Deon: The Digital Handshake

This article is co-authored by Dirk Sebald (CEO), Florian Herzog (CTO), Fritz Henglein (Head of Research) and Zsolt Mohácsi (Creative Project Manager) from Deon Digital and originally published on LinkedIn.

Highlights

  • Deon’s mission is to “tear down walls” not only within, but also between organizations: letting information, ideas and transactions flow freely — and exactly where, when and how they should.
  • You will soon live in the world of the Digital Handshake, where contracts and business are fully digitized.
  • Think of us as missionaries of the digital age, who empower new ecosystems by helping businesses to create new ways of cooperation and synergies.
  • You are looking at a key pillar for the future Internet of Value: the digital contract layer will enable people to engage in business on equal and transparent terms all over the planet.
  • Deon’s technology is the coordination layer between the Internet of Things (“machine world”), the Internet of Energy (decentralized renewable energy) and the Internet of Transportation. In this constellation, the Internet of Value will regulate prices, ownership, access and contracts.

Introduction

30 years ago, Ronald Reagan sent a message from the divided city of Berlin to the head of the Soviet Union, “Mr. Gorbachev, Tear down this wall”!

The message was aimed to demolish not only a physical wall cutting a long-suffered city in half, but also a symbolic one, dividing the world. Still, there are invisible walls around us: limiting our thinking and our potential. Most companies hide behind the fences of their established premises, sticking to old — albeit still more or less functional — business models and internal processes.

However, change is around the corner. Those who ignore its now-gentle knocking on the door, will eventually have the door broken on them and will be forced to realize that their business model is kaputt (Oliver Bussmann and Florian Herzog have called it “dangerous complacency”). The emergence of blockchain and distributed ledger technology (DLT) generated a massive hype in the media about the “bitcoin bubble” and the appearance of mysterious new cryptocurrencies, overshadowing the real and much deeper potential impact of this innovation.

The true impact of DLT happens silently and almost in the background, profoundly transforming business in all domains.

Tearing down walls is not only important within, but also between organizations: to let information, ideas and transactions flow freely and exactly where, when and how they should. Deon set sail to transform the foundations of business and everyday life, by creating and empowering new ecosystems: to boldly go where no business has gone before.

Welcome to the new era of cooperation: the world of digital contracts.

Trust: the mortar of business

You might ask: why are contracts so important?

In order to survive, people need to cooperate with each other. Our ancestors quickly understood that no one can stand alone in a dangerous world. Therefore, we formed groups: families, communities, companies and countries.

To cooperate, people need to agree on something. Between two persons, if they trust each other, a deep look in the eye and a handshake is enough: for instance, in ancient Egypt, most contracts were oral agreements, sealed with a handshake in the presence of a few witnesses. However, in a complex and globalized world with a multitude of participants, nuanced interests and variable conditions, we need to write down (i.e., formalize) who is doing what. Otherwise, we might forget or misunderstand important details. We, humans are also prone to make mistakes. In the worst case, we mistrust our business partners, while we still need to rely on them.

This is where contracts step into the picture: being agreements in legal form, they constitute the foundation of modern business, creating a framework in which transactions (both data and money) can seamlessly flow. Contracts determine our relationships with other people in all aspects of life, including business, property rights, employment, getting married or just buying a lawn mower with a guarantee.

Modern business doesn’t exist without formalized trust: according to a range of economic theories, the firm can be looked at as an assembly of contracts (see references by Kállay, 2012). The concept of the “company” was created to reduce transaction cost, facilitating the management of contractual relationships both internally and externally. Contracts are the capillaries of an interconnected, complex and global economy; underpinning and gently shaping the framework of modern life.

In a nutshell: contracts are business.

Still, there is a problem.

Paper vs. reality gap

As the complexity of our society and economy grew, contracts became increasingly complicated. Paper towers emerged on our desks. Details matter more than ever. For a while, technology enabled us to cope with the staggering amount of details to manage.

To cope with increasingly complex contractual requirements, companies created Enterprise Resource Planning (ERP) systems. Businesses digitized almost all aspects of their operations such as accounting, inventory tracking, human resources, communication and information exchange. Large scale software systems keep track of monetary flows, the circulation of goods, the number of employees, and so on.

Even though the aforementioned solutions came to the world with the promise of optimizing corporate process flow, their limitations became evident all too quickly. For instance, it takes multiple and separate IT systems to digest, interpret and execute only parts of enterprise contracts within one company, ridden with duplications, technical errors and misinterpretations (not to mention processes still managed solely on paper). None of these very expensive, sophisticated and widely used systems actually understand the notion of a contract: they only process transactions.

The above-mentioned technical limitations increase business risk in all domains: companies feel the pain of the widening gap between paper and reality. How do decision makers know that their systems actually execute what they are meant to? How can executives make sure that their instructions laid down in tidy bullet points are actually carried out in the exact same way in their company’s internal systems? Complexity reached a point, where old solutions are faltering. Everybody hears the old engine coughing. As a result, implementing and executing contracts with existing technology became increasingly difficult. The gap between reality and paper is growing wider and wider.

What are the consequences?

In a nutshell: people struggle with enforcing, implementing and applying agreements. The stack of paper pile (or the number of scanned documents on your hard drive, it is all the same) on your desk is getting taller day by day, while you spend more time than ever trying to understand the best way to act within your contractual obligations.

Maintaining and overseeing contracts is sheer pain — and worse, implicates a tremendous cost in time and money. Businesses spend a fortune on the writing, the interpretation and the enforcement of these documents: lawyers, accountants, bankers, tax advisors and other middlemen jump in to reduce transaction cost. Still, sustaining intermediaries is expensive, not to mention agency problems, lack of transparency and occasional rent seeking. In heavily regulated businesses, like finance, it is becoming increasingly difficult to comply with quickly mutating, complicated rules. As a result, financial institutions face increased reputational risk and eventually inevitable fines, even if they do their best to avoid them! Companies simply lack the proper tools to be compliant.

How do you know that your partner is doing everything according to the agreed guidelines? Even if your counterparty is acting in good will, how can you make sure that you actually fulfill your obligations and that you don’t have some blind spot that will eventually cost millions of dollars? You also have to rely on a third party (i.e., the authorities) to enforce contracts. Even if all the participants involved respected the contract terms, it could take months if not years for disputes to be settled. If not, intermediaries step in, complicating things further.

Furthermore, in the world of disconnected services, companies lose by not earning revenue on untapped synergies between separate business models. As current systems destined to manage the related contractual work and data management are insufficient, businesses do not engage in otherwise lucrative cooperation.

Is there a solution?

The Digital Handshake

What if you could imprint the trust of a handshake in the digital world? As contracts represent the very foundation of business, if we find a way of digitally writing and executing contracts in a quicker and more precise way, we can bring massive value for companies.

Trust is relying on another person’s benevolence. Thus, you are taking a leap of faith when you trust someone. Distributed ledger technology is a system of “embedded trust”, rendering trust, as we know it today, obsolete.

You don’t need to rely on other people’s voluntary actions anymore. Blockchain technology offers decentralization (no privileged party with information asymmetry), digitally secured access and an implicit guarantee for preventing value forgery (history cannot be changed) and the avoidance of serious technical glitches (e.g., double spending). Hence, DLT is a natural candidate for becoming an underlying infrastructure for digital contracts.

As contracts refer to values (i.e., scarce resources like money and property rights), the safety and transparency features of DLT are quintessential. Equal access to information is crucial as well, hence no party can gain an edge they could use to maintain an unfair advantage against others (just think of today’s mammoth-sized intermediary platforms, shamelessly trading with user data).

Neither smart, nor a contract

The term “smart contract” was originally created by Nick Szabo (The Idea of Smart Contracts, 1997) and — simply put — refers to computer programs designed to automatically execute (at least parts of) contracts, once they are launched and certain conditions are met. Today’s popular “smart contract” solutions are running on the blockchain infrastructure and are designed to facilitate, verify, or enforce the negotiation or performance of a contract.

The first generation of blockchain technology, such as bitcoin, has an embedded contract in its protocols. The bitcoin contract is actually very simple, as it states that units of the cryptocurrency can only be transferred by the owner, no double spend is possible and the blockchain is maintained by the participants. The second generation of blockchains, such as Ethereum, have included a general purpose (or Turing-complete) programming language to empower users to build their own conditions for transactions (i.e., the “smart contracts”). Both constructions include the notion of a contract, but not in the legal or common sense, which is a key attribute of paper contracts. Why can’t existing blockchain solutions fulfill this promise? The “smart contract” application layer is inseparably molded with the specific underlying distributed ledger technology, so the same applications cannot be used on another ledger.

Today’s “smart contracts” are neither smart, nor contracts. Smart contract specification and execution are tied together. Worse, the program itself is unreadable for laymen or a judge (!) without profound computer science knowledge. Even if a person could read the program, interpretation would still be difficult, as the contract text and the prefixed individual strategies are closely interwoven.

Once running, “smart contracts” cannot be stopped and are vulnerable to security issues and hacks. If the program is activated, it is also impossible for contracting partners to alter their execution strategy, which is a huge disadvantage if business conditions change.

Deon’s digital contracts

The new breed of legal agreements, Deon’s blockchain-based digital contracts, represent digital trust. By separating contract language from the execution, we created a solution where the contract itself can be read both by humans and machines (these are the conditions set forth by the so-called Ricardian contracts, a term coined by Ian Grigg). In addition, Deon provides a smart contract layer, separated from the underlying blockchain, supporting the scalability of the technology.

Digital contracts are the passive specifications of the obligations, rights (permissions) and prohibitions of the parties entering in an agreement. It is an essential requirement that such a contract is readable by a third party, therefore anyone can evaluate its contents without prior computer science knowledge. If such requirements are met, the way for legal interpretation of digital contracts is open. Deon’s contracting layer clearly separates the contract language (Contract Specific Language) from its execution (Contract Execution Language), complementing the suite with robust reporting capabilities (Reporting Language). You will also have the possibility to run actual simulations on a contract, in order to test different scenarios. The contracting party might then realize that the agreement they are about to sign has potential risky outcomes.

In a nutshell: with Deon’s technology, you can extend the trust embodied by a personal handshake to countless individuals, without having to rely on their voluntary actions. Not only the possibility of malice, but also that of a common issue, the misinterpretation of contract boundaries and obligations will be gone.

Empowering new ecosystems

Transaction cost diminishes in the world of truly digital contracts, since no cross-checking between digital and paper is needed anymore. You can envision practically infinite application possibilities for true digital contracts in the domain of enterprise processes. However, the true impact goes far beyond merely complementing or improving legacy systems.

Think of us as missionaries who set sail to help companies join forces and create a new dimension of business cooperation. Tearing down walls means washing away inter-company boundaries and creating a new dimension of cooperation.

Digital contracts will enable companies to form ad-hoc and short-term alliances, in order to create new product lines or offer specific services for a limited amount of time. Today, such initiatives are hindered by the unbearable complexity of contracts and the limitations of traditional software engineering. Furthermore, big companies are wary to give up using their own ERP systems for common projects and to share their sensitive data with potential competitors. Digital contracts can address these concerns with provisions for transparency, a clear view of rights and obligations, complemented with the creation of a common platform to support the cooperation.

Imagine a design agency and a large manufacturer quickly launching a limited edition sportscar model, marketed by a third party PR company. There is no need of sticky outsourcing agreements and complicated paperwork. After consortium members achieved their goal, they can either decide to quickly dissolve their alliance or launch a new project. Such arrangements will offer participants the flexibility of quickly adapting to the changing market conditions or shifts in customers’ tastes and preferences.

Connection inevitably comes with the re-definition of the very products and services businesses offer. For example, do you really need a car or rather an access to an intangible good called “mobility”? After all, most of us just want to get from location A to B at the lowest price or least amount of time possible. Think about a solution that offers you the booking of an entire trip, including taxi, train, airplane, car rental, and so on, accessed via a single platform with a press of a button. The system would automatically take care of eventualities. Providers can further increase the appeal of their offering by adding services like insurance, VIP lounge and accommodation, to the package.

In the end, the birth of new ecosystems will mean a quicker and overall more affordable access to a range of services for you.

The future: Internet of Value

Looking at the horizon, you can see profound changes coming. What is a vision worth pursuing? How can we harness innovation for a meaningful purpose? How can we help companies embrace a new way of thinking and prepare for a fundamental transformation of their business model? New technologies should benefit mankind and make people’s lives easier. The advent of blockchain technology promises to connect previously “unconnectable” dots and to create synergies, where it has been deemed impossible. How can Deon’s technology of digital contracts transform business, the economy — and your life?

Today, distributed ledgers are local and value cannot be transferred from one to another, as each platform aspires to be the “one chain to rule them all”. However, the evolution of technology will inevitably go into the direction of the interconnectivity of different blockchains. Once an interledger protocol is established, value can be transferred between distributed ledgers. However, a crucial step is missing. In order to leverage the potential of a such a globally interconnected system, the layer of digital contracts need to be separated from the individual ledger technologies. People need a global standard to manage not only single, but sequences of value transactions, governed by contracts. Deon is a pioneer of this transformation: our technology is blockchain-agnostic, meaning it can work with any kind of ledger.

Your future business platform will be truly open and decentralized. It will use an open-source code, include sufficient guarantees against value forgery and mistakes and will exclude the presence of a central authority or privileged party.

Today, large centralized platforms owned by a few dominant corporations enjoy a disproportionate power by having an asymmetric access to information. You will benefit from Deon’s vision to create a global digital contract layer, as it will enable you and your company to engage in business on equal and transparent terms. Everybody will be welcome to join, contribute and innovate. The level playing field will provide all the participants with a common ground, where equals will deal with equals. The “Deon layer” will coordinate between the Internet of Things (“machine world”), the Internet of Energy (decentralized renewable energy) and the Internet of Transportation.

Soon the Internet of Value will emerge, where not only data, but value will be exchanged on a global scale, with the ease of sending an e-mail today. The new platform will regulate prices, ownership, access and contracts. Imagine that you can directly benefit from who you are, do the job you love and can share and monetize the data or skills you want to. That your company can change or adjust its business model and partnerships on the fly. Where you can make ideas happen, without facing huge entry barriers. The new system shall promote equality, inclusion and diversity and wash away the world of hierarchy, separation and conformity.

Welcome to the world of the Digital Handshake.

© Deon Digital 2018. All rights reserved.

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