Monday, October 10, 2016

GENERATION, SECURITY AND DISTRIBUTION OF NATIONCOINS BY A SOVEREIGN AUTHORITY

GENERATION, SECURITY AND DISTRIBUTION OF NATIONCOINS BY A SOVEREIGN AUTHORITY

Dr.Kartik H

ABSTRACT
In this paper, I explain the generation, security and distribution of NationCoins by a Sovereign Authority. I begin by explaining the concept of cryptocurrencies (also referred to as cryptocoins in this paper). We then discuss the concept of Regulated and Sovereign Backed Cryptocurrencies (RSBCs). Then we envision a scenario where cryptocoins are a main medium of exchange in an economy. The generation, security and distribution of NationCoins by a Sovereign Authority are deliberated. Finally, the paper concludes by outlining the functions of the Sovereign Authority vis-a-vis NationCoins.

INTRODUCTION
A cryptocurrency is a medium of exchange using cryptographic techniques to safeguard transactions and also manage the formation of additional units of the currency.

A BlockChain is a widely disseminated archive of data that maintains a continually-expanding register of records fully and reliably protected from any alteration or modification. Each block has a timestamp and link to the preceding block.

A Crypto wallet is an encrypted electronic device that allows an individual to make electronic cryptocurrency transactions. Each wallet will have a public key visible to anyone. But it can be operated by only a person who has a private key. Transactions on the cryptocoin network are usually anonymous.

When people send cryptocoins to each other, someone has to keep account of who spent how much at what time. In case of fiat money (or paper money) it is done by banks (known as Trusted Third Parties, for which they charge a commission).But in case of Cryptocoins, it is registered on a ledger called BlockChain (with nil or minimal fees).
The cryptocoin network makes this possible by detailing all the transactions made during a certain timeframe into a list. This list is known as a block. A certain set of people called 'miners' verify these transactions mathematically and register them on the BlockChain. Those bona-fide miners who have successfully verified the transactions are paid freshly created Cryptocoins. This is how miners are rewarded, and new cryptocoins are generated. This is also the reason why no transaction costs are levied, as the network (in the form of miners) verifies the transactions.

Bitcoin is a peer-to-peer based cryptocoin which is not backed by any commodity and (unlike fiat money) carries no sovereign guarantee whatsoever.

Regulated and Sovereign Backed Cryptocurrencies (RSBC), are government backed cryptocurrency akin to paper currency, but in digital form. In the RSBC system, the cryptocoins (known as NationCoins) are backed by Sovereign Guarantee.
They are run on a highly secure Controlled BlockChain(CBC) in which Sovereign backed Cryptocurrencies will be transacted without any hassles.
A Controlled BlockChain is different from a BlockChain per se. 

A BlockChain is a permissionless Distributed Database, whereas a Controlled BlockChain will be Permission Based. The Permission here, being provided by the Sovereign Authority. NationCoins will thus be completely managed by the Sovereign Authority i.e. the Government.

The earliest Central Banks were created to manage assets and provide loans to a nation’s government. In the digital age, we will need institutions similar to Central Banks with a mandate to manage a nation's digital assets. For this express purpose, I have envisaged the creation and development of a Digital Asset Reserve- A DAR. The DAR is part of a larger ‘Protocol’- The K-Y Protocol [1].

The K-Y Protocol is a set of rules and instructions to implement the Regulated and Sovereign Backed Cryptocurrency (RSBC) system. It envisages a highly secure Controlled BlockChain in which Sovereign backed Cryptocurrencies will be transacted without any hassles. It will be a Controlled BlockChain.
(A Controlled BlockChain is different from a BlockChain per se. A BlockChain is a permissionless Distributed Database, whereas a Controlled BlockChain will be Permission Based. The Permission for access and operation, being provided by the Sovereign Authority.)

A Controlled BlockChain (hereby referred to as CBC) resulting from the K-Y Protocol has several money and non-money uses. In its complete form, it will have a wide spectrum of applications ranging from banking, taxation, and contracting to space research, automation and public services.

BlockChain- A blockchain is a public ledger of all cryptocurrency transactions that have ever been executed. It continually grows as 'verified' blocks are added to it with a new dataset for every block. The blocks are added to the BlockChain in a linear, chronological order.
DAR-Digital Asset Reserve- Organisation which will frame policies and manage the CBC based on the K-Y Protocol.
The Digital Assets Reserve will consist of the following organisational structure:
The DAR will have 3 departments directly under it. The departments will have following functions.







DATA:
It is the technical department of the DAR. DATA is short for DIGITAL ASSETS TRACKING & ADMINISTRATION. It will be the technical wing of DAR and Its functions comprise setting up of the hardware and software infrastructure to run and sustain the RSBCs. It will set up the nodes, Hard-code the K-Y Protocol into software, and setup the distributed computing network. It will Manage and keep the various IT infrastructure needed for RSBCs.

NLD: It is the National Ledger Database. It is the ledger which will record all transactions that involve the respective NationCoins. Its copy is present in all the nodes. Every NationCoin, after sovereign stamping and certification will pass through the NLD where it will be registered. The NLD will keep an updated account of NationCoins in existence.
If loss or other emergencies occur, it will, with DATA's help and DAR's concurrences liquidate certain NationCoins and remove them from circulation (Akin to destroying old and torn currency notes).
The NLD will also act as a ledger to record other digital assets which have non-currency applications. I.e. non-RSBC digital assets like certificates, receipts, land records, etc.

DAREC:
It is the Digital Asset Regulatory and Exchange Commission. When RSBCs increase in quantity and scope, DAREC will act as a regulator between RSBCs and other international RSBCs of other nations. DAREC will carry out the policies and decisions of DAR about RSBCs and other digital assets. On the directions of DAR, DAREC will also regulate non-RSBC digital assets and their exchanges wherever necessary.

The DAR, in actuality contains the reserve. In fact, it is THE RESERVE itself. What is under the DAR (NLD, DAREC, and DATA) is demarcated from what is within the DAR. The DAR will contain THE RESERVE, the one entity that gives RSBCs their identity. The reserve will provide the Sovereign Stamping and Certification that will give RSBCs the sovereign backing. The reserve will consist of two parts.



Holding will consist of freshly mined RSBCs which have not yet been Sovereign Stamped. The corpus (physical assets) will contain the money that will provide the freshly mined cryptocurrencies their sovereign backing. For ease of operations and record keeping, the corpus is divided into two parts.

Non-Backed Corpus: comprises those physical assets which have not yet provided any backing to any NationCoin.

Backed Corpus: It will consist of those physical assets which have already provided backing to the NationCoin.
Non-backed NationCoins will be in Holding. It’s the only outlet is into the SBE: Sovereign Backing Engine, which will inscribe the sovereign stamp and give certification. SBE is the entity which will provide security features and authentication to the cryptocurrency.



After getting mined, the non-backed NationCoins will be stored in to a system not connected to the internet i.e. it is offline. It is within this isolated system that NationCoins will get sovereign backing.
The backed corpus will have guarded safe containing physical assets that have backed the NationCoins. The only way they can be released outside is, when the backed Nationcoins are destroyed i.e. if $1,000 worth of USCoins is destroyed, then, $1,000 from the Backed Corpus is released into the economy after confirmation.


Backing can be done in several ways. Say $100 million worth of USCoins are to be backed. Now a Hundred Million $1 bills are taken and their serial numbers are hard-coded into every USCoin. That means 100 million USCoins, each bearing a unique serial number corresponding to the serial numbers on the Dollar bills are created. These 100 million $1 notes will go into the backed corpus to be stored away safely. Now, these 100 million USCoins will enter the economy instead of 100 million $1 bills.

Sovereign Stamping & Certification
In Certification, a unique item, unique to that country is coded into the NationCoin. For the USA it can be "E pluribus Unum". For India- "Satyameva Jayate" etc. These will ascertain the nationality of a particular NationCoin. It will have a hashed 64 digit version of the country's unique national motto with an added number. Every one million NationCoins generated will contain the same hash number. This hash number will be maintained in the NLD Index registry. In future, to check the validity of a NationCoin, this hash number is searched in the index. If it matches, that means it belongs to that particular batch of NationCoins.

Sovereign Stamping- Sovereign stamping will give a unique Sovereign number to every NationCoin. Unlike Certificate number- which is common to NationCoins of a particular batch, sovereign number is unique for each NationCoin. Along with NationCoin number (like serial number on a currency note), Sovereign Number (given by sovereign stamping) and Certificate Number (given by certification) will provide added tiers of security to the NationCoin.

Backing
Backing occurs when physical assets in non-backed corpus are moved into the backed corpus in an accountable manner. If $10 million moves from non-backed to backed sections, then $10 million worth of NationCoins should be added to the RSBC vault.
RSBC vault: This is a safe area where non-backed NationCoins, after Backing arrive as RSBCs. It is offline and not connected to the network.
Right from Holding to RSBC vault, the entire reserve system is isolated by using Cryptic Gate technology.

Cryptic Gates: They are isolation mechanisms which keep the reserve offline to improve its security and protect it from external tampering.



It follows a simple mechanism. When nbNC (non-backed NationCoin) pool is connected to ISOLATION SAFE, the isolation safe is cut-off from Holding. When isolation safe is connected to Holding, it is cut-off from nbNC pool. It is an either-or relation i.e. ISOLATION SAFE can at any given time be only connected to one other unit- either Holding or nbNC pool.


A similar thing happens at the other end where RSBCs are created. RSBCs after creation go to the NationCoin vault. We may have to use multi-tiered Cryptic Gates with 2 or even 3 isolation pools between RSBC vault and payment pool. These RSBCs will go into the Isolation Pool 2 guarded by cryptic gates. [Since RSBCs are ready-to-use currencies, we need added security features]. The Isolation Pool 2 at any given time is connected to only one unit- Either to RSBC vault or the payment pool.
The DAR will have the following functions related to NationCoins.

1) Sovereign Backing: This is the core and the only main role of the DAR. All other functions of DAR and its departments are submissive to this function.
The DAR will provide sovereign backing through sovereign stamping and certification process. It will keep the Corpus with correct account of non-backed and backed assets in the corpus. It will make sure that Sovereign Backing of NationCoins happens in a secure environment in a non-inflationary way. (If, after sovereign backing, backed corpus assets are released into the economy, it will cause inflation due to increased money supply in society). The DAR will have physical, high security vaults with restricted access and multiple checks and balances.

2) RSBC destruction: As a corollary to the first (and main) function, DAR will also be responsible to verify authenticity of NationCoins already in circulation in the economy. If there are counterfeited, fake or tampered NationCoins, the DAR will seize them. After examining and investigating the NationCoin(s) in question, the DAR can destroy the said NationCoin(s). It will then decide to reintroduce a batch of fresh RSBCs instead of the ones already destroyed.

3) Distribution - Once generated securely in the above mentioned mechanism, The DAR will distribute the NationCOins as per the K-Y Protocol.
This is akin to a Central Bank detecting and weeding out counterfeit or damaged currency notes from circulation.

CONCLUSION
The NationCoin system is based on multi-tiered steps which enhance security and ensure steady production of NationCoins. These NationCoins have several money and non-money uses. The system has enough built-in features to ensure reliable and safe system for transaction of RSBCs. The totally new innovations such as Cryptic-gates make sure that the NationCoin system is highly tamper-proof and accountable. The methodology outlined in the paper make it possible for the Sovereign Authority to introduce Digital Currency into the economy. Not only that, the Sovereign Authority is assured of a steady supply of NationCoins to transition to a fully digital economy over a period of time.

References

[1]The K-Y Protocol: The First Protocol for the Regulation of Crypto Currencies (E.g.-Bitcoin) 

EXTRA-TERRESTRIAL APPLICATIONS OF BLOCKCHAINS AND CRYPTOCURRENCIES

EXTRA-TERRESTRIAL APPLICATIONS OF BLOCKCHAINS AND CRYPTOCURRENCIES
Dr.Kartik H

ABSTRACT
In this paper, I analyse the extra-terrestrial applications of blockchains and cryptocurrencies. I evaluate as to how value based transactions can be conducted in outer space. First, I explain the concept of cryptocurrencies (also referred to as cryptocoins in this paper). Then we discuss the concept of Regulated and Sovereign Backed Cryptocurrencies (RSBCs). 

Later, we envisage a scenario where extra-terrestrial settlements use money to exchange value. We then assess the feasibility of paper money systems on future settlements outside earth. The various advantages of BlockChains in facilitating economic activity in extra-terrestrial settlements are deliberated. Finally, the paper concludes as to why cryptocurrencies will be best suited to be the mainstream bills of exchange in extra-terrestrial settlements.

INTRODUCTION
A cryptocurrency is a medium of exchange using cryptographic techniques to safeguard transactions and also manage the formation of additional units of the currency.
A BlockChain is a widely disseminated archive of data that maintains a continually-expanding register of records fully and reliably protected from any alteration or modification. Each block has a timestamp and link to the preceding block.
A Crypto wallet is an encrypted electronic device that allows an individual to make electronic cryptocurrency transactions. Each wallet will have a public key visible to anyone. But it can be operated by only a person who has a private key. Transactions on the cryptocoin network are usually anonymous.

When people send cryptocoins to each other, someone has to keep account of who spent how much at what time. In case of fiat money (or paper money) it is done by banks (known as Trusted Third Parties, for which they charge a commission).But in case of Cryptocoins, it is registered on a ledger called BlockChain (with nil or minimal fees).
The cryptocoin network makes this possible by detailing all the transactions made during a certain time frame into a list. 

This list is known as a block. A certain set of people called 'miners' verify these transactions mathematically and register them on the BlockChain. Those bona-fide miners who have successfully verified the transactions are paid freshly created Cryptocoins. This is how miners are rewarded, and new cryptocoins are generated. This is also the reason why no transaction costs are levied, as the network (in the form of miners) verifies the transactions.
Bitcoin is a peer-to-peer based cryptocoin which is not backed by any commodity and (unlike fiat money) carries no sovereign guarantee whatsoever.
Regulated and Sovereign Backed Cryptocurrencies (RSBC), on the other hand are government backed cryptocurrencies akin to paper currency, but in digital form. In this system, the cryptocoins (known as NationCoins) are backed by Sovereign Guarantee.
They are run on a highly secure Controlled BlockChain(CBC) in which Sovereign backed Cryptocurrencies will be transacted without any hassles. NationCoins are completely managed by the Sovereign Authority i.e. the Government.
This system is based on the K-Y Protocol [1]. The K-Y Protocol is a set of rules and instructions to implement the Regulated and Sovereign Backed Cryptocurrency (RSBC) system.
When the first human colony starts to function on Mars, what might be the best possible medium of exchange that can be used?

It can be cryptocurrency systems. Using paper money or plastic money on Mars or anywhere outside Earth is ruled out. That is because; carrying physical money into space is a costly process. If you carry a $100 note into space at $1,000/Kg it will cost $1 (as a $100 bill weighs approximately 1g). It means that the value of $100 bill will then be $101. If it is carried to the Moon it will cost even more. If you carry it to Mars, it will cost even more than that. So a $100 bill may actually have a value of $150 on Mars.

For a future Martian colony, it may be greatly confusing to use paper money. Moreover, it will cost more money to carry lower denomination bills outside space i.e. A $1 bill will also cost $1 to be launched to space. So, its actual value will be $2. Even more paradoxical will be to carry coins in space. It will cost almost $2 to carry a ten cent American coin to space. (A One dime coin weighs approximately 2.27g)
Therefore, it will be illogical to use paper or plastic money in space due to the physical issues and costs involved. It has to be cryptocurrency. Even plastic money will need card readers or other instruments which will be cumbersome to carry space-wise.

The first Lunar and Martian colonies can use cryptocurrency for trade and as a medium of exchange.
We must take into account several factors that will make the future space economy a possibility. The first is distance. The Moon is only      3, 84,000 Km (approx) distance from Earth. Light takes hardly 2.6 seconds to travel from the Earth to Moon and back. If there is a colony on the Moon, it will in fact be possible for people on Earth to transact with the lunar colony in real time.

The Moon will become just another “province” of Earth. A blockchain transaction can easily occur without much trouble. RSBCs can be used as they will provide stability of value unlike decentralized cryptocurrencies. Moreover, governments will have a major role in colonizing space. As such they will be bound to use RSBCs.
Mars is a different case. It takes light at least 20 minutes to travel from the earth to mars. In case of Mars, it will be very difficult to carry out a real-time transaction. Unlike the Moon-Earth system, we cannot maintain a single Controlled Blockchain for Mars and Earth. What can be done is that a separate Martian blockchain with its own cryptocurrency can be created which can be traded in an international cryptocurrency exchange. Powerful microprocessors embedded in objects flown to (or created on) Mars can do “Smart Mining” [2] and provide the basis for a money exchange system. Machines containing embedded chips will 'Smart Mine' Cryptocurrencies which can be used for Extra-Terrestrial transactions. Thus, machines launched into outer space will automatically add value to the World Economy.

The same holds true for the later expansion of human footprint across the solar system and beyond.
By the time man has setup a full-fledged colony on Mars and moved beyond the Kuiper (asteroid) belt, the extra-terrestrial economies can be linked by an intricate network of Controlled BlockChains. There can be a Marscoin, on a Martian blockchain, LunarCoin, JupiterCoin, SaturnCoin, TitanCoin, and so on, on their respective Controlled Blockchains.

BlockChains can also be used for Extra-Terrestrial contracting, voting, taxation, banking, etc. Any Extra-Terrestrial value based transaction can be conducted through BlockChains. BlockChains, in actuality will make it possible for rules, regulations and laws to be enforced in space without the need for human supervision or intervention.

CONCLUSION
We have seen how it will be very expensive to use paper money in outer space. Moreover, it will also be difficult to use paper money systems as a means to assess value-addition to the economy. By using BlockChains and crypto-currency we can achieve multi-faceted economic results. Various aspects of Extra-Terrestrial life like banking, taxation, voting, contracting, law enforcement etc. can be realized successfully through BlockChains and cryptocurrencies. Thus, paper money is a hindrance to space exploration and settlement, whereas cryptocurrencies facilitate space travel and extra-terrestrial settlements. BlockChain systems therefore can form the basis of future Extra-Terrestrial societies.

REFERENCES
[1] The K-Y Protocol: The First Protocol for the Regulation of Crypto Currencies (E.g.-Bitcoin)

[2] SMART MINING - THE FUTURE OF LIVING - https://goo.gl/gPDPEv

BANKING SYSTEMS IN A CRYPTO-CURRENCIES DOMINATED ECONOMY


BANKING SYSTEMS IN A CRYPTO-CURRENCIES DOMINATED ECONOMY
                                          
                                  Dr.Kartik H

ABSTRACT
In this paper, I analyse the workings of commercial banks in a scenario where crypto-currencies are the mainstream bills of exchange. I start by explaining the concept of cryptocurrencies (also referred to as cryptocoins in this paper). Then I discuss the concept of Regulated and Sovereign Backed Cryptocurrencies (RSBCs). Later on, I envisage a scenario where cryptocoins are the main media of exchange. The banking aspects of Paper money, Bitcoins and RSBCs are then deliberated. I analyse the interplays between Banking and various currency formats. Finally, the paper concludes as to which currency is best suited to be the mainstream bill of exchange.
INTRODUCTION
A cryptocurrency is a medium of exchange using cryptographic techniques to safeguard transactions and also manage the formation of additional units of the currency.

A BlockChain is a widely disseminated archive of data that maintains a continually-expanding register of records fully and reliably protected from any alteration or modification. Each block has a timestamp and link to the preceding block.
A Crypto wallet is an encrypted electronic device that allows an individual to make electronic cryptocurrency transactions. Each wallet will have a public key visible to anyone. But it can be operated by only a person who has a private key. Transactions on the cryptocoin network are usually anonymous.

When people send cryptocoins to each other, someone has to keep account of who spent how much at what time. In case of fiat money (or paper money) it is done by banks (known as Trusted Third Parties, for which they charge a commission).But in case of Cryptocoins, it is registered on a ledger called BlockChain (with nil or minimal fees).
The cryptocoin network makes this possible by detailing all the transactions made during a certain timeframe into a list. 

This list is known as a block. A certain set of people called 'miners' verify these transactions mathematically and register them on the BlockChain. Those bona-fide miners who have successfully verified the transactions are paid freshly created Cryptocoins. This is how miners are rewarded, and new cryptocoins are generated. This is also the reason why no transaction costs are levied, as the network (in the form of miners) verifies the transactions.
Bitcoin is a peer-to-peer based cryptocoin which is not backed by any commodity and (unlike fiat money) carries no sovereign guarantee whatsoever.
Regulated and Sovereign Backed Cryptocurrencies (RSBC), on the other hand are government backed cryptocurrency akin to paper currency, but in digital form. In this system, the cryptocoins (known as NationCoins) are backed by Sovereign Guarantee.

They are run on a highly secure Controlled BlockChain(CBC) in which Sovereign backed Cryptocurrencies will be transacted without any hassles. NationCoins are completely managed by the Sovereign Authority i.e the Government.

This system is based on the K-Y Protocol [1]. The K-Y Protocol is a set of rules and instructions to implement the Regulated and Sovereign Backed Cryptocurrency (RSBC) system.

BANKING
A bank is a financial institution that accepts deposits from the public and creates credit [2].

One of the important ways by which banks help create money is through the Fractional Reserve Banking system.
It plays out in the following manner.
Joe deposits $1,000 in the TOWN BANK. Now this $1,000 is a liability for the bank. Why? Because it has to return this $1,000 to Joe any time he demands. Moreover, the bank has to bear the cost of holding $1,000. From this $1,000, the bank takes $200 and sets it aside as a reserve (to use if needed immediately). The rest $800, it lends out to Bob, who needs a loan to start a business.

Now the TOWN BANK charges interest on the loan it gives to Bob. If Joe checks his account, he will find $1,000 written in his account book. If Bob checks his account, he will find $800 in it. Now, there appears to be a total of $1000+$800=$1800 in the system, but in reality, there is only $1000.

It is because of a book-keeping technique that banks use. The bank has created a debt instrument called IOU (short for- I owe you). What Joe will find in his account is only $200 in cash plus an $800 worth of promissory note that when given to the CENTRAL BANK (of that country) will provide that money to the TOWN BANK.
Bob spends the $800 to buy some stuff from Alice. Alice deposits $800 in the CITY BANK. CITY BANK sets aside 20%, i.e. $160 as  reserve and then loans out $640 to Robert who needs the money (on interest). Here whatever money is lent is actually created. This process goes on until the total amount of reserve in the system is equal to $1,000 (original amount deposited by Joe). At 20% reserve rate, $1,000 can create $4,000 of additional money.

This creation of money where a bank takes deposits, provides loans, but holds reserves that are a fraction of its liabilities is known as Fractional Reserve Banking.
The process is not as simple as it seems. The Central Banks tightly control this creation of money by several direct and indirect regulations. This Fractional Reserve Banking was borne out of a unique observation made by medieval bankers.

As discussed, medieval age bankers used to accept gold deposits and issue promissory notes to be redeemed later. The people started using these promissory notes as currency notes. The bankers observed that if they had 100 Kg of gold and issued 100 promissory notes, not all 100 notes would be redeemed at the same time. It meant that there was a certain amount of gold that lay unused. The bankers then loaned this unused gold to those who would pay interest. Thus, the bankers got interest on depositors' unused gold.
Banks lend money not only to private borrowers but also to governments. Governments borrow money from the banks; to be repaid later with interest. To record the borrowing, the government issues Treasury Bonds. These Treasury Bonds can be redeemed later by the banks for a stipulated amount.
Banks, apart from holding depositors' money and lending loans to borrowers fulfil several other functions.
One of the most crucial functions of a bank is that of a verifier. A transaction done through a bank is also supervised and recorded by the bank.

John has an account containing $10,000 in the TOWN BANK. Joseph has an account containing $100 in CITY BANK. John has to pay $2,000 to Joseph. He writes a check to Joseph transferring $2,000. Joseph takes the check and gives it to his CITY BANK. CITY BANK gives the check to TOWN BANK. TOWN BANK verifies that
(a) John indeed holds an account with them.
(b) The account has adequate money to be transferred.
(c) The check is genuine, and the signature belongs to John only.

After all this is verified, they pay CITY BANK $2,000. Similarly, CITY BANK verifies Joseph's credentials and deposits the money in his account.
This payment service with verified authentication and confirmation is done by banks. 

So banks act as a Trusted Third Party (TTP) between the transactor and the transacted. Here both John and Joseph trust a third party, i.e. the bank to complete their transaction. And this role of a TTP does not come for free. There is an inbuilt transaction cost, deducted by the banks for their service as a TTP and verifier.
Basically, the TTP certifies that the transaction is authentic.
The present day financial system has evolved so much so that hitherto important functions like holding deposits and issuing checks have been relegated to the background. The most vital role of a bank now-a-days is to act as a Trusted Third Party (TTP). Banks act as TTPs in settlements, loan lending, project financing, issuing of banknotes (printed by Central Banks), credit mediation and creating money (through the Fractional Reserve Banking).

Trading and business interaction in our society is based on transactions. And to safely and authentically conduct a transaction, there needs to be a supervisor, trusted by both the transacting parties. Banks have thus evolved to fulfil the role of a Trusted Third Party.

The introduction of the Bitcoin concept brings about a paradigm shift in the way money supply system works. Imagine a scenario where Bitcoin is a world-wide accepted currency. It is a decentralized and peer-to-peer based currency. Bitcoin usage needs no intermediaries. As such, banks will be completely bypassed. Loans and mortgages will become personal and customized. Anyone willing to loan will become a money lender. There will be no “Double Accounting”, which is the basis for Fractional Reserve Banking. 

People will no longer keep money in banks (or prefer to keep) as they will have a competitive market for interest rates throughout the world.

Joe can lend his money to Kate at 10% interest rate, wherein his banks provide only 5% on savings. Kate, on the other hand will get money at 10% (from Joe) interest rate instead of 14-18% interest rate loans offered by banks.
Thus, Kate would rather take loan from Joe than from banks. And Joe would give loans to Kate, rather than keep it in the bank. [But amidst of all this, comes the issue of trust. All is well, as long as there is a guarantee that Kate will return the money back to Joe. But that seldom happens. The network thus will verify the transaction and guarantee its integrity].

But who will enforce a contract in the absence of an authority like a Bank? If a bank does not get back its loans, it will classify them as Non–Performing Assets (NPAs) and may be getting some relief from the government, the market or from the insurers. But if Kate does not return Joe’s money, that may spell doom for Joe financially.

In the age of Bitcoin, credit–worthiness will become an important issue. In a scenario where Bitcoin becomes a major currency of exchange, each individual will need to have a credit–rating. And for that to happen, credit–rating agencies will start to take centre stage. The banking system will be all but extinguished. Probably banks will take on new roles as credit–rating agencies.

But unlike the banking sector, the Credit– Rating Market cannot have too many players. You cannot have 100 judges in the same court, it will be chaotic. The market itself is like that. Because, just like money, trust is limited. And one cannot trust everyone with it. Over a period of time, only a few Credit–Rating agencies will have to emerge. So, a few banks may successfully transform into Credit-Rating Agencies whereas others may have to bite the dust. It is therefore important to realize that Bitcoin–like currencies (decentralized, unregulated ones) are heavily disruptive.

Lending money without supervision or control becomes very easy. But so will cheating. People may lose their lifetime savings to unscrupulous elements with doubtful credentials. In such a situation, Credit–Rating Agency data may themselves be manipulated. Cartelization and insider trading may go on unabated. This system will quickly deteriorate to a point where nobody can trust anybody.
Contrast this with a scenario where RSBCs will be the norm. 

In case of RSBCs, Along with sovereign backing, there will be a regulated market. Banks can then act as a Trusted Fourth Party (TFP) instead of a TTP (which is the network itself, in case of Cryptocoins). TFPs will regulate crypto currency instruments. This is different from the government directly supervising markets. TFPs will function as a quasi–autonomous free market regulator of the crypto currency sector. They can underwrite or guarantee credit–worthiness of investors, money lenders and loan takers. They will be regulators and insurers merged into one. They in turn will be audited by government agencies so as to maintain integrity of the financial system.

Smart Contracts and RSBCs
What if we can program the money so that after a certain time, it automatically reverts from Kate to Joe (with certain conditions)? That is what smart contract is all about. In smart contracts, the contract itself is the guarantee that it will execute itself. In case of unregulated cryptocoins where smart contracts are enabled (e.g-Ethereum) there will still be the trust issue as Ethers (or Bitcoins) are not backed by any Sovereign Authority. But in case of RSBCs, Contracts will be automatically executed, with full faith that the Sovereign Authority backs it. Thus, prices of NationCoins (the medium of exchange in the RSBC system) as well as its functioning will be fully guaranteed by the Sovereign Authority.
What about Fractional Reserve Banking (FRB) in case of RSBCs?

FRB's role in the money supply will be greatly diminished in case of RSBCs.

In case of Unregulated Cryptocoins like Bitcoin, FRB is totally eliminated. Governments will no longer have control over money supply. In fact, money supply will be decided by market forces. This provides a fertile ground for manipulation by cartels and interest groups.
A constricted money supply regime (as seen in Bitcoin-21 Million units only) will only lead to a deflationary spiral. This is detrimental to the world economy as a whole.
In case of RSBCs, governments will have control over the money supply. The role of FRB will indeed be greatly reduced. Banks can still use FRB to increase money supply. But money supply can be more closely controlled by Central Banks than it is now. A built–in inflation rate will ensure that a constant inflationary situation is maintained. Economic expansion is thus ensured.

Governments can directly borrow from the people at competitive rates. Banks will still exist as TFPs, albeit with a more sophisticated role. In fact, banks can transform themselves into VOFR (Verifier of First Resort) in contrast to government which will be VOLAR (Verifier of Last Resort). Banks can charge a small fee for their role as TFP.  One can thus see that Bitcoin–like currencies are heavily disruptive. They have the potential to destroy FRB, eliminate banks resulting in a deflationary economic outlook.
The final result will be that the total amount of trust in the system will go down. And an untrustworthy economic system is not good for business or individual growth. The role of government as the sole issuer of currency will also be side-lined. This is akin to a government surrendering its sovereign authority to the network. The problem is that, if the network goes down, the economy goes down with it.
On the other hand is RSBC. It is also equally disruptive. But its disruptive power can be controlled. Role of FRB in money supply will be greatly reduced. But banks will still have an important role in the economy as a Trusted Fourth Party (TFP). The economy, as usual will continue on an expansionary trajectory.
The trust in the system will increase as credential verification will become faster and cheaper. And a trustworthy economic system is good for business. The role of the government as the sole issuer of currency will continue. Even if the network goes down, the government has to restore it or provide an alternate economic system (i.e. paper currency system). So, the economy will not go down with the network.

There is also another upside for Central Banks and Governments. Nations today pay a high price run a paper currency based economy due to substantial cost of effort, resources, time, maintaining and operating paper money infrastructure, high fees for cash withdrawals, moving and managing cost of paper money etc. Imagine all the money saved by shifting to a cashless economy. It is estimated that India alone - a $2 Trillion economy now- could save close to $70 Billion by 2025 if it shifts to a cashless economy [3].The savings world-wide by introduction of RSBCs will be enormous, probably running into hundreds of billions of dollars by 2025. All those savings can be utilised for poverty alleviation or managing the ill-effects of climate change.

CONCLUSION
We see that Banks, through Fractional Reserve Banking (FRB) help to expand the money supply in the economy. FRB is in fact an indirect way of exerting control over money supply by the Central Banks. At the same time, FRBs may pose a risk to the economy if it goes out of control. If Bitcoins and similar cryptocurrencies become mainstream media of exchange, there will be heavy disruption of the present economic order. Banks will lose their primacy in the economy; there will be large flight of capital from the Banking system. FRB will be in eliminated. The Money supply will purely be determined by market forces. This may give scope for manipulation and cartelization by unscrupulous elements. Money itself may be monopolized. RSBCs on the other hand reduce the role of FRB to a minimum. Banks will still have a role in the economy, albeit a different one. Banks will be transformed into Trusted Fourth Parties (TFPs) which will have the responsibility of certifying credit-worthiness of individuals and other legal entities in a Crypto-currency dominated economy. One can observe that RSBCs allow for introduction of crypto-currencies into the mainstream economy in a controlled manner. 

Moreover the savings of shifting from a cash-based to digital economy is also substantial. This is akin to harnessing the destructive power of the atom albeit for peaceful purposes. Thus RSBCs are better suited than Bitcoin-like cryptocoins to become mainstream digital bills of exchange.

REFERENCES
[1] The K-Y Protocol: The First Protocol for the Regulation of Crypto Currencies (E.g.-Bitcoin)
[2] Bank of England. "Rulebook Glossary".

[3] https://goo.gl/SkGLuK

Friday, April 1, 2016

SMART MINING - THE FUTURE OF LIVING

                          It is the year 2030.Kate is going out to the supermarket to buy groceries. Unlike during her mother’s time, Kate is not doing it out of compulsion. Kate is doing it because she wants to take her daughter Eva out for a stroll. Her groceries have already been bought. Yesterday, her refrigerator, in collaboration with the kitchen shelf, and “smart” Tupperware, ordered and stocked up on grocery items. The payment was done by the “smart” appliances online. It was all paid for in ethers. Those ethers were “mined” by the “Smart” kitchen, “smart” fridge and the “smart” Tupperware. The delivery of the grocery items was done yesterday night itself by a driver-less vehicle from the supermarket. Kate’s house robot verified the items and stacked them in their nominated places.

                               The supermarket is now a place where the local community meets, once in a while to spend quality community time. Paper currency has now been greatly replaced. It is now used only in very remote and unconnected places, by people who live there. Kate remembers her mother struggling with the many bags of groceries that she used to shop every fortnight. Now she watches her daughter Eva play with other children while she comfortably sips a glass of complimentary wine with her friends at the supermarket.

                               Picture a world where your meals are paid for by the table on which you eat. Your beer mug pays for the beer that you drink. Your car pays for its own fuel. Your water bill is paid for by the pipes and taps of your house. And yes, your electricity and Wi-Fi bills are paid by your house itself. A pipe dream? A fantasy?  Hallucination? Not really.

                              The Internet-of-Things combined with blockchain and “mining” technology gives rise to a new phenomenon which I have conceptualized. I call it “Smart Mining”. “Smart Mining” is the process where objects pay for the function that they are designed to execute. The IoT will give way to a situation where almost all objects will just be platforms on which to mount microprocessors which will keep mining cryptocurrencies. Since Regulated and Sovereign Backed Cryptocurrencies (RSBC) cannot be mined by private networks, only decentralized cryptocurrencies (like Bitcoin, Ether etc) will be mined. They can then be exchanged with RSBCs (or independently traded) at exchanges. This exchange will be done by the machines themselves with no human intervention. But one may wonder whether computing power will be enough for small appliances to carry out “Smart Mining”.
                           
                              Moore’s law allows for doubling of computing power every 2-3 years. But there is a limit to miniaturization. At some point of time, Moore’s law will face a ceiling. What then? One simple answer in two simple  words. Quantum Computing. In December 2015, NASA announced the world’s first operational Quantum Computer. It was built by D-Wave, a Canadian company. Right now Quantum Computing is in a very nascent stage. But its possibilities and applications are immense. A true Quantum Computer, the size of your thumbnail will have more computing power than the World’s current fastest supercomputer. And imagine a future where objects around you will be embedded with such Quantum Computer chips. Your House, Refrigerator, Washing machine, car, garage,Tupperware, and even your clothes can mine their way to glory. All that you have to do is to keep your Wi-Fi network on. Or even that may not be necessary with the advent of 4G and 5G mobile data technology. In fact if you host enough number of Quantum chips on the objects you own, in the future you need not even have to go to work to earn your livelihood. Your “Smart objects” will “mine” it for you.

                              This is as if the objects are thanking you and paying you , because you brought them into existence and own them. The only constraint will be the cost of the chips embedded in the objects.But rest assured that the costs will go down drastically. In fact most of the cost will be paid by the machines themselves that manufacture the chips.The question is not whether this phenomenon will become a reality or not.The Question is when?

Governments can tax the machines directly instead of taxing humans.And the machines will pay.A time will come when Automation and “Smart Mining” will make humans working-for-a-living practice a thing of the past. Man will eventually be freed of the need to work in order to live. “√čarning for a living” will be outsourced to the machines-the ultimate slaves who will do “Smart Mining”

Monday, February 22, 2016

THE Canop-E Project

Ahmed Suleiman is an Omani Farmer. He lives in a small settlement near Matrah, a few miles off the Omani capital of Muscat. Ahmed Suleiman works hard on his fields to grow food grains and also runs a shop in his town. Ahmed Suleiman's town has erratic power supply. Last year he lost a major part of his crop because of drought. The aquifer that his town was using went dry. Coupled with electricity woes it was impossible for Suleiman to save his crops. The sun shines intensely on the Omani landscape making it one of the most drought prone areas in the region. Today morning while walking to his shop after attending to his field, Suleiman fainted on the road due to the intense heat. The Passer-bys helped him up and gave him a little water. This incident was not new for either Suleiman or the Passer-bys. In his town almost every other day, some or the other person faints due to heat exhaustion. A few even die due to Sun strokes caused by the heat. Suleiman's wife Farah is concerned and worried for her husband.
It is strange that with present day 21st century technology and know-how we have not been able to harness the energy around us. But there is a way out. We can build a structure which will harness solar and wind power. Additionally it will provide water harvesting facilities for remote settlements. At the same time it will also protect the inhabitants of settlements from rain, sunlight and inclement weather the idea is Revolutionary as much as it is simple. it is fantastic as much as it is audacious.

I call it the Canop-E (pronounced C-A-N-O-P-Y). 'E' stands for Energy, Environment and Ecology.

The idea is to build a huge canopy of 1 Square Kilometre area 500 feet above the ground supported by around a hundred or more evenly spaced heavy duty pillars. The canopy will have solar panels installed on the outer aspect which will be exposed to the sunshine. The canopy will also be interspersed with small in wind turbines to harness wind power that will flow through the canopy in pre-designed gaps. Rain falling on the outer aspect of the canopy will be harvested. It will be led through pipes within the supporting pillars and collected below. An entire town can be located below the canopy. Buildings as high as 15 storeys can be easily built under the canopy.


There are several Benefits in building  the Canop-E.

Energy
The canopy will cover an area of 1 square kilometer. That is almost 250 acres of area (247 to be exact). It will be about the size of more than 170 football fields. The earth receives solar energy of around 1361 watts per square meter at the upper atmosphere. At sea level, the energy obtained per square meter is about 1000 watts per square meter. It means that the Earth receives more solar energy in one hour then the energy consumed by all human beings in one year. If we can harness a fraction of that power, our energy problems will be solved. Enter Canop-E.

The Canop-E will have a collective area of more than 1 Square Kilometer. That is 10 Million square feet of floor space calculation show that there is a capacity of 1 gigawatt of solar energy that can be harnessed in this area. Even at 40-50% efficiency of solar panels (which or now being scaled up) almost 500 Mega Watts of power can be generated for 12 hours of sunshine around 6 Giga Watt hours (Gwh) of energy can be harvested per day. Depending on the place where it is constructed this translates to about half to one and a half million Dollars' worth of power generated/saved per day. That  comes to around 200 million to Half a Billion Dollars per year. The material from which the Canop-E will be constructed can be built in panels and assembled on the canopy rooftop. We can use 1 to 2 meters thick polyurethane or hard Polyethylene plates/sheets. They are lightweight and the entire canopy will weigh around 10,000-15,000 tonnes. They can be supported by appropriately spaced and built pillars (either concrete or otherwise) 500 feet tall. Once the Canop-E is built, the wind patterns of the area will put immense stress on the structure. It will be like opening a sheet 170 football fields large. The winds will try to blow away the entire Canopy. But we must view this as an opportunity. Gaps will be provided in certain places for winds to pass through to and from the canopy. This is like providing holes in the very large sheet that we visualized. Only, the holes will contain small turbines which will rotate as the winds pass through it. These turbines will produce electricity as they rotate. Faster the wind more the electricity generated. Solar energy generated from such a structure alone will be about 2 Terawatt hours (Twh) per year. Electricity consumed by Oman per year is about 13.25 Terawatt hours. 7-8 such structures can easily provide most of the electricity for a country like Oman.

Water Harvesting
The average rainfall around Muscat is about 10 centimeters per year. if the canopy can harness this water it will amount to more than 1,00,000 tons of water (One Hundred thousand tonnes) of water harvested every year. This will be enough water for a small town. But the best use of water will be in the hydroponic factories under the canopy. Other countries with more rainfall can harvest more rainwater.

City Planning
Entire settlements with buildings, schools, parks, roads etc can be housed under the canopy. At an average usage of 25,000 kilowatt hours per year for every inhabitant, the canopy can easily house a population of more than 10,000 people. Appropriately spaced and sized glass panels throughout the canopy we let adequate sunlight to the ground below. Because intense sun rays won't reach the ground, the town under the canopy will be cool and comfortable to live in. Hydroponic units in buildings under the canopy will use the harvested energy and water to grow food for the inhabitants of the canopy City. In fact the canopy will produce surplus food which can earn revenue for the living unit that is built under the canopy. Because rain does not reach the ground, people will be protected from inclement weather.

Using Prefabrication Technology
The cost of setting up solar panels will be around 70 cents per watt. That comes to around 400 to 700 million Dollars. The light plastic roofing along with the support structure will cost another hundred million Dollars. The hundred pillars might cost anywhere from 200 million to 500 million Dollars depending on the place, method and materials used in construction. a total of 1.5-2 Billion US Dollar will be the cost of building the canopy. But the return will be obtained in around 3-5 years only considering energy, water and the food harvested by the canopy. To reduce the cost of construction prefabrication technology can be used to the maximum. The canopy panels, solar panels, Pillar material, Foundation material, framework superstructure, pipelines etc. can be prefabricated in assembly line Manner. This will save a lot of labor transport and material costs and also minimize wastage.
There are several advantages to the Canop-E living units.
1.   Countries with arid regions can set up canopy in those places remote settlements will be greatly benefited by the Canop-E.
2.   A canopy unit will cost around 1.5 Billion US Dollars to build.It is estimated that 1 Billion Dollars in investment creates 25,000 to 30,000 permanent jobs.Building Canop-E units will create hundreds of thousands of jobs.
3.   Renewable energy usage will increase. This will reduce the carbon footprint of the nation that builds Canop-E units. Agriculture efficiency will improve as hydroponic units will produce more food in lesser area using renewable energy sources. Since the area under the Canop-E will be cooler in the surroundings cooling costs like air conditioning and watering is saved
4.   Cool comfortable living units- the land under the canopy is protected from the vagaries of nature therefore they will be very comfortable places to live in.
Canop-E units can be built on the outskirts of large cities. Once built, a part of investment can be recouped by parceling and selling land under the canopy at appropriate prices. People will be free to build their own living units i.e. houses, offices etc. within given specifications. Some areas will be earmarked for hydroponic units. The government can move some of its officers to under the canopy to encourage habitation. Energy intensive factories can be set up under the canopy. The canopy can sell energy during the day and buy it during night-time. This will even out the energy loads on the system. Canopy living units can be set up wherever there are arid areas with enough sunlight. Central Asian countries, Chinese and Indian Hinterlands, African Sahara, parts of North America, South America and Australia are ideal places where Canopy units can provide lot of benefits and ease the life of the people living in that area. 

Dr Kartik Hegadekatti

is a published Author and Administrator focused on Infrastructure and Development. His Books Include- How To Win Quiz; 501 Quiz Q&A; FUTURE TRACK INDIA; You Can Succeed In IAS