Bankex Whitepaper

Tuesday, June 19, 2018
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BANKEX Proof-of-Asset Protocol The Smart White Paper, version 0.3.1 beta October 19, 2017 Abstract BANKEX Proof-of-Asset protocol (PoA) is a standard that enables new generation of assets and contracts called Decentralized capital markets. We are building Internet of Assets (IoA) on the principles of Bank-as- a-Service (BaaS ), powered by Internet of Things (IoT ) and Artificial Intelligence (AI ) technologies. PoA protocol is open for 3rd party fintech providers, AI and IOT labs, traditional financial institutions and asset owners. Contents 3.5 Fundamental Advantage of Tokeniza- tion for an Asset . . . . . . . . . . . . 13 1 Introduction 2 1.1 Disclaimer . . . . . . . . . . . . . . . . 2 4 Originator, Product Owner and Sup- 1.2 BANKEX Proof-of-Asset Protocol . . 2 plier 14 1.3 Specification of Examples in White 4.1 Schematic of the Proof-of-Asset Protocol 14 Paper . . . . . . . . . . . . . . . . . . 3 4.2 Originator . . . . . . . . . . . . . . . . 14 1.4 Game Theory Behind the Proof-of- 4.3 Product Owner: Vision . . . . . . . . 15 Asset Protocol . . . . . . . . . . . . . 3 4.4 Product Owner: Certification . . . . . 16 4.5 Product Owner: Basic Information . . 17 2 Modern Financial Markets 3 4.6 Product Owner: Smart Asset Catalog 17 2.1 Bank-as-a-Service (BaaS ) Business 4.7 Supplier . . . . . . . . . . . . . . . . . 19 Model . . . . . . . . . . . . . . . . . . 3 2.2 Decentralized BaaS Model . . . . . . . 4 5 Initial Smart Asset Offering (ISAO) 19 5.1 BANKEX Foundation . . . . . . . . . 19 2.3 Classical Microservice Architecture . . 5 5.2 BANKEX Crypto-FIAT Depository . 21 2.4 Blockchain Serviсe Architecture . . . . 5 5.3 BANKEX Crypto Fund . . . . . . . . 22 2.5 Complexity regulation of the 5.4 Initial Smart Asset Offering (ISAO) . 22 Blockchain Service Architecture . . . . 7 5.5 Open Source: Smart Asset Core . . . . 22 2.6 Benefits of the Blockchain Service Ar- chitecture . . . . . . . . . . . . . . . . 7 6 BANKEX Proof-of-Asset Protocol 23 2.7 Liquidity Theory in the Context of To- 6.1 Registration data & product data . . . 23 kenization . . . . . . . . . . . . . . . . 8 6.2 Creating a Smart Asset . . . . . . . . 23 2.8 Mathematical Market Making Models 6.3 Smart Asset Сaterpillar . . . . . . . . 24 for Smart Asset . . . . . . . . . . . . . 9 6.4 Initial contract . . . . . . . . . . . . . 24 6.5 Validation . . . . . . . . . . . . . . . . 27 3 Target assets for tokenization 10 6.6 Audit & Legal . . . . . . . . . . . . . 28 3.1 Types of Assets and Asset Requirements 10 6.7 Proposal . . . . . . . . . . . . . . . . . 28 3.2 Choosing a Role in New Economy: Coin or Smart Asset . . . . . . . . . . 10 7 Technical solutions 29 3.3 Requirements and Options for Asset 7.1 IT Architecture Scheme . . . . . . . . 29 Tokenization . . . . . . . . . . . . . . 12 7.2 Asset data compression for blockchain 3.4 Example: Tokenizing Shares in Non- record . . . . . . . . . . . . . . . . . . 29 Public Companies . . . . . . . . . . . 13 7.3 Role and system access matrix . . . . 29 1

7.4 Originator/Supplier interaction in the We provide the description of the technology, ecosystem architecture . . . . . . . . . 29 based on our level of knowledge and development. 7.5 Bank & non-Bank Originator/Supplier 29 We hope you will find it valuable. However, there 7.6 Use of Microsoft Azure Bank API . . . 29 are certain commitments we are unable to make in 7.7 Large data volume hashing in the Mi- regards to the technology of the protocol. Neither crosoft Azure Storage . . . . . . . . . 29 BANKEX, nor its suppliers and distributors provide 7.8 Soft and Hard Commitment assign- any guarantees regarding the Proof-of-Asset Protocol ment rules . . . . . . . . . . . . . . . . 29 software, aside from those mentioned in the provided 7.9 Bid & Ask records independence prin- and additional Terms of Use. We take no responsi- ciple . . . . . . . . . . . . . . . . . . . 29 bility in regards to the contents of the protocol soft- 7.10 Decentralized Order Book rules . . . . 29 ware, its special functional capabilities, availability 7.11 Decentralized matching — pros and cons 29 and compliance with your requirements. All services 7.12 Offchain Settelment Control . . . . . . 29 are provided “as is”. 7.13 Settelment directions . . . . . . . . . . 29 Local law of certain countries ensures guarantees 7.14 Formula 1: saturation of request with such as vendibility, serviceability in certain fields, in- data in a blockchain environment . . . 29 vestor protection and intellectual property rights pro- 7.15 Reasons for differentiation between or- tection. Aside from situations outlined in the legal der and bid for Smart Assets . . . . . 29 system, we exclude any and all implied warranties. 7.16 Formula 2: solution for automated or- After reading The Smart White Paper you may der merging and separation . . . . . . 29 decide to take part in the development of new decen- tralized technologies, using your knowledge, time and 7.17 Formula 3: filter cascade system in the financial resources. Therefore by reading this text, Order Book . . . . . . . . . . . . . . . 29 you assume the unconditional obligation that, in the 7.18 Formula 4: implementation of clas- event of being a citizen of USA, China, Singapore, sical stock market trade rules in a Russia or any other country, any lawsuit with any blockchain environment . . . . . . . . 29 claimant, where your name is featured as an involved 7.19 Study of speed parameters of matching party, we receive a guaranteed right to charge you as for Smart Assets . . . . . . . . . . . . 29 a private party for the full amount of losses, including 7.20 Technological differences during Sup- any fines or legal costs, including in the event of your plier tokenization . . . . . . . . . . . . 29 using software (VPN, Class Action, etc) to conceal 7.21 Transaction execution with decentral- your true country of residence. ized storage . . . . . . . . . . . . . . . 31 7.22 Work with order packages during con- tract initiation . . . . . . . . . . . . . 31 1.2 BANKEX Proof-of-Asset Proto- 7.23 Order of Escrow function in the trans- col action execution block . . . . . . . . . 31 7.24 Smart Asset Core v.3 . . . . . . . . . . 31 BANKEX is an organization that unites members of 7.25 Smart Asset Core v.4 . . . . . . . . . . 31 the financial markets in order to build a community and implement the Proof-of-Asset Protocol enables 7.26 “Plasma” protocol & Proof-of-Asset community members to profit from mutual use of as- Protocol . . . . . . . . . . . . . . . . . 31 sets. 7.27 The most important features of The product of BANKEX is the Proof-of-Asset Plasma protocol . . . . . . . . . . . . 31 Protocol, which solves the issue of non-fungible asset 7.28 IoT Integration Scheme . . . . . . . . 33 liquidity. Proof-of-Asset means the token released as A Terminology 35 part of the protocol is ensured with an asset. The know-how of BANKEX is the Proof-of-Asset pro- tocol, in essence a combination of BaaS (Bank-as- 1 Introduction a-Service) and blockchain technologies. We take a client asset, primarily on the financial market, we to- 1.1 Disclaimer kenize it, then, without waiting for the portfolio to ac- cumulate critical mass, we turn this asset into money You are reading The Smart White Paper. for the bank. This is made possible through forma- It was developed by the BANKEX team and de- tion of a single pool of similar assets (e.g., pool of scribes a decentralized technology for control of liq- banks) thereby creating a marketplace, where banks uidity of smart assets based on the Proof-of-Asset benefit from liquidity and investors benefit from a Protocol. predictable and transparent cash flow. 2

1.3 Specification of Examples in We offer a solution — the Proof-of-Asset Proto- White Paper col, the point of which is an instant audit of the asset. Now every investor is aware of the status of All examples and demonstrations in this White Pa- his investments in non-public companies and assets. per are used only as demonstrative examples of the Equipped with this tool, the market will force certain SmartDeal technology. The business of BANKEX in- businesses to change (lawyers, accounting, auditors, volves manufacturing fintech products and tokenizing and in separate cases banks and collectors). What is primarily financial assets, although we do not think our plan? We will begin by modernizing the mecha- it impossible to apply the Proof-of-Asset Protocol in nisms of assigning and validating ratings, as the cash other fields, with approval from the BANKEX Foun- flow recorded on the blockchain using the Proof-of- dation in case of non-financial Smart Assets. In our Asset protocol is transparent, understandable, as well case, first and foremost we create liquidity for finan- as much faster and cheaper. In essence, the asset’s cial assets. state is being constantly monitored by the logic of smart-contracts. In turn, the increased amount of information on 1.4 Game Theory Behind the Proof- economical operations and their authenticity grant of-Asset Protocol new opportunities for the development of an econom- Game Theory1 is a branch of mathematical eco- ical AI, building sufficiently precise artificial intelli- nomics focusing on the outcomes of conflicts between gence systems for risk evaluation, making the cost of players, and the optimality of their strategies. such calculations approach zero. This would enable Game theory is one of the prime fundamental di- the creation of a competitive market of economical rections in economics. 11 scientists specializing in AI working for the good of modern society. game theory have received the Nobel Memorial Prize in Economic Sciences, including John Nash [4], [5], 2 Modern Financial Markets responsible for introducing one of the key concepts in game theory, known as the Nash equilibrium. It 2.1 Bank-as-a-Service (BaaS ) Busi- is a state in which a single player cannot benefit by changing strategy while the other players keep their ness Model set of chosen strategies unchanged. Bank-as-a-Service (BaaS ) is a business model that Analysis carried out according to game theory in- makes it possible to build new financial products that dicates that the global financial market is currently are integrated with multiple existing technological so- trapped in the sub-optimal equilibrium of the pris- lutions and jurisdictions. oner’s dilemma. This dilemma is a fundamental On one side of these platforms are originators in problem of game theory, illustrating how players will various jurisdictions with various technologies, and sometimes fail to cooperate even if it was in their best on the other are fintech-companies wishing to launch interest. a new product or expand to a new market. Thanks We see that players in financial markets distrust to the platform, they are able to do this quickly and each other and keep overpaying for an inefficient set efficiently, without the need to work out integration of various ratings, scores and audits, although these with the legislation of every country and every new are frequently wrong (as with the Enron scandal and bank from scratch. Since the platform already con- the subprime mortgage crisis). This inefficiency leads tains technological and legal integration, it can pro- to high costs and often losses, which in turn raise the vide access to a new player more cheaply and more cost of capital and lead to a lack of access to capital quickly. for decentralized small businesses or borrowers. An- The originator in the BaaS model is a store- other issue derived from this dilemma is the obstruct- front, essentially establishing access to the end client, ing cost of deployment to the public market. If this be it a bank, a fintech company, an internet platform, barrier is removed, then the market itself is cable to a stock exchange or an insurer. It is critical that evaluate every asset based on the collective wisdom of when building the BaaS business model, the origina- all trading participants, as the increase in volume of tor of the platform maintains his client and access transparent and authentic trade operations provides to the client under his control, but at the same time more information that can be used by the market to he provides the client with the most up-to-date and verify the assets. competitive products on the market by the best tech 1 Game theory is the study of the ways in which interacting choices of economic agents produce outcomes with respect to the preferences (or utilities) of those agents, where the outcomes in question might have been intended by none of the agents [6]. 3

(fintech, IT) companies on the market. It’s an excel- streams are becoming global. They are no longer lent solution to preserve and monetize clients. easily controlled by common tools. Regulators and How does an end client see it? Like a bank — he central banks, defining the movement of the market, does not have to see the third party provider. are responding to this with more strict regulations. There exist several levels of integration of partici- In turn, banks respond by creating as many service pants of the BaaS model: from primitive analogue in- offerings as permitted by their license beyond their tegration, where an employee would have to re-enter confines. They aim to create innovative services, leav- data into a separate service, to fully automated inte- ing only themselves with just the core. gration. The originator makes the choice of whichever This trend creates the risk of a bank evolving into model of work with an end client is most beneficial something more similar to a telecommunication com- to him, either where the end client is shown that the pany — a company with a license that no longer sees company he is interacting with provides services by its clients. outside service providers, or where the end client sees At BANKEX we see this risk, but believe it is the entire product line under the originator’s brand. right for banks to preserve the status of the most im- Some researchers call this conception “The Lego portant key element of the world’s financial ecosys- Bank” which owns no pieces but assembles the pieces tem. Fintech and IT companies should not be dis- into different form factors. The constituent pieces are rupters of the banking system. Instead they should all the same. It is how you put the pieces together supplement each other in a mutually beneficial way. that makes the difference. Like Lego, you can build Several years ago, banks and innovative technolo- the pieces into a Castle, a House or a Winnebago. gies existed separately, with banks expressing an in- It’s all about how you click pieces together [8]. terest in external IT products such as certain sepa- As a result, the Bank-as-a-Service platform is a rate features. Today the market has changed, lead- unified window, where corporate or retail clients can ing banks of the world work more and more closely choose and receive services that are being offered by with fintech companies, while the fintech companies various banks and tech companies in various coun- in turn ceased to see themselves as disruptors tri- tries. This platform takes over technical and legal umphing over banks and instead view themselves as integration of various players on the financial mar- partners to banks. Everyone acknowledges that of- ket. fline bank departments will remain, even if nobody goes to them, as foundations of faith in the system. 2.2 Decentralized BaaS Model A customer must understand that the financial ser- vice he receives is that of a bank, the bank actually According to McKinsey & Co., there are three main exists, it has a department in the city, to which the trends in banking evolution: customer can go in case of an issue for assistance. • automation; This reason at least will remain. This isn’t just a domain that might close tomorrow and leave its end • increased regulation; client alone with their issue. On the other hand, fin- tech and blockchain companies acknowledge that the • increased pace of technological development. market share occupied by their products is too small, Blockchain allows to automate different processes below 10%, and in order to amplify it, they must and banks can benefit from it a lot. Accounting, legal partner with banks. and risk parts might be automated. McKinsey & Co. In other words, fintech products must end up at states that blockchain, based on advanced cryptogra- banks. Clients, in turn, will purchase and use inno- phy, might allow doing such operations in the most vative financial products much more willingly if they effective, safe and transparent way in human history. can do so under the brand of a familiar bank. It’s For global players, adaptation to such worth noting that some banks will remain skeptical trends will become a vital issue. Enhanced fi- about integration with fintech companies. Luckily, nancial regulation will force participants to use part- the banking community understands that fighting in- ner BaaS platforms as adaptation to new jurisdic- novation will only result in market share loss. tions independently will become prohibitively expen- On the other hand, FinTech innovation alone is sive. Fast tech development, which many of the banks not sufficient to absorb the exorbitant transaction can’t handle, will drive banks interest in using other flows and and vast financial streams. One expla- fintech companies’ services. It will drive a demand nation is that banks don’t trust one another and for BaaS usage. they don’t trust technological companies. They are Decentralized BaaS is the future of bank- afraid of losing their client-base by partnering with ing. Why? The world has changed and financial a stronger or more technologically advanced player. 4

They are concerned that upon close examination their Such architecture allows technically complicated products will not be competitive compared to alter- applications to constantly evolve without the need to natives. They are afraid regulators would penalize wait for the release of a new version of the product to them for use of innovations in their base products. make changes. There is no need to release an updated Another important note is that decisions regarding version of the product, if the changes apply only to such risks are made by top-managers, most of whom a small part of the product. That’s why it’s possi- are more concerned with protecting their reputation ble to customize for various business tasks of every than introducing innovation. enterprise, department or person. Technological progress has presented us with so- Notably, microservices can be fully managed by lutions to such issues — organizing mutual trust of different teams in compliance with different standards participants in the system and trust in operations in and are also more available: even if one of them the system based on decentralized data storage and crashes, it does not lead to the crash of the entire automated smart-contracts. application. A unified architecture facilitates work Many professional market players admit that a de- in situations where multiple modules need to inter- centralized BaaS business-model is an optimal path act with one another, or where classes need to be to collaboration between classic banks and financial transferred from one module to another. At the same companies with cutting edge IT companies and con- time microservices can guarantee that there will be tinually growing decentralized technological compa- no shared states between the modules. Finally, mi- nies of the future. croservices allow you to use multiple technologies and Front service of clients remains in the hands of languages, depending on business needs (Figure 1). the banks, while products are presented by narrowly- oriented product banks or companies. 2.4 Blockchain Serviсe Architecture We believe that the B2B2C combination of business-models and technologies is the key to On an Ethereum blockchain micro-service, architec- BANKEX’s success. ture is used in the implementation of external ora- cles. At the same time, the Ethereum network is itself an example of network that uses the concept of 2.3 Classical Microservice Architec- micro-services, since it contains all the characteristic ture features of micro-services (Figure 2): Microservice architecture is a network of module ser- • excess and reservation, as each node of the net- vices that can be deployed independently from one work is autonomous; another. Microservice architecture is an approach to struc- • service discovery for automatic configuration of turing applications whereby they are broken down network topology; into smaller independent internal components. • extensibility through the use of other types of micro-services (such as oracles, micro-services Advantages of Microservice Architecture: allowing to display statistics, etc.). • autonomous ownership for different microser- The logic of the BANKEX liquidity protocol is vices within an application; based on the concept of the Ethereum smart con- • agility, application micro-components can be tract2 , and accordingly uses all of its infrastruc- developed and tested in autonomous decentral- ture advantages. At the same time, technically, the ized teams much faster; BANKEX protocol is a series of smart contract up- dates, however these smart contract updates are not • improved scalability (scaling independent of micro-services themselves, the micro-services are in other components, on-demand scaling); relation between API calls themselves. From our • continuous delivery and deployment of micro- side, the business tasks of the protocol, which re- components. quire a classical micro-service architecture, are real- ized through the creation of the oracle system. Pro- A monolithic architecture is much easier in imple- tocol oracles are designed strictly according to the mentation, control and deployment, while microser- principles of the micro-services, that is, the instances vices require careful management, as they are de- of these oracles should be automatically added un- ployed on different servers and use API. der the required conditions. In this case, dynamic 2 The phrase “smart contract” was coined by Nick Szabo initially in [10] and later in [9]. 5

Monolythic Architecture Microservice Architecture UI Microservice D UI Business Logic Data Access Level Microservice A Microservice B Microservice C DB DB DB DB Figure 1: Monolythic vs. Microservice Architecture Ethereum Network Oracle Web3j Client Node Client Node Client Node ... Miner Node Management Data Client Node Client Node Client Node ... Miner Miner Oracle Web3j Client Node Client Node Client Node ... Miner Miner Figure 2: Blockchain Microservice Architecture 6

balancing of the number of oracle instances is used. Moreover, the Smart Asset retains all the features Part of the BANKEX oracles is implemented on the of a blockchain Smart Contract — everyone is able to basis of Microsoft Azure cloud technologies, since it’s see what value is behind it and how truthful it is. one of the most bank friendly platforms. An example You can add your own logic block to the of the protocol logic was realized through the interac- BlockchainService chain — Proof-of-Asset Protocol, tion with the signals from Internet of Things sensors. because it is an open source code. To do that — you But for the description of the BANKEX Proof- will need to address the BANKEX Foundation com- of-Asset protocol the definition of the micro-service munity. architecture is not entirely correct. BANKEX team calls it the Blockchain Service Architecture. 2.6 Benefits of the Blockchain Service Architecture Blockchain Service Architecture is a sequence of smart contracts, every step of which can be cus- Why would the service architecture of the fu- tomized by a predetermined pool of actors validated ture use blockchain? In the existing infrastruc- for the particular step of the included smart con- ture, a large application or product consists of a large tracts, while the contents of contracts in a step and number of modules which are almost always devel- the number of steps are embedded in the business oped by different teams, and, even if the teams work logic necessary to tokenize the Smart Asset. within the same bank, they still requires a large num- It is an asset tokenization constructor, but one ber of cash flows between different participants in the that only works in a sequence of smart contracts cor- system and a large amount of agreements and inspec- rectly arranged after one another, supplemented with tions. It is costly, time consuming, and very likely to oracles connected as micro-services. result in mistakes, including system errors. This allows to tokenize an asset with maximum Blockchain helps automate the chain of transac- precision and transparency for all participants of the tions, increasing reliability, transaction transparency market, while also working in line with the open and removing inefficiencies and bureaucratic hurdles. source BANKEX Proof-Of-Asset protocol. It lowers the risk of human mistakes and for many operations completely removes the need for human intervention. This will make your business faster, 2.5 Complexity regulation of the lower your costs and increase the market’s trust in Blockchain Service Architecture you. Finally, Blockchain Service Architecture will allow We often hear from technical experts: Your protocol you to build, in the best way, a product line fitting is too complicated. Other technical gurus say — your with the trend of personalization and to offer unique protocol is too simple. Yes, they are correct. The solutions to consumers exactly when they really need complexity of the BANKEX protocol, which is based it. on the Blockchain Service Architecture, is regulated Blockchain technologies are perfectly suited for by the increase/decrease in the number of smart con- this task, as they provide an infrastructure with an tracts in the tokenization logic (Figure 3). open register of immutable operations. The first re- The creation of a smart asset of a certain type lease of the Proof-of- Asset protocol relies on the es- does not necessary use all the steps that are laid out tablished technology of open blockchains, most im- in the Blockchain Service Architecture, only the steps portantly Ethereum. Technologies for the creation of the smart contract chain that are required by a par- of private blockchains are currently on their way to ticular Smart Asset are used. The simplest Smart As- becoming established and accepted by the industry. set consists of three steps: initialization, validation, Thus the first release focuses on the tokenization and valuation. And in this case the Smart Asset will of open assets. In the future, the algorithm will fulfill its mission — make the asset liquid. It’s not be adapted to private blockchains in line with their complicated at all. readiness for industrial application. At the same time, BANKEX is an old company We see the current issues with financial instru- in the sphere of financial technologies, classic fintech. ments from within; we see how many inefficiencies We know very well how complex financial tools can exist between market participants. Our mission is be, and how difficult it is to properly formalize them. to provide technologies that market participants will Our solution is the Blockchain Service Architecture — like, that will improve upon the current market struc- exactly what you need. You can add any level of ture, and that will enable the same people — the same complexity to the asset tokenization chain which will market participants, to interact more efficiently and, result in a Smart Asset. above all, more profitably. 7

Initial Additional Information Information Asset Owner Smart Smart Smart Smart Contract Contract ... Contract Contract 1 2 N-1 N Smart Smart Smart Smart Contract Contract Contract Contract 1.1 2.1 (N-1).1 N.1 Smart Smart Smart Contract Contract Contract 1.2 2.2 N.2 Smart Contract 2.3 Smart Contract Verification IoT ... IoT External Data Sources Figure 3: Blockchain SA Smart Contract Chain 2.7 Liquidity Theory in the Context vinced that the description of the good is truthful. of Tokenization This, as a result, requires the buyer to check the de- scribed characteristics in order to make a purchasing Liquidity of an asset is the ability to sell or buy the decision. This happens because this “asset” is not asset quickly without significant change in its price. digitized at the outset, so the mechanics of selling it Higher liquidity alleviates the trade-off between the become more complicated, compared to the sale of a price of an asset it can be sold/bought for and the similar new asset. speed of its sale. People have preference for liquidity, To address this problem, various niche technolog- such a theory was first introduced by John Maynard ical services emerged that assist in making an as- Keynes [3]. Many theories and empirical studies sug- set more liquid, while also facilitating trust between gest that lower liquidity results in underrated value each sides of the deal. Services do this in different stored in assets [1]. ways, from simple announcement boards, to complex Making these assets more liquid will help unlock internet-services with risk insurance included. These the value. services make an asset “understandable” to the mar- Protocol of liquidity is a derivative of what we re- ket, after which said asset becomes significantly more fer to as The BANKEX Proof-of-Asset protocol. We liquid than it initially is. call it that because today, unless it possesses a cer- tain description of characteristics, it is fairly difficult This is an example of digitization of an asset giv- to sell an asset, even if at first glance it appears liq- ing it liquidity. uid. For instance, a new consumer good, as an asset, But tokenization is different from digitization: is fully liquid — all one needs to do is list it in an on- digitization is about creating descriptions, its con- line store, making it possible for an end client to buy sumer characteristics, photographing etc. Tokeniza- it. But not all types of assets and even not all of the tion, beyond the aforementioned steps, adds financial simplest consumer goods have deliberately truthful components — automated smart contracts for deal ex- characteristics and a capacity for digitization. The ecution, commands for automatic transactions, for- most common example, a used consumer good, re- mulas for calculation of the asset price, automatic quires at least a description of changes to its base validation of the initial data and much more. characteristics, and then the buyer needs to be con- So, digitization is about asset description and its 8

publishing on the market. Tokenization is about asset and empirical. Most of the theoretical research pa- description, validation by oracles, asset price calcula- pers model market maker as a single player with tion, automated audit, calculation of cash flows based whom other market players can trade, with no trad- on its price, execution of the SmartDeal. ing activity apart from that. On the other hand, One of the major reasons for tokenization of an there are some research papers where market mak- asset is the possibility to avoid fraud that may be ers compete with middlemen (dealers/brokers). In present in the case of classic digitization. A good can this model, the author introduces market-makers to be digitized but might also contain false information a model by D. Spulber with buyers, sellers and deal- in its description. Often it is difficult for an asset ers. owner to see the real information about cash flows A number of researchers have focused on the op- even if there is no intention to hide them. BANKEX timal behavior of a market maker (specialist). Some Proof-of-Asset Protocol provides the proof that an papers examine the effect of risk aversion and inven- asset and its cash flows are authentic. tory on the pricing policies of a market maker. In We remind you that this BANKEX White Paper another paper, the authors study the profitability of uses examples and demonstrations only as demon- market making strategies. Other researchers model strative examples of the SmartDeal technology. The bid-ask spread as a need to compensate for losses due business of BANKEX involves manufacturing fintech to adverse selection problem: traders who engage in products and tokenizing primarily financial assets, trade with a market-maker might know information although we do not think it impossible to apply that the market maker does not know. the Proof-of-Asset Protocol in other fields, with ap- Recent papers have focused on combining finan- proval from the BANKEX Foundation in case of non- cial market maker model with the field of artificial financial Smart Assets. intelligence; high frequency trading has made a sig- nificant footprint in market-marking models. For ex- 2.8 Mathematical Market Making ample, Abraham Othman combines two concepts — Models for Smart Asset automated market making from the artificial intelli- gence literature and risk measures from the finance What is market making? literature. In another paper, the author studies the Market maker is a player on a market for a good or impact of high frequency market making on liquidity, security who provides both buy and sell opportuni- price discovery and institutional traders’ returns. ties for traders, thus making this market more liquid. Market makers hold both the security/good and cash in inventories in order to be able to take the oppo- Benefits of market making: site side of trading order volume to fix imbalance in buy and sell orders. Market-makers earn on bid-ask • liquidity provision (buyers and sellers do not spreads, but bear the risks of price decline of their need to make orders simultaneously); inventories. • reduction in dealers’ bid-ask spreads due to MM Key players: publicly quoting prices; • traders: responsible for creation of purchas- • less uncertainty due to market maker displaying ing/sell orders; quotes publicly; • market makers (specialists): display public buy & sell quotations for a guaranteed number of se- • lower search costs because traders do not need curities/goods to traders and fulfill orders from to search other traders or dealers to sell at good traders at these quotations; price; • dealers: buy and sell securities/goods from traders but do not disclose quotes publicly; • market maker can tax and subsidize transac- tions by changing bid and ask prices; • brokers: carry out orders on behalf of their clients. • lower transaction costs for all players due to Liquid trade is of great importance for the stabil- centralized exchange; ity and effectiveness of financial markets. Market making is an established trading practice, • lower market volatility because fluctuations of which has inspired much research, both theoretical demand and supply are smoothed. 9

Examples of market makers today We see that selling public equities takes several seconds, bonds can be sold within a day, municipal They also play a major role in stock exchanges, and bonds would take weeks or months. Private equi- historically exchanges have often appointed trading ties — 10 years, real estate — 5–10 years, objects of firms to act as official market makers for specific eq- infrastructure such as bridges, roads or factories – uities: tens of years. Works of art may wait for their buyer more than 50 years. • market makers typically either own or are mem- In this situation, blockchain tokens which can be bers of an exchange such as the New York Stock bought and sold on a decentralized blockchain in less Exchange or the Chicago Board of Trade; than 10–30 minutes, are an opportunity to tokenize • NYSE designates a single market maker for everything that currently takes longer than that to each stock, known as the specialist for that sell. stock. In contrast, NASDAQ allows several The potential tokenization market includes every- market makers for each stock; thing that sells over days, weeks or years. Mean- ing potential for the tokenization market is enor- • HFT firms buy and sell simultaneously profit- mous. The issue currently being addressed by the ing from spreads, thus they are market makers, best blockchains in the world — Ethereum and Bit- however, without formally being designated so. coin, the issue of having to wait several minutes to They forecast increases in buy orders volume, receive several transaction confirmations, is no issue buy before other buyers and then sell to them to us. at a higher price. Asset Tokenization does not work on the market of assets liquid enough to be sold in seconds. The The BANKEX Proof-of-Asset Protocol includes Market Opportunity of BANKEX Asset Tokenization Smart Asset Exchange, support of liquidity of stands to the right of Tokens on Figure 5. Smart Assets being traded within the protocol is an We therefore do not compete or fight for the as- important task for BANKEX. It’s important to note sets that take seconds to sell. This is the market of that market making to support liquidity of Smart As- Ripple3 — the world’s only enterprise blockchain so- sets in OrderBook is a more complex task than it is on lution for global payments. To them, instantaneous a classic stock market. This is due to certain types of transactions are key, unlike liquidity of Smart Assets Smart Assets having more characteristics that affect during tokenization, where a few seconds don’t mat- price, than the classic balance of supply and demand. ter. Another significant note is that the BANKEX In our opinion, target assets for tokenization can Proof-of-Asset Protocol is based on the Ethereum include classes of assets with summary capitalization blockchain, meaning Smart Asset tokens issued in the exceeding 100 million USD. ecosystem of BANKEX can be traded on any market supporting the ERC20 standard. 3.2 Choosing a Role in New Economy: Coin or Smart Asset 3 Target assets for tokenization We receive hundreds of requests: can our business in 3.1 Types of Assets and Asset Re- the real sector be tokenized and how? Many business quirements owners see an opportunity to fund their business us- ing crypto economics via ICO or ITO. Experienced Everything in our world is relatively liquid. The Fig- businessmen understand this capital to them is sig- ure 4 is taken from a report [7] by Blockstone — one nificantly less costly compared to classical sources of of the biggest equity funds in USA, demonstrating capital and is also associated with less administrative that everything is liquid and has a duration of sale. risk, as the business decision making center stays in They mention that investing into assets that could the hands of the owner. In crypto economics there seem insufficiently liquid at first may in fact result in can be no board of directors with members who are greater profitability than other assets. non-amicable to you. 3 Ripple provides global financial settlement solutions to enable the world to exchange value like it already exchanges infor- mation — giving rise to an Internet of Value (IoV). Ripple solutions lower the total cost of settlement by enabling banks to transact directly, instantly and with certainty of settlement. Banks around the world are partnering with Ripple to improve their cross-border payment offerings, and to join the growing, global network of financial institutions and market makers laying the foundation for the Internet of Value. https://ripple.com/xrp/ 10

Figure 4: Everything Is (Relatively) Liquid Based on [7], source: [2]. For illustrative purposes only Figure 5: Realizing the Value of Liquid Assets Takes Time 11

In terms of forming a new economy, BANKEX (b) Distributed asset. You own several office build- sees a solution to real business funding in separat- ings that are rented out several rooms at a time. ing technological and infrastructure projects from You can easily see the authenticity of cash flow projects in the field of business operating industrial from the entire asset, but you may find it very and manufacturing assets. Technological and infras- difficult, even downright impossible, to figure tructure projects that can help decentralized econ- out the authenticity of cash flow from a single omy develop and become bigger, more convenient, as office room. well as expand usage of technology over the globe can definitely receive funding via ICO. But what about (c) Standardized end product. This would allow projects in the real economy segment that require to- us to identify meta-information when creating kenization, but lack strong technological teams, ex- a Smart Asset. It’s important for us to be able perienced IT founders, financial evangelists? to bring it to a single basis. We all know the crowdsale mechanism will only (d) Fungibility (tradability). The possibility of work with influential founders, powerful ideas and a trading one for another. One asset for another fully transparent vision of the project’s technological asset, since you as an owner are not concerned realization. with what the asset is. What matters is the The answer is obvious: use the technology and cash flow provided by this asset. infrastructure of core projects in decentralized econ- omy, including ones utilizing an open source protocol. (e) Use of token as a mean of payment for end- The BANKEX Proof-of-Asset Protocol is precisely product. An option that would allow the ISAO this kind of solution. token released not to be too similar to a pay- We present to you the procedure of creating a ment obligation. A Smart Asset token insures Smart Asset — ISAO (Initial Smart Asset Offer- receiving payment, but it can also be used as ing) based on decentralization protocols, such as the a means of payment. For example, it can be BANKEX Proof-of-Asset Protocol. Your asset, even bought to finance construction of a building, if it’s an offline business, will be able to attract re- but then this same token can be used to rent a sources by tokenizing its assets using already made room in this building. As a result, it becomes powerful technological protocols. You don’t need an a utility token, which is important. ICO procedure, instead you can perform Asset Tok- (f) Use of the token to own a large asset by a enization of your business using ISAO. high number of investors and easy means for It’s simple. Use Smart Asset. a buyer to exit co-ownership of a large asset. Businesses (farms, stores, manufacturing enter- If an asset can simultaneously be owned by a prises) referred to as Smart Assets in our White Pa- large number of owners, then it’s makes entry per can be tokenized as part of the ISAO procedure, into asset ownership easier. A classical exam- subsequently forming an Asset Community and re- ple is shared ownership of large real estate or ceiving returns via Smart Deal. non-public company shares. Entering such as- sets with a small share is very complicated at 3.3 Requirements and Options for As- the time. set Tokenization (g) Ability to automatically and unambiguously Over the years, working in classic fintech, we have be- measure characteristics that directly or indi- come accustomed to always seek situations that have rectly indicate a potential quantity and qual- some sort of problem. Today, we realize that in each ity of end-products. The ability to integrate of these searches, we would also effectively seek out regular IoT audit of an asset significantly in- a problem that prevented an asset from being truly creases the quality of Smart Asset monitoring. liquid. It’s a significant competitive advantage over au- Below are several problems, causing a decrease of diting or rating agencies, whose annual surveys an asset’s liquidity, and the more of the below quali- become inferior to real-time IoT audit. ties your asset has – the more attractive tokenization (h) Possibility to withdraw an asset from the owner of such an asset would be. if the terms of the contract are not fulfilled. Tokenization of assets gains the greatest value un- This means that, aside from auditing a contract der the following conditions: and tokenizing with an escrow module, there is (a) Presence of a large number of asset owners. the option of trading the asset, receiving collat- This means the asset has multiple owners who eral or different contract conditions in the event can have difficulty reaching a consensus. of a breach of terms. 12

(i) Control of end-product sales and minimization kens of this Smart Asset. At the same time, share- of the possibility of sales that are not accounted holders are essentially not changing. All presence for. This feature does not suit all cases. What rights of token holders are passed to the SPV. For this means is that the end product that is tok- non-public companies that don’t want changes in enized and funded is traced. In the event of tok- their board of governing shareholders, obtaining liq- enizing an agricultural asset such as strawberry, uidity of their capital via tokenization of part of their IoT sensors need to be installed that would cal- equity into a Smart Asset is essentially the only mutu- culate the number of grown berries to deter- ally acceptable option for all sides involved. For early mine whether all of the manufactured berries investors this method of investment becomes a new have brought the appropriate cash flow. These step to decreasing investment risks, and as a result IoT sensors must detect the entire lifetime of increases the possibility of investment into formerly an asset up to the generation of cash flow. unavailable assets. (j) Assets the transfer of which require high legal 3.5 Fundamental Advantage of Tok- and accounting expenditures. Early investors frequently want to sell their assets at the peak enization for an Asset of profitability, while other investors are sim- The analytical block of BANKEX, gathering and an- ilarly interested in entering ownership of said alyzing financial technologies from all over the world assets. Tokenization will make such deals sig- for several years, is seeing an interesting trend that nificantly simpler and cheaper. has been forming around financial tools during the last few years. If we take apart the basic needs of a person or a 3.4 Example: Tokenizing Shares in company in terms of movement of funds, it would be Non-Public Companies easy to discover that every person or company does To give an example of high suitability for tokeniza- not have that many basic financial needs, namely: tion, let us examine late stage private shares that • spending money; have yet to go public. These are assets that require very high legal, accounting and administration costs. • moving money; There are many investors in non-public companies • storing money; who, early ones in particular, are ready to sell their shares, while other investors are interested in enter- • earning money. ing. But such companies are not public and their By correlating these basic financial needs with the shares cannot be traded on the public stock market. current range of financial technologies it turns out Furthermore, they frequently can’t be resold without that today there is a strong leaning towards satura- the approval of company board, since company man- tion of certain needs with financial technologies: agement must control who their private shareholders are, and prevent their number from exceeding a cer- • spending money — the need that is most sat- tain quantity, because otherwise they would breach urated and easiest to digitize. There are cur- the limit of investors and become a public company. rently thousands of companies that help a per- son or a company to easily and quickly spend These limitations, born from the inefficiency of a their money; historically established system, are an inconvenience to everyone involved — both the investors and the • moving money — similar in terms of satura- company board. In particular, this inefficiency may tion, but this basic need has several unresolved often lead to disagreements among shareholders and issues, including ones currently being addressed the stalling of company development. by our colleagues at Ripple; Blockchain technologies allow the necessary de- • storing money — the need for people and tails on shares to be recorded in a Smart Contract. companies to keep their money in their pock- Part of the company share, intended for early in- ets is virtually non-existent today, having fully vestors or investors with a miniscule share, is tok- been digitized and moved to plastic cards and enized as an asset in a Smart Asset. Its nominal a whole range of innovative solutions. holder can be any entity permitted by the legislation of the company’s location, such as an SPV. The BANKEX Proof-of-Asset Protocol allows After that, from the nominal token-holder’s per- people and organizations to fulfill an important, vital spective, they can easily change upon reaching con- need — the need to earn money. By becoming part sensus among themselves, as buyers or sellers of to- of the Asset Community you will have the option of 13

earning, and thus realizing yourself in fields of your the simplest example being an IT-company or ecom- choosing. merce offering their clients more and more new ser- Cryptocurrencies solve the global issue of digitiza- vices, including financial ones. They are originators. tion of the human need to earn money, and altogether It is also fair to assume that there is the option the emergence of cryptocurrencies is a technological of tokenizing an end client’s assets without the par- response, solving this fundamental issue. ticipation of a product storefront. That’s why, based SmartDeal based on open source Smart Asset by on the methodology of processing data in blockchain the Proof-of-Asset Protocol is the next step. You will systems, we define two different types of originators be able to build your future with your own hands. (Figure 7). Originator Agent — an organization (such as a bank), which serves as a storefront for an end client, 4 Originator, Product Owner is the owner of client data or searches for clients wish- and Supplier ing to conduct tokenization. Originator End client — an end client wishing 4.1 Schematic of the Proof-of-Asset to create a Smart Asset in the BANKEX ecosystem, which will be backed by an provided asset. Protocol In previous sections we have examined the Bank-as- Several important notes a-Service product model and the concept of Smart Asset Tokenization. These are two big entities, so Both roles can be filled by one and the same organiza- you may want to know just how BANKEX combines tion simultaneously. For instance, a bank tokenizing them in its protocol. assets that the bank itself owns. The Proof-of-Asset Protocol is the technology for From a technological standpoint it is also possi- interaction of multiple sides that normally take part ble to omit the Originator Agent role in the event in financial deals, but the most important, system- of, for example, an end client owning a large asset forming sides of the protocol are these three: that they can tokenize themselves. To that end an Originator End client asset needs to have sufficient • originator; capitalization. For small end clients, work through an Originator • supplier; Agent is the only possible method to create a liquid Smart Asset. This will be discussed further, as we will • product owner. examine this very situation in the form of merging re- quests into portfolios and, possibly, securitization. Let us examine them using the schematic depicted It is also easy to see that tokenization is no threat on the Figure 6. to Originator Agents, such as banks that are owners of storefronts or end clients, but rather an opportu- 4.2 Originator nity for them to provide their end clients with new services and benefits in merging client requests (also On the left side of the schematic is the asset. The similar to securitization). originator is the owner of the asset that is being to- Thus the Originator in the protocol has the fol- kenized. The BANKEX protocol allows for the orig- lowing characteristics: inator to have different roles. On the schematic, for example, the Originator is marked as an end client. • role: creator of the Smart Asset; As we’ve already said, the originator is the owner of the asset tokenized. But despite the originator be- • function: providing asset for tokenization, ini- ing the owner of the asset being tokenized, he can also tiating Smart Asset creation. serve as the storefront for products of other origina- tors (types of tokenization - types of Smart Assets). Here’s a simple example: a small business enter- This is something we’ve discussed while examining prise (SME ) Originator End client comes to a bank the BaaS model. Originator Agent wishing to receive a small business Normally the originator for financial assets is a enterprise loan Product (Smart Asset Type). The Bank, but even today it can be an internet-platform bank has a product: small business enterprise loan (ecosystem), ecommerce, a fintech platform, a stock Product Instance 1, and receives the enterprise’s re- exchange, a broker, an insurance company. Mean- quest. Next the bank has its scoring procedure for ing this is the company the end client goes to, the this enterprise in order to make a decision on the loan, owner of a client. Anyone can see this almost daily, but the results of scoring mean that the loan cannot 14

Figure 6: Asset — BANKEX — Exchange — Capital Originator Originator End Client Originator Agent Smart Asset Type (customer, fund, (bank, ecom, fintech, (choose product, portfolio) IT-ecosystem, etc.) tokenization type) Figure 7: Asset Originator be given according to the bank’s rules Product In- creates new types of Smart Assets for the Originator. stance 1. The bank automatically checks other avail- At the time of Summer 2017 the BANKEX able product instances fitting the request and finds Proof-of-Asset Protocol ecosystem has two function- an alternative, such as small business crowdfunding ing Product Owners — daughter company Findeliv- Product Instance 2, the requirements of which are ery4 (founded in 2015) and BANKEX Lab (founded well suited for Originator End client. Then the deal in 2016). It was BANKEX Lab that created can be made. the Smart Asset Types that you can try out As a result, the bank gives the client the product today by using the tokenization demo https:// they require, while also keeping their client and satis- dev-web-prototype-bankex.azurewebsites.net/ fying them, instead of turning them down and forcing them to look for a different bank, which may lead to Obviously the mission of developing and creat- irreversible loss of a client for the bank. ing all types of SmartAsset the world needs neither can nor should be undertaken by the fintech team of BANKEX Lab alone. That’s why it’s important to us 4.3 Product Owner: Vision that more and more smart contract developers from Product Owner — a company that creates various fin- banks and fintech companies, as well as blockchain tech products. In the future it will become something community specialists join the Proof-of-Asset Proto- more - both the company and the community that col ecosystem. create product technologies together. BANKEX is creating the protocol architecture It’s a Solution provider, Product provider and fi- with the goal of creating various types of Smart As- nally Technology Provider. Mainly it is a company sets and in our ideal vision of the future, every type of that owns the technology of Smart Asset creation asset will come to have an Asset Community formed based on the Blockchain Service Architecture and it for its development, support and audit. 4 Findelivery (for Google: Findostavka) — fintech company on russian market. The company provides services: delivery of bank cards, remote conclusion of contracts, remote offline KYC clients of the bank. The company has an operating profit. https://findostavka.online/en 15

We must note that, for differing locations and ju- solutions must stand the test of time. risdictions the same Smart Asset (Product) would To solve this issue BANKEX utilizes the con- have a differing Product Instance, because for the cept of the Smart Asset Certification Center. Its moment different countries have different laws and le- key mission is a synergy of interaction between classi- gal conditions for transaction processing. This means cal financial institutions and the newest decentralized an enormous number of tasks for developers, for pro- communities. grammers who will be working on the Smart Asset This concept is already functioning today. De- code that will change the way deals are made in the spite being an innovative approach, we have already whole world. turned to it in reality several times. Here’s how it Realization of this task is upon the BANKEX works. On the one hand, BANKEX is a classical Foundation. Every Product Owner can become part fintech company, known and valued in many classi- of the BANKEX Foundation and make his own con- cal banks and financial institutes.On the other hand, tribution to the tokenization of deals worldwide. An founders of BANKEX are all fairly experienced mem- important function of the Asset Community in the bers of the blockchain community. BANKEX Foundation is support of Product Owners This allows synergy when evaluating the Solidity by providing access to product expertise and secu- of open source code of new Smart Assets. Here’s how rity audit of the written smart contract code. CEO it is done currently: of the BANKEX Foundation Petr Korolev5 , success- fully worked with the BANKEX Lab team to develop • first, the Product Owner creates the Smart As- one of the Product Instances of the protocol in Au- set code and the code goes to BANKEX Lab; gust 2017 at a hackathon. BANKEX’s Ethereum storage of mortgage securities earned BANKEX first • next, BANKEX Lab conducts code analysis us- prize6 of the blockchain hackathon from the hands ing in-house programmers; of Ethereum Foundation Council’s Vitalik Buterin. During development the Blockchain Service Architec- • next, even after the brilliant technical exper- ture methodology was used, which allowed the cre- tise of BANKEX Lab’s inhouse team, the pro- ation of a superior quality Product Instance from gram code is sent for audit to our partners with scratch both significantly quicker and more efficiently old school global technology consultancy, re- than other competitors. ceiving feedback on code quality from top level It’s important to remember that Product Owner, IT specialists working with leading technologi- just like separate Product Instances, is a business. A cal brands in the world; Product Owner can issue Smart Asset tokens, and • next step, the updated code is sent to subsequently provide product expertise, offer audit be checked by programmers from several services or technical support for his Smart Asset Type blockchain communities. Their experience is together with the BANKEX Foundation. priceless. Almost all of them have had a chance to learn the price of Smart Contract bugs on 4.4 Product Owner: Certification their own wallets; Obviously, both Product and Product Instances cre- • as the final step of the code audit, the code is ated by the Product Owner based on the Proof-of- validated together with all suggested fixes from Asset Protocol must be certified. This is particularly all sources by members of the BANKEX Foun- important for financial Smart Assets. That’s why the dation together with the Asset Community and ecosystem includes the Smart Asset Certification other friendly blockchain foundations. Center (SACC ). The mission of the certification center is to en- This process may at first glance seem to take more sure the security of Smart Assets created. Today time to validate the Smart Asset code’s quality, but we can see an industry paradox, which is that the when you are steeped in the atmosphere of blockchain blockchain, created as a technological solution to en- research and development, you come to realize that in sure, first and foremost, the security of transactions, greenfield smart product development experience of is frequently attacked, and such attacks are occasion- programmers with various training backgrounds al- ally successful. We understand that this is the issue of lows to achieve impressive results and optimal code blockchain technology’s rapid development and new quality as quickly as possible. 5 GitHub of Petr Korolev: https://github.com/skywinder 6 GitHub of the winning solution: https://github.com/BankEx/Blockchain-Hackathon-Kazan 16

Resulting from the work of the Smart Asset Certi- Product — a Smart Asset Token, consisting of a fication Center, you receive a guarantee of the Smart chain of smart contracts, based on the Blockchain Asset code’s safety from Bankex, a company well Service Architecture methodology and the rules of known and recognized by the global financial commu- the BANKEX Proof-of-Asset Protocol. The method- nity and listed among the top 50 fintech companies ology gives the option of creating a Smart Asset on worldwide7 . any blockchain, but currently all Smart Assets are be- It can be added that the BANKEX team, being a ing created by the BANKEX team on the Ethereum pioneer on the market of legally valid audit of Smart blockchain. Assets, understands that audit of blockchain-based Formulas written into the product set the rules smart contracts is a new and enormous industry that for product info that has to be digitized by the Orig- will augment and possibly replace the existing order inator and Supplier during tokenization, determining of business consulting. We are ready to work in this the interconnection between three of the main entities direction with all players interested in smart contract of the protocol. security, from community teams to consulting lead- We call this “Smart Asset initialization data”. ers.We have no agreements with consulting on paper, but we are negotiating these matters with virtually 4.6 Product Owner: Smart Asset all the world leaders of consulting and audit, such as Microsoft, E&Y, PWC, Deloitte and others. Their Catalog interest in this topic over the last year has greatly in- After examining the entity of the Product Owner, creased and that is the correct approach for everyone. we now understand that the Proof-of-Asset Proto- col is able to realize a multitude of product solutions 4.5 Product Owner: Basic Informa- and Product Instances depending on application, lo- tion cation and legal conditions. The number of Product Instances is not limited, so to introduce the Product In the last few segments we have determined the mis- in a new country or account for a change in current sion of the Product Owner — it’s a company that cre- legal conditions, the Product Owner needs only up- ates various products, meaning types of Smart Assets date the Smart Asset formulas and releases a new based on the Proof-of-Asset Protocol. Product Instance. The Product Owner has the following character- With time a large number of Product Instances is istics in the protocol: going to form for every Smart Asset Type and this number will form a product catalogue that the pro- • role: technology owner; tocol’s ecosystem will interact with. The BANKEX • function: to provide technology to Origina- team calls this the “Smart Asset Catalog”. tors in order to tokenize assets. To create Let’s examine how members of the BANKEX various Products and Product Instances on ecosystem interact with the Smart Asset Catalog us- the BANKEX for members of the BANKEX ing a schematic. ecosystem. Every Product Owner is a mem- As you can see, we have the BANKEX Lab Prod- ber of the BANKEX Foundation. Products uct Owner 1, which, for instance, has created a Smart and Product Instances that come from Prod- Asset — Blockchain KYC Product. This technology uct Owners must be certified using the Smart is going to be listed in the Smart Asset Catalog Prod- Asset Certification Center. uct Catalog of the Proof-of-Asset Protocol catalogue. This is very similar to Product Containers utilized in Let us examine the Product Owner from an initial classical banking development. data standpoint using the schematic on Figure 8. Let’s say that next two companies came to the A new Product Owner joining the Smart Asset ecosystem: Company A from Japan and Company B ecosystem must provide basic registration info. To from USA with the intention to sell the Blockchain become a member of the BANKEX Foundation this KYC technology Product in their countries. For these needs to be a company with a registered legal entity companies and, more importantly, together with and a bank account. them as they have better understanding of the partic- Code of products created by the Product Owner ular traits of business in their country, the BANKEX can go not only through a BANKEX audit, but also Lab Product Owner 1 develops a Blockchain KYC audit of other organizations and community teams Product solution for the Japanese market Product In- via the Smart Asset Certification Center. stance 1 as well as a solution for the US market Prod- 7 According to “Top 50 Financial IT Pathfinder Ranking” [11] 17

Product Owner (bank, fintech) Product Product Product audit by BankEx registration data Foundation adn other Escrow Setup Originator Setup Supplier product data product data Product Smart Asset Tokenization and Other Magic Figure 8: Product Owner uct Instance 2. Next let’s imagine some time after will serve as the push to technological competition the above a fintech lab called Another Lab Product between Smart Assets. Owner 2 develops a Smart Asset for the Blockchain There will come a future age of competition be- KYC technology Product, which gives this technol- tween Smart Asset Tokens dedicated to the same ogy new consumer features, which could be either Smart Asset Type. In this competition of fully digi- superior or inferior to the predecessor. In order to tized and tokenized assets, the main competitive ad- introduce this new technology to the Proof-of-Asset vantage would be the actual performance of the as- Protocol ecosystem, Another Lab Product Owner 2 set, as well as the outstanding algorithms and value chooses the country and jurisdiction where they wish calculation formulas of Smart Assets and subsequent to apply their solution, and they find an integrator, Smart Deals. Competitive advantages of the old Company D. world that are achieved through a different kind of Company D is, for instance, a company on the benefits will become a thing of the past. This is market of Singapore, where it realizes its solution an enormous quality increase for people in the whole Product Instance 3, which updates the product cata- world, as they will have access to assets distinguished log for the Blockchain KYC technology Product with by their performance. a new instance. On the side of the BANKEX Proof-of-Asset Pro- It’s important to note that Smart Asset pioneers tocol ecosystem the Instance Switcher block comes who hold the role of Product Owners of their tech- into play, responsible for switching between Product nologies can realize Product Instances for the first so- Instances within a single product container. Within lutions on their own, without the need to involve third the Instance Switcher, Product Instances are pro- party integrators. Decentralized Product technol- cessed and arranged, filtered based on various pa- ogy allows to perform integration in the most efficient rameters, competing among themselves for buyer re- way possible, skipping steps that would not apply to quests. Inside the Instance Switcher every product a particular situation. container has its own Instance Trigger that selects Now let’s examine the Smart Asset Catalog from optimal Product Instances out of those available for a competition standpoint. Obviously instances on a product based on the criteria set by the client. markets of different countries will have little to no Until now we have observed the Smart Asset Cat- competition amongst themselves. They are located alog top to bottom, from the Product Owner to the in different countries the markets of which are, for Product Catalog, but with the emergence of compet- now, developing independently. But it’s also obvious ing Product Instances the logic of analysis changes that Product Owners who harness the technology of instead and we go from bottom to top, seeing the building Smart Assets will begin to expand to newer picture of product choice in its entirety. As competi- and newer markets, utilizing new integration part- tion emerges, it’s the consumer who determines which ners. With the technology developing further there Product Instance he will choose, and that is exactly will come a day when several Product Instances form how the process of bidding begins within a single type in the same country and the same legal field. This of Smart Assets. The Instance Switcher can therefore 18

be viewed as an analogue of the classical order book. tential.We are aware that in order to create a global A buyer’s request falls into this order book following technology, the participants of said technology must the client’s product choice. not be limited, so the Supplier Accreditation proce- This is how a decentralized product exchange be- dure is not a limit. Is it merely one of the smart con- gins — the Smart Asset Exchange. tracts within the chain of Supplier tokenization and, in the event where a resource is unable to pass Sup- plier Accreditation, this merely means the Product 4.7 Supplier Owner of this particular Smart Asset needs to deter- On the right side of the schematic presented in section mine the ensuing path of the resource tokenized with 4.1 of the Smart White Paper we see the Supplier. the new parameters received. This includes determin- The supplier is the owner of the tokenized prod- ing special legal conditions for it where necessary, if uct. it is required by the country where the Product In- BANKEX engineers have conducted research of stance of the particular Smart Asset functions. This entities and characteristics of resources presently used allows to bypass limitations of usage for the Proof-of- in various financial and internet ecosystems and have Asset Protocol on a low technological level stemming reached amazing results. We have discovered that from the particularities of local legislation — they are our typical perception of the resource taking part in simply included into the tokenization formulas of the deals as financial resource only is too limited. corresponding Product Instance. Perhaps we as a fintech company should be com- It is also important to note that, as with the Origi- pelled to state here that resource equals money, but nator, work through a Supplier Agent is a very simple our research and development on the matter shows mean of investing their resource into previously inac- that within the protocol’s ecosystem when creating cessible types of assets for smaller end clients. End various types of Smart Assets there will sometimes client resources are easily merged into portfolios dur- be Smart Deals with a different resource. ing tokenization, granting them access to profitable That is why we give the following definition of a and secure asset types. Never in history have such Supplier End Client — it’s an end client in posses- types of assets been accessible to a simple end client sion of financial or other resources wishing to use his with a moderate amount of resources. Blockchain- resource in a chosen Smart Asset to create a Smart based tokenization gives these opportunities to prac- Deal with a tokenized cash flow or other goods. tically any person regardless of accumulated riches The BANKEX protocol accounts for the possibil- or social status. It is a true evolution of liquidity of ity that the Supplier may also have various roles, as assets and their accessibility. shown on the schematic on Figure 9. So, the characteristics of the Supplier in the pro- Supplier Agent — an organization (e.g. bank), tocol are as follows: representing a portfolio of end clients who wish to • role: Smart Asset consumer; take part in a Smart Asset using their resources. There is a significant difference here from the sim- • function: taking part in the Smart Asset and ilar structure of an originator, because in the situa- creation of Smart Deal using his resource. tion where a Supplier End Client enters the ecosystem without a Supplier Agent, he has no way of access- ing a Smart Asset deal directly, instead BANKEX 5 Initial Smart Asset Offering serves the role of a Supplier Agent in this case. Fre- quently the Supplier will be represented by financial (ISAO) resources, and in order to allow them to enter the 5.1 BANKEX Foundation Smart Asset Exchange, they will require, at the very least, a KYC procedure of the Supplier End Client BANKEX Foundation is a non-commercial self- based on the requirements of the country where the regulated organization with a community the mem- particular Product Instance functions. That is our bers of which are engaged in work and development current method for our active fintech products. of smart contracts for new Smart Assets and Product For some Smart Assets the BANKEX team devel- Instances created with its participation. It includes ops special procedures of Accreditation. This has blockchain technology experts, programmers as well to do with the complicated matter of acceptable risk as product providers and product experts. levels for a resource and not all end clients are able The BANKEX Foundation as a non-profit orga- to evaluate it accordingly. One of our advisors re- nization is an important element of the BANKEX garded the development of the Supplier Accreditation Protocol ecosystem, which allows coordination of the procedure as a potential limit to the technology’s po- actions of various other elements of the system. 19

Supplier Supplier End Client Supplier Agent Smart Asset Type (investor, people, (bank, fund, investor, (choose product, KYC infrastructure element) infrastructure owner) accreditation token) Figure 9: Asset Supplier We must note here that while other sections of is clearly an individual or group of individuals The Smart White Paper BANKEX describe processes who are pioneers and enthusiasts of this prod- and technologies in various states of readiness but ex- uct. These are the people the BANKEX Foun- isting in the real world, this section is going to present dation forms a product community from for the the model of a concept not yet existing in the world, creation of a new type of Smart Asset. This but aimed at solving issues. product community then takes over the busi- When creating prototypes of various Smart Assets ness development of the aforementioned Smart at the BANKEX Lab we have encountered a situation Asset. The initiator of the request for such a where many business owners from various countries Smart Asset Type may become the founder of started coming to us, wishing to tokenize their assets said Asset Community. Such communities are via the ICO procedure. Our vision of tokenization, also needed by the ecosystem for two more im- which we have already discussed in this White Pa- portant functions - product expertise and pro- per earlier, concludes that issuing your own coin is a viding Proof-of-Asset evidence in the event of poor solution for assets belonging to the real sector Smart Deal disputes. It’s important that in the of economy where rocket science technologies don’t Asset Community we do not require identifica- exist. Nonetheless, the necessity and even inevitabil- tion of all the members — they take part in the ity of the tokenization of their assets in the future ecosystem only with their knowledge and expe- are obvious. We suggested the procedure of Smart rience. Asset emission to these clients, some of the resulting Originators were accepted by the BANKEX Lab as Foundation Community — this is a community pilot designs. These assets will be prepared for the of programmers and business developers, who Initial Smart Asset Offering (ISAO) in the Proof-of- are fans of the decentralized Blockchain Service Asset Protocol ecosystem. But we turned down the Architecture. They are the people responsible majority of them. for creating the world-changing chains of Smart How do we see the possibility of providing these Contracts for various No token Assets. businesses with the option to tokenize, regardless of the centralized initiator-company of the Smart Asset? New Smart Asset Type — is a program code fully The BANKEX team assumes the Market will ready for initiation. As we see on the schematic form more and more such requests as time passes. the Asset Community, Foundation Community These requests will come from owners of businesses and the BANKEX Lab with participation from or assets, meaning Originators with No token Asset. third party experts takes part in the creation The BANKEX Lab is receiving such requests now, of this code. The quality of the code is guar- but subsequently they will be addressed to multiple anteed by the BANKEX Smart Asset Certifica- Product Owners in the ecosystem. Those requests tion Center. that the Product Owners can tokenize they will pro- cess, creating Product Instances. Of course, they will So the BANKEX Foundation in the protocol has also turn down many incoming requests. The reason the following characteristics: is not so important at this point. Such requests for tokenization of a new type of assets are directed by acting Product Owners to the • role: community built around the protocol; BANKEX Foundation (Figure 10). Now let’s examine the schematic to see how the • function: creation of new types of Smart Assets BANKEX Foundation coordinates actions: and the development of the protocol that will be in-demand by the community, as well as the Asset Community — as the request for creation growth of the community that is going to use of a Smart Asset came from the Market, there the protocol. 20

Figure 10: ISAO Structure 5.2 BANKEX Crypto-FIAT Deposi- stance. Banks are unable, or rather they cannot per- tory mit assets to be stored with such security parameters. One of the existing and not yet solved issues in asset In the BANKEX ecosystem solution of these prob- tokenization is the impossibility for legally significant lems is handled by the BANKEX Crypto-FIAT organizations to purchase tokens. There is a long se- Depository. This is a legal organization and a tech- ries of details relevant for different locations. nology for cryptoasset storage. The Crypto-FIAT Let us pause on the most important and define Depository works as any classical depository with the their common features. only difference being that it grants its classical clients First, banks and organizations are able to invest the ability to store cryptoassets. into companies, using stocks and equities. In banks, We see this as the Depository forming a legal classical funds and large financial groups there are agreement with a bank or organization to give the special departments that invest into corporate secu- Depository permission to store clients’ cryptoassets. rities and other financial instruments on stock ex- After that the client registers a wallet in the Deposi- changes. These departments are able to invest into tory for the cryptoassets he requires. If it’s an ERC20 securities, but lack the ability to invest into crypto- token then an Ethereum Wallet is registered. After graphic coins and tokens, as they have no common that the client does not receive the private key to the tools for that. wallet - instead it’s instantly conserved in the deposi- Second, banks and organizations must place pur- tory’s storage until the client closes the account. The chased assets on their balance upon investment, for client receives a regular depository receipt in return that they require legally relevant documents that con- for his cryptoasset. firm purchase of the asset. Token purchase provides no such documents. The technology to store coins and tokens in the Third, banks and organizations lack the technol- Crypto-FIAT Depository allows a client to conduct ogy to follow their existing security regulations when operations with cryptoassets on his balance, and storing cryptoassets. As we all know, should the pri- what’s more important, it lets him do this in a way vate key be compromised, that would be enough to that he’s used to. He sees these cryptocurrencies in lose access to the crypto wallet, and it doesn’t matter the same way he would see classical assets. This is what amount is stored on the wallet, if a malignant the very technology that FIAT and Crypto markets party obtains the private key it can vanish in an in- are waiting for. 21

5.3 BANKEX Crypto Fund 5.5 Open Source: Smart Asset Core BANKEX Foundation presents a platform for col- laborative work with an open source code, created to promote technologies in the banking and financial 5.4 Initial Smart Asset Offering sectors. (ISAO) An Open Source approach to development based on collaborative use of software can ensure trans- Initial Smart Asset Offering (ISAO) — is the initial parency, stability and support needed to implement Smart Asset offer with the goal of tokenizing finan- blockchain technologies. The main task of organiza- cial assets or real economy sector assets in the form tions is the development of a global cooperation and of emission and sale of Smart Asset Tokens to buyers. support of leaders and entrepreneurs in the field of An ISAO can only be carried out with an as- finances, banking, Internet of Things and decentral- set present, in other words either a functioning or ized technologies. planned cash flow. A technological startup or RnD We welcome all who take part in the developer cannot be tokenized via the ISAO procedure. community of the Smart Asset Protocol regardless of On the schematic (Figure 10) we can see the re- membership status. Additional information on the quest for an ISAO comes from an Originator, i.e. technical details and methods of collaboration can be owner of a financial or manufacturing asset. This found on the community page https://github.com/ Originator does not need to create the tokenization BankEx. technology – instead the best programmers from var- Open Source Protocol — Smart Asset Core ious teams coordinated by the BANKEX Foundation (https://github.com/BankEx/smart-asset-core) compete for its creation. is the base structure to tokenize and securitize assets. It would be fair to state that a first-time Origi- It contains all the necessary modules for integration nator with the desire to create a new type of Smart of third party information providers and tools for Asset and an Originator initiating an Initial Smart writing specialized smart contracts. Asset Offering can be one and the same person, which is what we are striving for. But at the same time this Open Source Proposal: schematic does not permit centralization of the pro- gram solution, as the Originator neither influences • development of the blockchain community in the actual writing of the Smart Asset code, nor con- order to support the Proof-of-Asset Protocol; trols the programmers, the Originator is only able to • establishing partner connections and their sub- take part in the development via product expertise sequent technical support; using the Asset Community mechanism. In the BANKEX Proof-of-Asset Protocol ecosys- • formulation of the direction of technological tem the following can take part in the initial purchase development and establishing interaction with of Smart Asset Tokens on a technological level: Product Providers; • creation of the protocol’s core architecture with • buyers originating from the market; subsequent increase of functionality by involv- ing specialists from the open source community; • banks and classical funds via the BANKEX CF Depository and “Co-Fund” systems; • ensuring protocol security, including by means of involving third party white hat hackers & • members of the product community interested developers; in development of assets of this particular type. • organization of a tight cooperation with solu- tions of other open source communities, such If the buyer originates from the market or the As- as the Consensus Foundation, Ethereum Foun- set Community and he needs to make a purchase us- dation, Symphony Foundation, Hyperledger ing FIAT currencies, he has the ability to do that via the Crypto-FIAT Depository. If the buyer wants to make a purchase using ETH — he can do so directly. Open Source Finance part: The buyer of Smart Asset Tokens — in terms • tech support for partners; of entities present in the Proof-of-Asset Protocol, as outlined in the previous chapter — takes the role of • bounty program for developers (expenses) — the Supplier. guarantee of security. 22

6 BANKEX Proof-of-Asset ceived from client data initially verified by a reliable source. Protocol The most important consequence of the decision to take registration data beyond the tokenization cy- 6.1 Registration data & product data cle using the BANKEX KYC Adapter, is that various The our first step in researching the liquidity protocol Originators, including banks, can now be integrated is data. BANKEX as a classical fintech company is more comprehensively and with minimal effort. The well aware how many different existing banking sys- Originator defines identification parameters and the tems there are, many with an architecture that was Proof-of-Asset Protocol adjusts to suit those param- established many years ago. eters, creating a link between client data and the That’s why in order to build the protocol technol- Smart Asset blockchain wallet. ogy we have begun our research from scratch, rather What about the data that goes into the Smart As- than basing it off of any existing IT infrasctructure set? That’s product data - an arrangement of data of a bank. This may be an unexpected decision to necessary to tokenize the client’s asset, with parame- some IT specialists of the banking segment, but we ters and contents defined exclusively by the Product have decided to separate all the information we work Owner separately for every Smart Asset Type. with during initialization of Smart Assets into just On the schematic you can see, along with the pro- two parts: registration data and product data. We tocol entities you have already become familiarized see no reason to overcomplicate this. with, that the Product segment includes blocks that Registration data — data that allows the identifi- define product data for both the Originator and the cation of a client. Modern registration data contains Supplier. an intrinsic fundamental controversy. On the one The quantity and types of product data fields are hand, internet platforms have evolved to the high- not limited in any way — it is decided entirely by est level of simplification for this data - most of them the Smart Contract logic necessary for a particular request nothing but a client’s e-mail upon initial reg- Product Instance. istration. On the other hand, in order to work with As a brief summary, the ecosystem of the protocol financial information in global economy, it is neces- generally allows for various other registration data — sary to receive the most extensive registration data the principle of work with them is always going to from the client - this is a matter of public security. remain unchanged, they are technically impossible to In the blockchain network technology there is, store in a Smart Asset. In any event where any entity in essence, only one vitally important identification, needs to be identified, the process of identification it- which is the address of one’s wallet. As we are build- self is always going to be beyond the logical cycle ing the financial asset tokenization protocol, we find of the Smart Contracts included in the Smart Asset. this information insufficient. Here is our solution. The protocol only interacts with such data on the The registration data that allows client identifica- level of confirmed or unconfirmed registration data tion is taken beyond the tokenization cycle. When a hashes that come from external oracles. Smart Asset is created on the Ethereum blockchain, The only possible exception to this rule is when we retain the technological capability to perform to- the Smart Asset Proof-of-Asset Protocol is fully real- kenization using only the Ethereum Wallet number, ized on the Microsoft Azure Bank API server within but at the same time we also create a connection be- the bank’s security network. tween the Ethereum Wallet used in tokenization and the other registration data using the BANKEX KYC 6.2 Creating a Smart Asset Adapter. This is imperative as different banks may have completely different assortments of client regis- As we have already discussed the Blockchain Ser- tration data and, what’s more important, these are vice Architecture allows formation of various chains personal details that are protected in many countries. of smart contracts based on the protocol. Let’s ex- It would be unwise to create a Smart Asset reliant on amine the order in which a typical Smart Asset is them. created. On a technological level the Proof-of-Asset Pro- We see five desired logical steps in the Proof-of- tocol allows the BANKEX KYC Adapter to be in- Asset Protocol to be able to call a token a Smart tegrated with any KYC provider functioning in the Asset (Figure 11). These steps are: country. BANKEX has a subsidiary with a work- ing product of this type. This is not rocket science. • initial contract; All we can say is we are followers of the technology of client identification via blockchain-stored hash, re- • validation; 23

• audit; Proposal — Smart Contracts that fix the base price of a Smart Asset and define the type of opera- • legal; tion that will be performed with the taken asset on the Smart Asset Exchange. From a stock exchange • proposal. perspective, the result of this step is the creation of a bid. From a blockchain perspective — the issuing We first initialize the contract, selecting a type of a token. of Smart Asset. The Smart Asset’s type determines product data required for the token and the logic by 6.3 Smart Asset Сaterpillar which that data is processed. Next the Originator fills in General Information, which can happen both The BANKEX team named this tokenization princi- manually and automatically. Data entered by the ple the Smart Asset Caterpillar, although it was not Originator is what we presently call digitalization. our first choice of name. It was picked up when we The information is there, but its value is unknown as realized that in order to achieve true value of a Smart the filled in forms have no function and, more impor- Asset, which means proving that it is ensured by an tantly, have no validity - we have no way of knowing actual asset, it was imperative that smart contracts if that information is genuine. The next step is Vali- in the chain were to flow from one to another in an dation. This is where Smart Contracts are executed uninterrupted sequence. If you were to cut an earth- that validate the information entered by the client worm in half, its parts will survive for a time. But using various trusted sources. These can include In- if a caterpillar is cut in half or even if it loses any ternet of Things Sensors, Eternal Oracle, Crawlers segment of its body — it dies. This principle is true and others. It is crucial that the contract is satu- for the Smart Contract chain in a Smart Asset. If rated with data from sources independent from the you interrupt the chain or either of the links becomes Originator, which allows for an accurate assessment invalid then the Smart Asset formula will result in of the authenticity of General Information provided. a value of zero for the asset. Any link of the Smart Next the result is audited, always by an outside Asset Сaterpillar being insufficiently validated would party. This is the part of tokenization where a 3rd have a detrimental effect on the resulting value of the party gets involved. Primarily this is BANKEX, entire Smart Asset. comparing hash totals of the current Smart Asset A second important consequence of the Smart As- code with certification data from the BANKEX Foun- set Caterpillar tokenization principle is that every sig- dation. Only a verified SACC code can get the nificant step on the chain that affects the Smart As- BANKEX Verifed mark. These can also be account- set’s value is recorded on the blockchain. You enter ing services or any other services that can check the your General Information during step one and press process of tokenization based on Smart Asset logic. next - the Blockchain Service Architecture asks if you It is also important that at this point classical wish to record your commitment on the blockchain offchain organizations can also get involved, if that (Figure 12), after which you will receive details of is supported by the issuing conditions of the Smart the transaction on blockchain (Figure 13). Asset. This is not just digitization — it is tokenization, Legal is the step where every Product Instance an imprint of your commitment and, the further along can set up legal conditions specifically required for the Smart Asset Caterpillar you are, the more valid both it and the country where it’s located. This is your commitment is to other members of the ecosys- also where the Smart Assets intended for global liq- tem. uidity establish the norms of governmental and cus- It’s worth noting here that the BANKEX Proof- toms regulations. The Blockchain Service Architec- of-Asset Protocol technology supports several techni- ture allows any existing legal regulations to be writ- cal solutions for the recording of the aforementioned ten into Smart logic. If the government of your coun- imprints on the blockchain, including industry- try demands that you must receive an official doc- specific know-how. ument from the town hall for your asset, then you do just that. You head to the town hall, receive the 6.4 Initial contract official document, scan it and add it into the Smart Asset with your signature or that of a certifying of- The exact way in which every contract is initialized is ficer. After the government implements tokeniza- defined by the Product Owner when calculating the tion to their algorithms you can simply change the Product Instance (Figure 14). Let us note several one corresponding Smart Contract included in your significant steps for the majority of Smart Assets. Smart Asset. First, initialization will require the registration 24

Figure 11: Proof-of-Asset Protocol Figure 12: Step 1 — Asset Initialization Figure 13: Step 2 — Asset Validation 25

Figure 14: Initial Contract Figure 15: Example of Asset Initialization 26

data of the Originator End Client, and as we operate • a data record on the blockchain. in the technological stack of the blockchain network, we have agreed not to store registration data — we must receive a Wallet address. For the demo ver- 6.5 Validation sion of our product we used a web interface with the The Validation step (Figure 16) of a Smart Asset is Metamask Ethereum Wallet plugin (Figure 15): the most fascinating for Research and Development, With this iteration the Ethereum wallet address this is where various means and methods for the val- is automatically taken from the plugin. In other iter- idation of the General Information can be built. ations or on other blockchains this may work differ- Let us define the following terms. ently. Internet of Things (IoT ) will be the main con- Why do we need a wallet address? By using it dition for the validation of Smart Contracts, and this we receive the ability to perform client identification will come much sooner than we can imagine. Very through the BANKEX KYC Adapter or any other soon our world will become filled with myriads of vari- KYC provider. Additionally, the demo shows it’s pos- ous sensors and transmitters for smart contracts, just sible to request an optional field as well, such as an as it has already become filled with smartphones and e-mail. surveillance cameras. Second, when initializing the contract data is en- IoT Sensors can come in any number of different tered into General Information fields. General in- combinations. BANKEX is not an IoT company, and formation is entered either manually by the client or yet our lab already has more than 50 different sensors automatically, but its accuracy is decided only by the with different purposes. In the demo application we person inputting it. It would be fair to state that to- used three of them - an accelerometer, a location pin kenization does not rely on accuracy of the General and a photo camera that any smartphone is equipped Information entered. We take it as it is, whereas the with. Let us remind you here that cell phones are al- authenticity required for the Smart Asset is going to ready used as tools for payment. be determined by the logic of subsequent contracts Many companies today are trying to create Smart in the chain. It’s interesting that not all true infor- sensors, outfitted with an internal logic, but the de- mation may actually be required by the Smart Asset, cisive potential is definitely held in a combination of and an Originator End client who doesn’t know how IoT Sensors and the logic of Smart Assets. to determine a code’s Solidity may not even know The second element are External Oracles, how important the fields he is filling in are. When which are the obvious choice for data validation to- the BANKEX team hears talk about the need for day, and which are used by many companies world- each and every person in the future to have program- wide. You can check a person’s information using his ming skills, we immediately recall our Smart Asset Pass ID or request information on an organization Caterpillar. using its Registration Number. You can request in- Third, in the General Information block of the formation on rates and constants being developed by demo we show that information fields may be of any public organizations or institutes. Or you can simply type, depending on the habits of a programmer. A perform crawling of information from a chosen web- type-bar, a file, a catalogue, digits — any type of field site. Everything you need for your Product Instance. at all. Using External Oracles it’s possible to implement Fourth, part of the General Information block’s almost any logic you could need on the Ethereum function may be carried outside the blockchain logic blockchain even today, it’s not complicated. and outside the logic of external oracles, instead be- Use of the oracle technology to examine images ing based on the UI alone. Our RnD showed that or videos captured by IoT sensors deserves additional the simplest but sometimes necessary function of the mention. Soon enough you will not have to pay for logic, such as checking hash totals in specific fields the recognition of your car license plate. The Smart can easily be diverted to web-based or any other pro- Contract would be able to send a fine from your bank gramming logic used in a particular Product Instance. account on its own. The results of the Initial contract steps are: Smart Asset creation logic may include any num- ber of External Oracles and each calculation will have • creation of a Smart Asset entity; its price, but even today there are technical solutions • assigning the Smart Asset with a unique ID for which allow them to be cheapened on the Ethereum subsequent connection IoT and Oracle; blockchain. It would be safe to assume that in the future there will likely be even more such solutions • may involve the creation of a legal Soft Com- available. mitment; Internal checks are simplest logical flags or hash 27

Figure 16: Validation Step totals that nonetheless may greatly impact the price mark it with the tick, then the Smart Asset becomes of a Smart Asset, for instance a flag showing whether valid and, consequently, gains value. or not there is a supporting document uploaded along Obviously, the implementation of Smart Con- with the request to the Microsoft Azure cloud. tracts is only a matter of time for any efficient nation, The results of the Validation step are: since the volume of inefficiencies in any large organi- zation, including nations, is enormous. It is both ben- • additional information input into the Smart As- eficial and sensible. Once a nation’s work conditions set entity; are modernized, you need only update your contract • formula determining the importance of con- chain to the latest Product Instance. In fact, if you cluded validation; are the Originator, you won’t even have to do that — it will be done by the BANKEX Foundation. • operation saved on blockchain. Cost of delivery estimation and automatic cus- toms tax of the exported asset based on data from 6.6 Audit & Legal the location sensor could also occur during this block. Which, we may add, opens the way for export/import In terms of technical implementation, interaction of cash flow associated with various types of assets with third party audit organizations, jurisprudence between nations. or government is also dedicated to an External Ora- cle. We initially called this section Global Delivery 6.7 Proposal Conditions because in order to make an asset as liq- uid as possible, it must achieve global liquidity. It Logically and technically this is the most difficult step is similar to Amazon.com in the field of digitized of the Smart Asset Сaterpillar. It’s where the magic goods. Global liquidity of various assets is our fu- happens: ture, now the most important task is the embedding of the Smart Asset ecosystem into existing national • trading rules are set for the chosen type of legislation and state regulations. Smart Asset; We are often told that the implementation of • asset authenticity rate is calculated; Smart Assets is extremely complicated due to the im- possibility of giving them legal significance. It’s true • the asset’s base price is calculated; that it’s a complicated task, but offchain legal condi- tions are not at all difficult to write into the chain of • the asset’s intended use is specified; Smart Asset contracts, even if one of the Smart Con- tracts requires action to be taken offchain or even • Hard Commitment parameters are set; offline. Does something need to be done and then marked with a tick? Good - we include this condi- • cash flow distribution is defined according to tion into the logic of the Smart Asset’s function and Smart Deal. 28

Actually everything is much simpler, with com- 7.10 Decentralized Order Book rules plicated deals that we make in the offchain world be- coming significantly easier once they are given an al- gorithm with the Smart Asset logic. You can find this out yourself by simply breaking down any deal that 7.11 Decentralized matching — pros interests you to its basic elements. Now do the same and cons thing again while also removing human error and you get a Smart Deal (Figure 17). The result of this step is the issuing of a token and formation of a bid for the Smart Asset Exchange. 7.12 Offchain Settelment Control 7 Technical solutions 7.13 Settelment directions 7.1 IT Architecture Scheme IT architecture scheme is presented on Figure 18. 7.14 Formula 1: saturation of request 7.2 Asset data compression for with data in a blockchain envi- blockchain record ronment 7.3 Role and system access matrix 7.15 Reasons for differentiation be- tween order and bid for Smart Assets 7.4 Originator/Supplier interaction in the ecosystem architecture 7.16 Formula 2: solution for auto- mated order merging and sepa- ration 7.5 Bank & non-Bank Origina- tor/Supplier 7.17 Formula 3: filter cascade system in the Order Book 7.6 Use of Microsoft Azure Bank API 7.18 Formula 4: implementation of 7.7 Large data volume hashing in the classical stock market trade rules Microsoft Azure Storage in a blockchain environment 7.8 Soft and Hard Commitment as- 7.19 Study of speed parameters of signment rules matching for Smart Assets 7.9 Bid & Ask records independence 7.20 Technological differences during principle Supplier tokenization 29

Figure 17: SmartDeal Proposal Step Figure 18: IT Architecture Scheme 30

7.21 Transaction execution with de- 7.27 The most important features of centralized storage Plasma protocol One of the most important features of Plasma pro- tocol is an ability to extend EMV and add required functionality, that is now only possible by use of ex- 7.22 Work with order packages during ternal oracles. One of such examples would be a contract initiation development of JWT (JSON Web token) like mes- sage exchange format with mandatory cryptographic signatures, that would allow some form of replaya- bility and authentication of requests to external re- 7.23 Order of Escrow function in the sources. Such exchange format and use case can be transaction execution block illustrated as following: Over the lifetime of smart asset some data from external service (External API request) Traditionally it’s solved by use of external oracle (such as oraclize.it), that performs a request 7.24 Smart Asset Core v.3 on your behalf, provides some proof of authenticity (TLS Notary) and performs a callback. Such oper- Version 3 of Smart Asset Core is presented on Fig- ation is expensive and requires few roundtrips. TLS ure 19. Notary is not possible in modern versions of TLS pro- tocol. 7.25 Smart Asset Core v.4 Our proposed approach would be to build a stan- dard requests protocol that would start with pre- signed (by smart-contract itself or other way) pay- load, that can be used to perform a request to exter- nal resource at some timeframe and requiring a re- 7.26 “Plasma” protocol & Proof-of- sponse to be signed by private key of external resource Asset Protocol (with public key also known upfront). Also, standard A “Plasma” protocol was proposed recently, that would require that ANY request with such payload is universal extension of any Turing-complete would return THE SAME response, so it would allow blockchain (such as Ethereum) and allows creation of to perform distributed computing and easy verifica- “daughter” blockchains that are governed by higher- tion for including information into the blockchain. level (“parent”) blockchain. These “daughter” chains Another interesting extension would be possibil- can have different consensus rules, functionality (ex- ity to perform “delayed calls” — requests to a smart tensions to EMV, for example) and underlying base asset functions that should be performed either at token. known date or regularly. For now such action would Such extension naturally fits Proof-of-Asset pro- also require an external oracle, while such informa- posal with Bankex token (BKX) being an underlying tion can potentially be saved inside a blockchain, so currency used to pay for manipulations with asset every participant could trigger a function execution records. If functional requirements for some types for an incentive in a form of fee (similar to the gas of assets or operations would impose a need of ex- price). tended functionality, such type of assets can be moved At some point an extension of EMV can be re- to separate chain. These “daughter” chains can be quired to facilitate new requirements or have back- viewed as side-chains for ease of understanding prop- ward compatibility with older systems. Such func- erties, but strongly governed and penalized by “par- tionality can be RSA functions (for old systems), ent” chain for any sign of misbehavior of fraud. Such Schnorr signatures (can be extended already as con- approach and further extension of “daughter” - “par- venience method) or post-quantum cryptography. ent” relation to the whole tree of chains would al- We see a need in having a degree of backward com- low participants of Bankex protocol to effectively do patibility to connect existing systems to blockchain. transactions with minimal trust and be able to be But the most tedious questions to be solved for minimally exposed to potential fraudulent actions of wider applications of blockchain, where computations other participants, especially ones not even related to are transparent, are, in our opinion, random num- their current transaction, in contrast to traditional ber generation and homomorphic cryptography. First single level chain, where potential attack affects all one is the cornerstone of cryptography in general and users immediately (DAO hack, for example). a way of obtaining a random number of appropri- 31

Figure 19: Smart-Asset Core, Version 3 32

ate quality will be a major breakthrough in a field. created asset, which is done using a WebSocket The latter is, for now, the only known possible way connection. Until this step only the client and to achieve privacy and computation transparency at the blockchain are aware of the asset, and un- the same time. We think that extensive development less it is taken backend won’t be able to send and experimenting in this field should start as soon as events from the server, if they are linked to the possible, with choice of currently known candidates current asset. A WebSocket connection solves and implementing them in a “subchain” to which data this problem. can be transferred, manipulated and returned to the parent chain without disclosure of nature of underly- 4. To connect the asset to IoT devices, the web ing data. page displays a specially generated QR-code, containing a link to the asset ID http://iot. bankex.com/ASSET_ID. 7.28 IoT Integration Scheme One of the necessary steps for IoT-enhanced assets is 5. The user scans this code using the BANKEX the procedure of integrating them with the IoT device IoT App. If it’s not installed, the code can al- control infrastructure. The procedure is shown on the ternatively be scanned by any QR-code scanner Figure 20. There are four major layers of back-end application, which is going to open the link in applications involved: a browser, automatically redirecting the user to The backend consists of four primary server ap- App Store or Play Market to download the ap- plications: plication. Deep-linking support allows the ap- plication to be launched with additional param- 1. web3j-compatible connector to the Ethereum eters, including the asset ID, immediately after network node; installation, which helps prevent scanning the same QR-code twice. 2. TLS-secured web server for serving HTTPS- requests for both API and frontend; 6. BANKEX IoT App is now ready to connect the 3. secured WebSocket server (wss://); asset ID to the ID of the device, which the appli- cation already knows at this point. In a simpler 4. DeviceHive8 server for IoT device management. case, the BANKEX IoT App already supports the phone’s sensor identification, which requires Let us describe the full process of integration in no additional tools to demonstrate capabilities. the case of a web-application (with a MetaMask ex- External sensors can also be added using this tension installed) and the Android IoT App application. 1. The asset owner selects one of the types pro- 7. The device contacts API, sending two key pa- vided. rameters: asset ID and device ID. This informa- 2. Initial data on the asset is filled in by its owner. tion is also shared with the DeviceHive, where After all the information is filled in, the user ini- the new data is automatically registered, as well tiates the procedure of publishing the asset on as WebSocket to inform of the client’s newly a blockchain by using the contract function via added device. MetaMask. On this stage we learn the newly created asset’s unique identification, which the 8. At this stage, the device ID is not yet added client receives following a successful transac- to the smart asset, although it is visible in the tion. web client in the list of devices available to be added. To finish the integration, the user must 3. After receiving the asset ID, the web interface confirm the device using the function in Meta- moves on to the next step. The first thing that Mask. This transaction can charge additional is required is a backend connection between the Ether or BKX-tokens to credit the oracle’s IoT ongoing web-session and the ID of the newly event execution expenses. 8 https://devicehive.com/ 33

Figure 20: IoT–Asset Integration: the User Story 34

A Terminology Blockchain — a cryptographically secured database containing the history of all transactions performed on the platform. It works the following way: 1. Transaction info is sent into the blockchain network 2. This transaction together with other transactions forms a block. Every block has its number and holds encrypted information about preceding blocks. 3. The block is sent in to be checked by all members of the network 4. If there are no discrepancies, every member adds the new block to the chain of previous blocks and the transaction is executed. Node — a blockchain network participant storing information on past transactions (blockchain), checks infor- mation on new transactions for authenticity and is able to add in new transactions (adding blocks). All the nodes are connected to one another forming a single network. A public blockchain is a decentralized system where the information on transactions is stored and checked in many multiple locations. This kind of synchronization between millions of locations consumes large amounts of electric energy and is significantly more expensive than a private blockchain. The system also becomes slower. However, a public blockchain may prove preferable for industries where decentralization is necessary. A private blockchain is centralized, making it similar to traditional centralized systems, however it exceeds them in terms of efficiency and security. ICO (Initial Coin Offering) — a method of invitation to finance a campaign/project. Tokens/coins are issued that grant the right to receive a share/service/good now or in the future, or else they grant a percentage of future profits. After the start of sales, tokens can be resold to other investors. Trade is conducted on a blockchain. Cryptocurrency — digital money without a physical analogue. It is supported by the complexity of its development — mining. Today we are able to identify “classics” such as Bitcoin or Litecoin, and newer currencies such as Ether, which act as platforms for the creation of new assets - tokens. Ethereum — the most popular platform for issuing of tokens and smart contracts. Gas — a unit used to measure the price of calculations done on Ethereum. More difficult calculations are rewarded with higher amounts of Gas. This works the following way: the originator of a smart contract sets a price in gas. Miners, whose PCs handle the calculations, make the choice whether or not to perform these calculations. If the price offered is too low, then neither the calculations, nor, as a result, the contract will ever be concluded. Smart-contract a set of pre-programmed tasks that the program automatically carries out upon certain con- ditions being fulfilled, then forms a deal. That’s why it requires no trust between sides, nor a middleman: the contract has a strict logical structure and the computer executes it automatically. Smart-contracts allow for inclusion of a large number of conditions and states and for a correlation between their every possible combination and various outcomes. Ditigal tokens — croptygraphic assets issued using specialized blockchain platforms. An analogue would be a record in a register. A token has an address and may also contain a smart-contract that defines its function and also acts as a separate execution mechanism. Tokenization — the process of transforming rights into a digital token, which is then traded on a blockchain with low transactional costs. Tokenization is an analogue of securitization on a blockchain. Smart Asset — an asset that has gone through tokenization using the BANKEX Proof-of-Asset Protocol. ISAO (Initial Smart Asset Offering) — a method of fixing businesses (farms, stores, manufacturing plants) using tokenization of their assets based on the BANKEX PoA protocol. 35

Product instance — an iteration of a fintech-product owned by a BANKEX product provider. For instance a product provider can customize his product for various regions, thus creating a product instance for each country. Blockchain-agnostic protocol — an application level protocol that does not depend on the exact blockchain- technology utilized and can be implemented on any existing open source blockchain. References [1] Y. Amihud, H. Mendelson, and L. H. Pedersen. “Liquidity and Asset Prices. Foundations and trends in Finance”. In: Wordsworth Editions Limited 4.1 (2005), pp. 269–364. [2] A. Ilmanen and C. Asness. Expected Returns: An Investor’s Guide to Harvesting Market Rewards. The Wiley Finance Series. Wiley, 2011. isbn: 9781119990772. url: https://books.google.ru/books?id= WqFf6imwTsUC. [3] John Maynard Keynes and Mark G. Spencer. The General Theory of Employment, Interest and Money; The economic consequences of the peace. Wordsworth Editions Limited, 2017. Chap. 13. [4] John Nash. “Equilibrium Points in N-Person Games”. In: Proceedings of the National Academy of Sciences 36.1 (1950), pp. 48–49. [5] John Nash. “Non-Cooperative Games”. In: The Annals of Mathematics 54.2 (1951), pp. 286–295. [6] Stanford Encyclopedia of Philosophy. Game Theory. 2017. url: https://plato.stanford.edu/entries/ game-theory/. [7] Avi Sharon. “Patient Capital, Private Opportunity: The Benefits and Challenges of Illiquid Alternatives”. In: Alternative Investment Analyst Review Fall (2015). url: https://www.caia.org/aiar/access/ article-930. [8] Chris Skinner. Lego Bank is Here, but It’s not Built with Lego. 2017. url: https://financialit.net/ blog/bank/lego-bank-here-its-not-built-lego. [9] Nick Szabo. “Formalizing and Securing Relationships on Public Networks”. In: First Monday 2.16 (1997). url: http://firstmonday.org/ojs/index.php/fm/article/view/548. [10] Nick Szabo. “Smart Contracts: Building Blocks for Digital Free Markets”. In: Extropy 16 (1996). url: http://www.fon.hum.uva.nl/rob/Courses/InformationInSpeech/CDROM/Literature/LOTwinterschool2006/ szabo.best.vwh.net/smart_contracts_2.html. [11] “Top 50 Financial IT Pathfinder Ranking”. In: Financial IT April-May Issue (2017), pp. 36, 49. url: https://financialit.net/pdf/view/17419. 36