by drwasho and Delain Markos
Decentralised money necessarily requires decentralised markets.
OpenBazaar has begun to create the peer-to-peer (P2P) infrastructure to enable individuals to trade any good or service pseudonymously using bitcoin. The focus thus far has been on the sale and transfer of physical goods and services. However, decentralised markets are required for all asset classes, including shares.
However, there are several security considerations that must be factored into with peer-to-peer sales of share contracts. What is to stop an issuer or any bearer selling the same share contract to multiple individuals, essentially double-spending the share? Currently, there are several platforms to enable users to issue shares to avoid the double-spend problem. One solution is to employ the use of a central issuer or mediator, who validates all peer-to-peer (P2P) transfers to prevent double-spends. Alternatively, blockchain technology can be used minimise the risk of double-spends in the absence of a trusted third party. The latter can be accomplished by using the Bitcoin blockchain (i.e. colored coins, Mastercoin or Counterparty protocols), leveraging the existing and growing security of the network. Another option is for a user to create their own blockchain with each coin representing a token of the asset.
While these approaches may be technically sound, there are some key disadvantages. A central issuer/mediator that validates transactions between peers introduces a centralisation and security risk, which only grows as the share price moves in a direction contrary to the interest of the issuer. In the case of a central mediator(s) (e.g. an exchange server), while the use of Ricardian contracts would prevent any fraudulent manipulation of the share contracts, the mediators themselves are central points of failure for secure asset transfers.
Using the Bitcoin blockchain for asset issuance and P2P transfers consumes additional resources that are paid for by other members of the network. Moreover, transaction times between peers are limited to the existing contraints within the Bitcoin network. Creating a custom blockchain is a significant risk if there is a failure to gain a critical mass of honest nodes, contributing sufficient hashing power to security the network. It is also unclear how successful projects such as Ethereum will be addressing these issues and managing their own network security.
A preferable solution to this problem is to leverage the existing network and contractual infrastructure of OpenBazaar without relying on a trusted third party or a blockchain. While we do not presume to forsee what approach users may use, or force users to follow any one model, in this article we propose a scheme called one-time key revocation asset transfer (OTK-RAT).
- Allow the transfer shares without using a blockchain and creating a new coin
- Allow the transfer shares without requiring the issuer or a trusted-third party to keep track and verify transfers
- Preserve the privacy of users in the transfer of shares
Shares will be represented as individual Ricardian contracts, or 'asset contracts'. An issuer will include the following information as fields within the contract:
- Issuer ID (nym ID)
- Asset contract class (in this case 'shares')
- Share nonce (unique identifier for the share)
- Share entitlement (message outlining what the bearer is entitled to from the company)
- Issuer Public PGP key
- Issuer digitial signature of (1)-(5)
One of the most important pieces of data within the share contract is the share nonce. The share nonce is a unique identifier for each share, which can be verified by cross-referencing against a list of all shares issued (share listing) and their corresponding nonces in the initial public offering. The share listing will be digitally signed by the issuer and other arbiters.
For example, Acme Inc. conducts an IPO issuing 5 shares. Acme draws up the following share listing:
Share Listing Hash: 1e0b3a555c10104322b3a01bcd822444be53fb23
-----BEGIN PGP SIGNED MESSAGE-----
Hash: SHA1
<?xml version="1.0"?>
<!-- Contract Properties -->
<contract_type> Financial Asset </contract_type>
<finasset_type> Share Listing </finasset_type>
<!-- Share Issuer -->
<issuer_name> ACME Inc. </issuer_name>
<issuer_nym> 61768db8d1a38f1c16d3e6eea812ef423c739068 </issuer_nym>
<!-- Share Nonces -->
<share01> 356a192b7913b04c54574d18c28d46e6395428ab </share01>
<share02> da4b9237bacccdf19c0760cab7aec4a8359010b0 </share02>
<share03> 77de68daecd823babbb58edb1c8e14d7106e83bb </share03>
<share04> 1b6453892473a467d07372d45eb05abc2031647a </share04>
<share05> ac3478d69a3c81fa62e60f5c3696165a4e5e6ac4 </share05>
<!-- Share Entitlement -->
<share_entitlement> The bearer of this share is entitled to an
single stake of equity in ACME Incorporated, and one voting
right. </share_entitlement>
<!-- Issuer PGP Key -->
<PGP_Public_Key>
- -----BEGIN PGP PUBLIC KEY BLOCK-----
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=dDLn
- -----END PGP PUBLIC KEY BLOCK-----
</PGP_Public_Key>
<!-- Issuer Digital Signature -->
-----BEGIN PGP SIGNATURE-----
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-----END PGP SIGNATURE-----The share contract is created with its sale to the first buyer (Alice), the genesis shareholder. As with other Ricardian contracts, Alice makes a bid offer by including the following fields within the contract:
- Alice's details (nym ID, public PGP key)
- Price for the share
- Alice's digital signature of the final contract
After receiving Alice's bid, Acme Inc. accepts the bid by digitally signing the contract and sending it to a mutually agreed upon arbiter for triple-signing and the creation of the multsig address. Alice's funds in the multisig address are released once Acme Inc. updates the public share listing to indicate that the share nonce has been sold.
The risk of a double-spend primarily exists in P2P transfers beyond the genesis shareholder. If Alice wants to sell the share contract to Bob and Jack at the same time, two legitimate chains of ownership will be created for the same share nonce. This isn't a problem for physical goods and services, as failure to delivery the good or perform the service will prevent any funds from being released for the multisignature address. Buyers of share contracts require a means of validating that the share contract cannot be sold to any other party without using a trusted third party or deanonymising public ledger.
This can be achieved through the creation of one-time keypairs by both the buyer (Bob) and seller (Alice). Alice firstly advertises the share contract for sale, which includes her nym details and the issuer's digital signature of transfer to Alice, verifying that she is genesis shareholder. The share contract attracts the attention of Bob. Transferring the asset firstly requires the Bob to create a bid contract for the share, which must include the following data:
- Share nonce
- Optional: include a hash of Alice's 'for sale' share contract, but the nonce should suffice if the issuer's digital signature is valid
- Bob's details (nym ID, public PGP key)
- Price for the share
- Bob's one-time public key (full signature block and corresponding hash)
- Bob's digital signatures using their public key and the one-time public key
For example:
Bid Contract Hash: 4f43692c12a41079fb9b3dc58e7d367b453cc650
<?xml version="1.0"?>
<!-- Contract Properties -->
<contract_type> Financial Asset </contract_type>
<finasset_type> Share Contract </finasset_type>
<!-- Share Contract -->
<issuer_name> ACME Inc. </issuer_name>
<issuer_nym> 61768db8d1a38f1c16d3e6eea812ef423c739068 </issuer_nym>
<share_nonce> 356a192b7913b04c54574d18c28d46e6395428ab </share01>
<!-- Buyer Details -->
<buyer_nym> 4f43692c12a41079fb9b3dc58e7d367b453cc650 </buyer_nym>
<!-- Buyer PGP Key -->
<PGP_Public_Key>
-----BEGIN PGP PUBLIC KEY BLOCK-----
Version: Mailvelope v0.8.2
Comment: Email security by Mailvelope - http://www.mailvelope.com
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- -----END PGP PUBLIC KEY BLOCK-----
</PGP_Public_Key>
<!-- Buyer One-time key -->
<PGP_Public_Key>
-----BEGIN PGP PUBLIC KEY BLOCK-----
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-----END PGP PUBLIC KEY BLOCK-----
</PGP_Public_Key>
<!-- Digital Signature -->
-----BEGIN PGP SIGNATURE-----
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-----END PGP SIGNATURE-----
<!-- One-time key Digital Signature -->
-----BEGIN PGP SIGNATURE-----
Version: GnuPG v2.0.22 (MingW32)
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-----END PGP SIGNATURE-----Alice receives the bid for the share and decides to accept the contract. In order to do so, Alice digitally signs the contract using her one-time private key and forwards it to the Bob and the mutually selected arbiter of choice for triple-signing and the creation of a multisig address. Once Bob has transferred funds to the multisig address, Alice must publicly revoke her one-time keypair, preventing her from transferring the share contract to any other individual after a sale to Bob. The revocation message will contain the following information and format:
- The share nonce
- Alice's one-time public key
- The hash of Bob's one-time public key
- The hash of the arbiter's public key
- The hash of triple-signed contract
The revocation message is digitally signed with Alice's one time private key. The one time keypair is only considered revoked once it has been published to a distributed ledger of one time key revocations. The following is an example of a revocation message:
<?xml version="1.0"?>
<share_nonce> 356a192b7913b04c54574d18c28d46e6395428ab </share_nonce>
<seller_1tpubkey>
-----BEGIN PGP PUBLIC KEY BLOCK-----
Version: GnuPG v2.0.22 (MingW32)
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=6x5D
-----END PGP PUBLIC KEY BLOCK-----
</seller_1tpubkey>
<buyer_1tpubkey> 8a2da05455775e8987cbfac5a0ca54f3f728e274 </buyer_1tpubkey>
<arbiter_pubkey> 6a839aaeac978584b12ae1868e3d0010d1d53b11 </arbiter_pubkey>
<triplesig_contract> 2e3c0feeabaeb595f91f6dcc1639939ea012c490 </triplesig_contract>
<!-- Digitial Signature -->
-----BEGIN PGP SIGNATURE-----
Version: GnuPG v2.0.22 (MingW32)
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=MSdE
-----END PGP SIGNATURE-----After Bob and arbiter can confirm that the revocation message has been generated and published to the distributed ledger of one-time key revocations, the funds are released from the multisig address. The triple signed contract serves as a proof of ownership transfer from Alice to Bob.
The final measure to prevent Alice, or subsequently Bob, double-spending the share contract is for the share nonce to be hashed after every transfer (share nonce throttling). Within the triple-signed contract, root share nonce, previous and current hashes of the nonce can be included as fields. Any attempts to sell the same share nonce or use the same one-time keys twice can easily be detected by cross-referencing against the distributed ledger of one-time key revocations.
The new owner of a share contract can also to request the issuer to digitally resign the contract as an additional means of validating the share contract. Although the issuer's digital signature should only be relied upon as a secondary means of verifying the validity of the share contract.
The distributed ledger of one-time key revocations is not like the blockchain as individuals do not need to host the entire revocation ledger. Users (buyers, sellers, arbiters) can also host a revocation ledger for transactions that they have participated in, which they have an incentive to host to prevent potential disputes and attempts at double-spends. The share issuer, shareholders, arbiters, or altruistic users may decide to host a copy of the revocation ledger for the company's share alone. There is particular incentive for share issuers and arbiters to host revocation ledgers for their shares, in order to preserve the integrity of their shares being traded within OpenBazaar. The number of copies of a revocation ledger is irrelevant provided that at least a single copy of a valid digital signature exists of a revocation message.
In this article we propose a system called 'one-time key revocation asset transfer' (OTK-RAT) as a means of P2P transfers of share contracts within OpenBazaar, without resorting to a trusted third party or blockchain. While the market will decide the preferred process of transferring shares between peers on OpenBazaar, OTK-RAT is yet another means for users to consider.
So many hashes and nonces my head is spinning! I need a visual to help. Fascinating idea.
I think the main parts of this that will be challenging is making sure that the initial share issuer's public share listing is updated and accurate (would they have an incentive to not?), and the maintenance and accessibility of the distributed revocation ledger.
In a decentralized system like OB, if you aren't relying on a blockchain for share listings or for revocations then you are trusting other parties that their information is the most up to date and accurate.
If a particular share has been sold multiple times, would it be required for the potential buyer to query multiple revocation ledgers to ascertain the validity of the previous transactions? Are you suggesting that the client attempt to do this automatically? What happens if the revocation ledger is lost or inaccessible, does the share then lose its legitimacy?
Sorry for all the questions, this is complicated stuff.