transaction algorithm with arbitrary digital assets. The main advantages of smart contracts over the conventional contracts are: security, no need for intermediaries, reduced transaction costs and, of course, execution automaticity.

Published state and corporate analytical studies [3, 4] found that widespread introduction of blockchain will reduce costs of financial transactions, while at the same time enhancing their protection against fraud. It will also bring indisputable advantages in effecting control over all sorts of assets and ensuring data confidentiality.

Blockchain limitations

However, there are a number of technical challenges faced by blockchain:

  • Poor scalability (growth in data volume on each node)
  • Low bandwidth,
  • Centralization tendency [5] as a result of the growing resource-intensity of data validation procedure (when using the proof-of-work method used in Bitcoin blockchain).

There are many ways to overcome these problems and there are acceptable solutions. However, it becomes obvious that they are not the main obstacles to expanded introduction of blockchain outside the sphere of electronic money.

If we turn to the experience of effective development of the Bitcoin cryptocurrency and its clones, it would be noted that it was made possible primarily thanks to the closedness of the data space of their blockchains –credibility and privacy of transactions without intermediaries are ensured only due to the fact that transactions are conducted within one database and they do not require reference to any external source. It is exactly this necessary condition — closedness of data space — that is not implemented when attempting to apply blockchain in projects related to real rather than virtual objects. In fact, the Bitcoin blockchain should be regarded as a distributed registry of digital assets. These assets (coins) appear in blockchain in strictly fixed amounts, and the blockchain stores data of all transactions with these assets. This is what ensures security and privacy of the Bitcoin system and user trust in it.

Problem of data integrity

Any data placed in blockchain registries, document management systems and crowdfunding sites have no higher reliability than original offline information. That is, blockchain provides only data security, protects them from modification after entry into the system and ensures confidence in the safety of relevant transaction inside the blockchain. But it doesn’t guarantee full data integrity. Smart contracts also have this same kind of limitations — they can only be effective if the executable code has direct access to the objects described in them. It means that they can only operate on data stored in the blockchain platform implementing smart contracts. And it is clear that contracts operating only within the closed information environment of a particular blockchain cannot be widely used by state, financial and business institutions. The problem of credibility will not be solved either by entering all digitized state, financial and business information into a variety of specialized blockchain registries. Even if a common blockchain platform protocol for data transmission between blockchains is developed, the system as a whole will still not provide the level of reliability and, most importantly, the credibility level that the Bitcoin blockchain provides — transaction, verified within one blockchain cannot be reliable when data obtained from the outside is included in it even if the data are entered not by humans but by special applications (“oracles”).

Common space for smart contracts

From this analysis, it can be concluded that the obvious benefits of the blockchain technology can be fully realized only within a common enclosed information space, that is, within a common blockchain platform for all possible data types. This was the idea that formed the basis for the eGaaS project.

The following principles lie at the heart of the eGaaS blockchain platform:

  • Only those data that are generated within the platform can have full credibility;
  • These data would be credible only if they are used within the platform;
  • Maximum credibility of data inputted into the system from the outside can be obtained only if there is an extremely formalized and legally verified offline protocol, implemented at the level of governments.

In today’s world when all spheres — state, financial, economic, social — are extremely intertwined, interdependent and integrated into a common information flow, blockchain can be a reliable and effective platform only if data on maximum number of objects and agents involved in activities in these spheres are included. That is, the eGaaS database should incorporate all possible registries: of citizens, property, organizations, shareholders, industrial products, copyrights, licenses, etc. Besides, it is obvious that all financial activities delegated most likely to the central bank of the country has to be transferred to a common blockchain platform.

However, full functionality and maximum efficiency of such a common blockchain can be secured only by including in it the legislative regulations of the state. This will complete the creation of a closed information space required for efficient functioning of smart contracts. It is only when agreement objects (registry objects), conditions of agreements (legislative regulations, tariffs, standards), financial instruments, and, of course, transaction agents are joined in the common data space that smart contracts can be actually used for mass purposes.

Common information space and Smart laws

Transfer of core activities to the eGaaS common blockchain platform and widespread use of smart contracts as a means of regulating relations between the parties would inevitably lead to fundamental transformation of the existing forms of state governance. The role of legislative activity would utterly increase, and the need for the controlling functions of the government would virtually be eliminated. Laws that have been transferred to blockchain become instruments of direct effect: any changes in legislative regulations, tariffs and rates are automatically taken into account by all the existing smart contracts. At that, the smart contracts themselves are initially created in strict compliance with legislative regulations –this is ensured programmatically and no longer by lawyers. Therefore, combining laws and activities regulated by them in the eGaaS common database would eliminate a lot of regulatory authorities and automatically perform many functions of the state. The new term “smart law” is introduced to emphasize the special form of implementing state laws in the eGaaS blockchain platform.

Smart law is an algorithm (scenario) in which the conditions necessary for ascribing attributes/relations to objects of the law (legal and natural persons) or for performance of certain actions with these objects are established. For example, a smart law may determine the conditions of establishment of relationship “married” between two citizens of the state or conditions of transaction “tax payment”. Some smart laws (for example, tax laws) work in a tracking mode — they record execution of transactions of a certain type and automatically perform statutory action (tax deduction). Other smart laws (for example, marriage smart law) are triggered when they are accessed through special forms and are performed interactively. After checking all the conditions set out in them, these smart laws complete their action by ascribing attributes/relations to new objects or refusing to do so. Economic smart laws control both how smart contracts are created and how they are executed, thereby automatically prohibiting the inclusion in them of operations that contravene the law. Introduction of smart laws (in addition to the financial system and registry structure) therefore completes the creation of a common information space for full and efficient operation of smart contracts.

All state laws whose subjects are objects listed in the eGaaS blockchain registries are transferred into smart law format. Transfer of state laws into smart law format does not require the involvement of programmers — a special eGaaS interface is used. Earlier-adopted laws come into effect in the eGaaS space in the form of smart laws after signing them with electronic keys belonging, for example, to the heads of the legislative and executive bodies of the state. New laws can be created and tested right in the eGaaS space. A new smart law is adopted and comes into force once signed with the required number of electronic keys of representatives of the legislative body of the state. A special smart law establishes the percentage of votes required for the adoption of laws. Special smart laws prescribe the duration and conditions of legislative elections, they accept applications from candidates, launch the voting procedure and count the votes. Voting by means of electronic keys is quick and incurs minimum cost. Voting results, that are stored in the blockchain, are practically impossible to be tampered with.

Smart laws are directly effective laws. Implementing them does not require intermediaries or regulatory authorities. Amendments and changes made to them take effect immediately. Many of the functions of state bodies — most notably registration of civil status (birth, marriage, divorce), taxation, regulation of financial and business relations — are automatically executed and controlled by eGaaS smart laws.

Conclusion

The main question that should have been answered by this write-up is: Why do states need this particular common blockchain platform? Why is it meaningless to implement some of its services (such as smart laws, smart contracts, financial transaction mechanism, all kinds of registries) on separate blockchains? The key arguments in favor of a common eGaaS blockchain platform are summarized below:

  • Separate blockchain registries and blockchain platforms ensure data accuracy and integrity only within their own databases — any data transmission between separate blockchains minimizes all the advantages of this technology.
  • Smart contracts are effective only when all the data on objects involved in the transaction, as well as statutory provisions governing the contract, and, of course, the relevant financial transactions, are directly accessible by the smart contract algorithm, that is — are recorded in a common database.
  • Transfer of the legislative system of a state to smart law technology is also possible only if all the objects, whose interrelationships, including financial ones, are regulated by state laws, are presented in the common blockchain platform.
  • The normal functioning of the economy of a modern state cannot be closed within its borders. Therefore, a common blockchain platform can perform only as an international platform that connects all the states of the world together into a common network.
  • None of the existing blockchain platforms of which conventional computers could be the nodes, can provide the necessary reliability and performance of a common network. Therefore, only state-supported large data centers, each of which stores a full version of the blockchain, can serve as blockchain platform nodes. Only such a network configuration, where each of the nodes is involved in the verification and signing of blocks, can provide reliable data storage and accuracy.

All previous attempts at building information models of state and economic activities have failed because the parties involved built a typical model– they tried to duplicate and replicate offline relationships in the program code. But eGaaS offers just to give up offline economy and provides a tool for building a new, initially digital economy. A common blockchain is needed not to model relationships, but to implement them on a fundamentally different basis. All formal communications, all formal relations, contacts, transactions, sales & purchases go to the blockchain subspace. They fall into digital sediment. Live communication and creativity remain outside, on the surface.

References

  1. HSBC and Bank of America Merrill Lynch use Hyperledger Project for blockchain-based trade finance //www.ibtimes.co.uk, 2016.08.10
  2. French Central Bank Wants More Action on Blockchain Research — But also has Security Concerns // the-blockchain.com, 2016.04.20
  3. Reserve Bank of India (RBI) To Research Blockchain Technology // www.the-blockchain.com, 2016.06.26
  4. R3 (R3CEV LLC) — blockchain technology company, Official website
  5. Distributed Ledger Technology: beyond block chain // A report by the UK Government Chief Scientific Adviser, 2016
  6. eGaaS — Electronic Government as a Service