Blockchain-based distributed ledger technology (DLT), which was first applied as the underlying technology of the cryptocurrency Bitcoin, has a variety of potential applications beyond the narrow realm of digital currencies and cryptocurrencies. For instance, DLT could have applications in cross-border payments, financial markets infrastructure in the securities markets, and in collateral registries.
But potential applications of DLT are not limited to the financial sector. DLT is currently being explored to facilitate digital identity products (such as national ID, birth, marriage and death records) or build tamper-proof, decentralized records of flow of commodities and materials across a supply chain by using trusted stakeholders to validate flows and movements.
Despite this promising scenario, the blockchain developments is characterized by a low level of maturity concerning the standardization of solutions, their business processes and the related implementation in the legislative framework. The massive and rapid spread of blockchain technologies within the financial sector and their application to the industrial sectors is not coordinated.
That said, the technology is still at an early stage of development and there is still a long way to go before its full potential can be realized, especially with regard to issues related to privacy, security, scalability, interoperability, and legal and regulatory issues.
But a possible future scenario of the blockchain could be an internet of value, democratizing access and storage of digital assets.
TECTUM development is aimed to develop ready-to-use solutions and overcome challenges of blockchain and DLT particularly to reach development objectives in the financial sector which requires the development and active promotion of critical accompanying elements. Important among these are:
a) user-friendly application interface design;
b) financial literacy and capability;
c) a sound financial consumer protection framework that applies to financial services enabled by TECTUM;
d) interoperability with traditional payment and financial services and infrastructure;
e) effective oversight.
Alternative approaches to address limitations of existing financial infrastructure should be considered side-by-side and potentially in complement with DLT, such as cloud computing, e-money and mobile money, and biometric ID systems.
TECTUM consortium seeks to collaborate with financial institutions to advance this technology to meet banking requirements for identity, privacy, security, scalability and interoperability. TECTUM provides an opportunity for banks and other institutions to break free from multiple generations of inefficient legacy technologies and move toward a future where shared records of financial agreements are automatically managed without error.
Key Advantages of TECTUM
In the right context, distributed ledgers can potentially have a number of advantages over traditional centralized ledgers and other types of shared ledgers. The most important advantages of TECTUM are listed below:
Decentralization and Dis-intermediation
TECTUM enables direct transfers of digital value or tokens between two counterparties and decentralized record-keeping, removing the need for an intermediary or central authority who controls the ledger. This can translate into lower costs, better scalability and faster time to market.
Greater Transparency and Easier Auditability
All network members have a full encrypted copy of the distributed ledger. Changes can only be made when consensus is established and they are propagated across the entire network in real-time. This feature, combined with the lack of a central authority or limited involvement of a central authority, has the potential to reduce fraud and eliminate reconciliation costs.
Automation & Programmability
TECTUM enables programming pre-agreed conditions that are automatically executed once certain conditions hold. This is referred to as “smart contracts”, for example invoices that pay themselves when a shipment arrives or share certificates which automatically send owners dividends or cash-for-work programs that pay beneficiaries out once the contracted work is completed. Smart contracts can be done in traditional centralized ledger systems as well, but the design of centralized ledger systems requires such actions to be implemented only after the concerned parties have agreed to the underlying transaction as recorded in the central system, which in some contexts can take upwards of a day. In contrast, in a TECTUM, the counterparties by definition agree the moment the transaction is completed, as both have the same record of the transaction. Also, the result of the execution of the “smart contract” itself will take additional time to propagate and be reconciled in a traditional ledger system.
Immutability & Verifiability:
TECTUM can provide an immutable and verifiable audit trail of transactions of any digital or physical asset. While in most cases, immutability is desirable, it can create problems related to recourse mechanisms if the system fails. Immutability of the ledger, however, does not mean that a countervailing transaction to annul a disputed transaction cannot be created. This is in line with how dispute resolution works, for example in payment card systems. The original record would, however, in this case still remain.
Gains in Speed and Efficiency
DLT offers the potential of increasing speed and lowering inefficiencies by removing or reducing frictions in transactions or in clearing and settlement processes by removing intermediaries and automating processes.
Cost Reductions
TECTUM offers the potential for significant cost reductions due to removing the need for reconciliation as DLT-based systems by definition contain the “shared truth” and hence there is no need to reconcile one version of “truth” with that of one’s counterparties. Additional sources of cost reduction could be lower infrastructure costs for maintaining of a TECTUM, as well as reductions in frictions and fraud.
Enhanced Cybersecurity Resilience
TECTUM has the potential to provide a more resilient system than traditional centralized databases and offer better protection against different types of cyber-attacks because of its distributed nature, which removes the single point of attack. Fundamentally, DLT is an alternative design approach that allows for a decentralized business and operational model when compared to existing, centralized design approaches that can be used for similar purposes. This makes possible a greater deal of automation, faster processing, and greater scalability potential. In specific contexts, a DLT-based design approach can provide many of the benefits discussed above. The below example for a collateral registry helps illustrate the difference between DLT-based approaches and alternative design approaches:
Establishing a collateral registry using existing, centralized approaches requires a central entity to setup a dedicated platform, establish membership criteria, and establish rules and procedures. All transactions pertaining to the collateral are processed on this platform and all business actions are triggered by the centralized platform. This platform is created using standardized software applications developed for the specific business need or developed bespoke. A DLT-based approach, in contrast, features transactions involving collateral that are exchanged on a peer-to-peer basis, with embedded, pre-determined conditions, such as date of release and rules pertaining to failure to repay an underlying loan. There is no need to setup any centralized system and the business rules pertaining to a particular collateral can be tailored based on the specific agreement between counterparties.
There can be an administrator that establishes participation criteria and onboards new participants. But in contrast to the centralized entity in a traditional implementation, the role of the administrator in a DLT-based system would be very minimal. Business actions can be event-driven and can be triggered without any need for additional external interventions. Setting up a new collateral registry using a DLT-based approach can potentially be faster and more scalable as the resources needed at the administrator level are very minimal, the processing load is spread across all participants, and the business logic for collateral transactions can be tailored and customized based on the specific needs of the counterparties.
Applications of TECTUM
The potential applications of TECTUM are not limited to the financial sector. In general, TECTUM technology has potential when:
• Proof of ownership is important and this ownership needs to be transferrable.
• There is a lack of trust between parties.
• There are many bilateral relationships and parties on a market.
• There are different types of assets that interact.
• These assets move across organizational boundaries.
• Processes are highly manual or paper-based.
• Processes have many steps, intermediaries and handovers.
Overview of potential TECTUM applications
Financial Sector Applications
Money & Payments
• Digital currencies
• Payment authorization, clearance & settlement
• International remittances and cross-border payments (alternative to correspondent banking)
• Foreign exchange
• Micropayments
Financial Services
& Infrastructure
(beyond payments)
• Capital markets: digital issuance, trading & settlements of securities
• Commodities trading
• Notarization services (e.g. for mortgages)
• Collateral registries
• Movable asset registries
• Syndicated loans
• Crowdfunding (as initial coin offerings)
• Insurance (in combination with smart contracts) for automating insurance payouts and validation of occurrence of insured event
Collateral registries
and ownership
registers
• Land registries, property titles & other collateral registries
Internal systems
of financial service
providers
• Replacing internal ledgers maintained by large, multinational financial service providers that record information across different departments, subsidiaries, or geographies
DLT-based Applications in Other Sectors
Identity
• Digital identity platforms
• Storing personal records: birth, marriage & death certificates
Trade & Commerce
• Supply chain management (management of inventory and disputes)
• Product provenance & authenticity (e.g. artworks, pharmaceuticals, diamonds)
• Trade finance
• Post-trade processing
• Rewards & loyalty programs
• Invoice management
• Intellectual property registration
• Internet of Things
Agriculture
• Financial services in the agricultural sector like insurance, crop finance and warehouse receipts
• Provenance of cash crops
• Safety net programs related to delivery of seeds, fertilizers and other agricultural inputs
Governance
• E-voting systems
• E-Residence
• Government record-keeping, e.g. criminal records
• Reducing fraud and error in government payments
• Reducing tax fraud
• Protection of critical infrastructure against cyberattacks
Healthcare
• Electronic medical records
Humanitarian & Aid
• Tracking delivery & distribution of food, vaccinations, medications, etc.
• Tracking distribution and expenditure of aid money
TECTUM Protocol
Neurochain formula
A scalable peer-to-peer hybrid neural network (neurochain) of dynamic commutation (switching) of channels based on commutation of data packets, “fat tree” topology of network, distributed ledger and artificial intelligence (AI). Each node of the network (neuronode) is an element of AI, which determines its place (position, placement) in the network in the form of “fat tree” for each transaction resulting in reconfiguration of neural connections in the network due to a change in the weighting factor of neuronode (synapse).
Description of working principles
Neurochain is a network of channels switching that uses network of commutation of data packets (Internet). Each neuronode has its own dynamic weighting factor (coefficient), which can vary, both in positive and negative directions. With a larger weighting factor, the neuronode automatically rises upwards (to the top) of the rating, taking a greater load of the traffic. Dynamic weighting coefficient changes only by the number of transactions, both successful (positive change) and failed ones (negative change).
In other words, the Neurochain is an N-dimensional neural network, which allows the transmission of data packets in the most optimal way. The neuronode, at the onset of any event, uses its dynamic weighting coefficient as a differential one, that is not the one that it has at the moment but with acTECTUMnce to the formula:
Nd = Nk * Pk,
where Nd is the differential weighting coefficient, Nk– the dynamic weighting factor, Pk — the number obtained by the formula of a pseudorandom generator Pk-> (D1, D2) where D1 and D2 are the upper and lower bounds of the range.
For example:
● Dynamic weighting factor for Neuronode1 is equal to 100 and dynamic weighting factor for Neuronode2 is equal to 80: Nk1=100, Nk2=80. Therefore, the rating of the first node is greater than of the second one: Nk1 > Nk2.
● Let after pseudo-random generation for Nk1 at D1 = 0.8 and D2 = 1.2 we get Pk1 = 1.05.
● Let after pseudo-random generation for Nk2 at D1 = 0.6 and D2 = 2.1, we get Pk2 = 1.50.
● Thus Nd1 = Nk1 * Pk1 = 100 * 1.05 = 105 and Nd2 = Nk2 * Pk2 = 80 * 1.50 = 160.
● So now the rating has changed: Nk1 < Nk2.
As a result, the ratings themselves have floating values which makes it possible to unload transaction packets in the nodes of the neurochain (queues at intersections).Thus, when the data packet is transferred from one neuronode to the rest, the packet firstly “rises” up to the top of the ranking branch to the uppermost neuronode, which distributes the packet to all the neuronodes of the upper level, then each upper level neuronode sends the packet down to the lower neuronodes, which distribute it even lower, until all low-ranking neuronodes get their package.
Consensus Algorithm
TECTUM blockchain has implemented specific consensus algorithm: “Proof-of-Place” (position of the neuronode in the neurochain) that gives incentives for nodes to be online as much time as possible and have as much bandwidth of channel as possible. All neuronodes are equal to each other and have chance to get higher rating (position) in the network and get greater reward in crypto in acTECTUMnce with their position. Factor of communication capabilities is under control of the nodes.
TECTUM Capabilities
The analytical computer model shows that the packet delivery time to all neuronodes of the neurochain is basically not independent of the number of nodes and is about 1 second per 12 million nodes. The speed of filling the whole network depends not on the calculation of route, but on the physical means of communication of the network itself — the power of the hardware and the channel capacity:
● Transaction speed of TECTUM is about 600 sec*12mln/sec=7,2 bln times higher than speed of Bitcoin.
● Regulating mechanism based on pseudo stochastic selection enables network to adapt (reconfigure) to current needs of Memory Pool of the blockchain to prevent overload of network.
● Small block size (only 120 bytes) enables network to reconfigure into a “light chain” of blocks so that transaction history of TECTUM is much “lighter” than history of any existing blockchain networks.
● Commutation is highly stable as nodes are formed into dynamic clusters connected with each other due to “fat tree” topology of network. Offline nodes are compensated by many online nodes via atomic swaps.
● An atomic swap wallet has been developed enabling TECTUM network to become a decentralized exchange with secure crypto messenger (Grig Messenger) and voting service.
Operational Structure
TECTUM is primarily considering the implementation of a private network and is mindful of the potential impact on investor protection and market integrity of the design and implementation of the permissioning process of each such network. It will be vital that only responsible participants obtain access to the network(s) and that clear rules are in place, memorialized and monitored to achieve these aims. It is also important that the governance structures and admission processes of the networks allow for fair access and open competition, and necessary access to data for regulators.
Transaction Validation
Validation on a distributed ledger can be achieved in multiple ways. There are different models where validators can be internal to a company or even a third party. Public blockchains utilize proof of work a costly, inefficient solution used to establish voting order in an identity-free system. In a private, permissioned distributed ledger network, with an authoritative gatekeeper for nodes joining the network (“doorman”), proof of work is not necessary. In a private, permissioned distributed ledger network, participants are known and can therefore be trusted to perform certain functions, as the relationship between entities is governed by legal contracts. Only trusted participants will be allowed on the network, but consensus is still necessary. Rules must be in place to provide the trusted third-party legal authority.
Asset Representation
Digitization of assets or representing assets on a TECTUM provides tremendous value for tracking, transferring ownership, automated execution of rules (“Smart Contracts”) and providing secure and low friction movement. When both cash and assets are represented on the same (or interoperable) distributed ledger, there is a significant network effect allowing for delivery-vs-payment and payment-vs-payment, both domestically and internationally. Transactions can also split and merge states representing fungible assets.
Data and Transparency Requirements
A key benefit of a TECTUM is that it may be designed so that data is only shared with participants involved in the transaction. If you are a participant in the transaction, then you will be able to see the new state object financial agreement — as well as the transaction graph which displays changes and owners of where this state object was first created and shared. Network participants can only see this information if they are explicitly given permission to copy this state object to their node.
Network Security
With a traditional blockchain, security is a construct determined by the participants capable of dictating which transactions are approved, per the software governing the system. Even if a network participant exhibits prudent security regarding their private keys, unaccountable miners can decide the fate of their wallets by attacking the minority chain and preventing transactions from being included into blocks.
With a TECTUM distributed ledger, there are several features in place to ensure the integrity of the system. At TECTUM, network security is one of our top priorities and focus areas.
Customer Funds and Securities
For a valid transfer of beneficial ownership to occur on a distributed ledger, keys need to be exchanged between sender/ receiver of the asset/obligation. The exchange of keys is a prerequisite for the transfer of value. The rules established for network participation may require additional safeguards / controls such as a pair of key signatures (e.g. one from a maker and a second from a checker) to allow entities to transfer value, applying a four eyes principle. Control or access to the distributed ledger where the assets are held is dependent on both the technology of the ledger construct and the master agreement and network participation agreement that govern the ledger. In the event of a loss or destruction of assets, we all Smart Contracts contain an encoded dispute resolution mechanism. In the case of fraud, effective security policy controls need to be developed to reduce the impact of the potential fraud. In the event of a destruction of a record, the expectation is that the record can be restored from backup. In general, participants to the ledger should refer to the master agreement or electronic trading agreements that govern such events.
Clearance and Settlement
In a traditional settlement system, two (or more) participants record, book, and confirm a trade in separate silos, then communicate to verify if the details are accurate. If there’s an error, the information typically flows back up the chain from the back office eventually to the trader (or person who entered the trade), where corrections are made, and then the process repeats.
The use of TECTUM allows for the efficient simplification of the clearing, settlement, and reconciliation processes that are required of the participants privy to a transaction. The design of the distributed ledger arrangement can vary; for instance, a design may allow for only the sharing of information to all material participants to a transaction. Alternatively, a distributed ledger can also be designed to achieve full end-to-end settlement, through the exchange of information between material participants and then through the exchange of value, or assets on ledger. Using a distributed ledger system, you have shared business logic and the shared processing of that business logic, to create a single set of shared data.
Anti-money Laundering and Customer Identification Program
Allowing identities to update their own information on the ledger and control access to it (“self-sovereignty”) would greatly improve data accuracy, richness, and support sharing — all of which are essential to the development of KYC/AML tools far more powerful and efficient than anything in the marketplace today. A common question within this theme is how government actors would be able to interact with DLT solutions that handle KYC/AML, and what level of access would make the most sense given sensitivities around government access to certain personal information that makes up a digital identity. TECTUM designed to support a flexible approach in this area, giving participants the ability to set permission levels and thereby protect information that is not relevant to other participants on the network, including regulators. Data on the distributed ledger can be attested to by reliable third parties further strengthening the quality of information and help enhance compliance with “using reasonable diligence”. Users relying on the data would be notified if data changes. This feature would greatly benefit jurisdictions where regulators require entities to upload information to central registries.
Customer Data Privacy
TECTUM takes the subject of data privacy extremely seriously and has specifically designed its own DLT solution with all relevant data privacy laws and guidelines in mind. On TECTUM platform, data is not shared with all participants, but only with those with the appropriate authority (permissioning). TECTUM use cryptography to authenticate, protect and secure records as well as Smart Contracts to provide great flexibility in control of access to, and modification of records (including the records of those identities able to access and use the distributed ledger) substantially improves the ability of banks and other financial institutions to act responsibly with respect to client data records under their control
Trade and Order Reporting Requirements
The process of booking a trade (e.g. recognizing the definitive profit and loss on a bank’s books and records, and the intermediate steps to assure an orderly exchange of value) involves multiple IT systems and departments across a bank. Processing trades on a common distributed ledger offers significant efficiencies over current practice. Instead of capturing data from a trading platform and copying / storing it in a separate database, a trade processed on the distributed ledger can be validated and time stamped by a notary to confirm both participants are recording the same trade attributes. This eliminates the need for external reconciliation and creates a “golden source” of trade facts to feed internal processes as well. For trades on TECTUM, the presence of a regulatory node would allow regulators to have supervisory oversight of transactions processed by banks in their jurisdiction.
This would empower regulators to receive real-time information on cancels, corrects and amends and could eliminate the need to create a distinct reporting process. Post trade reconciliation performed by banks and regulators would be substantially less onerous.
Regulators and banks can focus -on the single source of truth and spend less time reconciling transactions and understanding the individual systems of record involved with trade processing. A significant amount of time and effort is currently spent by regulators to simply understand the data sets provided by different banks: a single source of record shared across banks would reduce this effort and free up time for deeper analysis.
Supervision and Surveillance
TECTUM offers more transparency and analytical oversight. It has the potential to improve reporting and assist compliance departments with many of the written supervisory procedures required by financial authority. Regulatory requirements rely heavily on documenting controls. A distributed ledger-based environment can serve as a mechanism for transacting and documenting controls and control results. Smart Contract logic can codify key controls, ensuring that all participants on the network apply the same control framework for their transaction records and processing.
TECTUM’s ability to capture trade information and share transactional information on a “need to know” basis allows designated individuals in first and second lines of defense positions to review internal and external transactions. Approvals and attestations can be shared on the distributed ledger so individuals with oversight responsibilities have a clear audit trail of all participants, internal and external. This level of oversight would enable diligent controls over key processes including safekeeping and segregating customer securities, escrow account maintenance and gift and entertainment expenses.
Dynamic Smart Contracts
Smart contracts, in the context of DLT, are programs that are written on the underlying distributed ledger and are executed automatically by nodes on the network. Any instruction that could be executed by a computer could theoretically be run by a smart contract. Transactions or data recorded on the distributed ledger trigger the smart contract and the actions taken are in turn recorded in the ledger.
TECTUM systems provide a platform that allows for smart contracts, written in computer code, to actually control real-world assets, such as real estate, shares, land titles, or escrows, without the need for a third party that controls the release of the assets, such as a broker, a land title administrator or an escrow agent, for example. This is due to the fact that the nodes in the distributed network have the ability to enforce a contract by executing code. Similar DLT-based approach could also be applied to a variety of other contexts, such as mortgage processes or collateral registries.
While distributed networks promise mass customer uncontrolled cash transactions, still only few projects dedicated to real business. Little number of blockchain solutions were introduced as ready to use technology for business and many advantages of distributed network to enhance entrepreneurship not revealed. Such multi party involved and highly transactional activities as supply chain, vendors KYC, international trade could be dramatically cost reduced if appropriate blockchain service applied.
Understanding business needs, knowing the costs of marketing, transportation, production of real economy sector originated the TECTUM project. Core concept of it is Dynamic Smart Contracts (DSC) infrastructure, that allow business counterparts interact faster, secured and in more predictable way.
TECTUM DSC is a part of neurochain for distributed smart contracts execution and management. Current smart contract (i.e. deployed in Ethereum network) are solid state and little capability to be adjustable for highly changeable business environment. TECTUM provides another approach — dynamically adjustable (amendable) smart contracts and AI applied to manage its execution.
How it works:
Real business contracts contain several covenants contemplated parties’ undertakings or perform certain actions for contract execution. Thus, any business agreement includes solid conditions like warrants and amendable conditions that parties adjust during contract execution (timings, price etc.). TECTUM provides distributed smart contract execution where its operations performed on several nodes. In other words, smart contracts consist of several blocks (each block execute specific business logic) allowing encrypted data transfer between blocks and adjust block regarding data received.
The greatest opportunity of DSC is in transactions flow between blocks. Data exchanged among blocks could be used as source for big data analysis which leads to an AI (neural networks) application to manage contract execution.
The AI (Artificial Intellect) can be applied to automate most routine operations, reduce transaction and operational costs. Transactions data properly collected could source highly predictable models for planning and future business activities.
TECTUM Consortium Initiative
With TECTUM technology, more than ever before we need to work together across the industry and across value chains to really gain the benefits of the technology. The nature of the technology is such that the value increases when it is applied to larger numbers of parties. Because the technology is so new, it is also vital to involve regulators and financial institutions as early in the process as possible and to set standards that can be adopted throughout the industry. Standards are important to reduce complexity and avoid integration costs.
The technology is still evolving and many regulatory and legal issues are yet to be resolved. For the time being, it is still unclear which TECTUM applications will actually deliver advantages over existing technological solutions and it is likely that overall gains will be incremental rather than sweeping in the medium term. In addition, there are several challenges related to migrating existing financial and payments infrastructure to DLT, such as central counterparties and securities settlement systems, due to the significant coordination and collaboration required within the ecosystem.
A further challenge, particularly relevant for the area of financial markets infrastructures, are the substantial costs related to migrating existing longstanding IT systems, operational arrangements, and institutional frameworks to DLT based infrastructure. Many industry observers note that due to these challenges, DLT applications will likely begin in areas without many legacy investments in automation, such as trade finance and syndicated loans in the financial sector.
TECTUM consortium initiative is to develop solutions and services, which could eventually provide the same level of trust and confidence as traditional IT systems offer today.
For adoption in the financial system, TECTUM will need to comply with Know-Your-Customer (KYC) and Customer Due Diligence (CDD) requirements in Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) regulations.
McKinsey, like many others, suggests that the blockchain is not a technology that will enable one organization to come up with a new category killer product or process that will give it an advantage over its rivals. Rather, its success “will require cooperation among market participants, regulators and technologists”. The greater the number of businesses around the table, the greater blockchains impact will be.
