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Blockchain and Smart Contract – the inevitable revolutionTowards distributed organisations – how decentralisation changes the AEC world
A blockchain is a digital ledger from which the information can’t be removed or changed. The decision about what new information can be entered is entrusted to a group (people or companies) and not to an individual entity. That’s why a blockchain is a decentralised ledger whose task is to check the truth of the facts, and the flows of data, processes or events, no longer relying on a human-managed, centralised system but a decentralised agreement system managed mathematically by a computer network.
Use of the blockchain is revolutionary, a feature of all the wider family of Distributed Ledger Technologies (DLT), which the blockchain is part of, and can have a great innovative impact in the Architecture, Engineering and Construction (AEC) world, where many applications have been and are being created. Understanding how decentralisation really works is important to understanding the advantages of the blockchain, using the example of payment systems, where the technology was first applied (a long time after the concept was invented in the 1990s).
Decentralised payment systems
Value dates and traditional payment systems are centralised – there is a central body with complete control of the value date or transactions carried out by users. For example, a central bank may decide when to issue new currency and a payment system can decide when a transaction is valid or not. Users have to trust the central body and any disputes can only be settled by a Court, with extremely high costs and long periods of time.
In decentralised payment systems, on the other hand, the network decides which transactions can be registered and successfully concluded. The first system of this type, based on blockchain technology, was put forward (in 2008) and developed (in 2009) by an anonymous developer, known as Satoshi Nakamoto. The new system of world payment where a new currency can be traded is called Bitcoin; the same name is also given to its currency (bitcoin or BTC). All transactions certifying the exchange of BTC between different addresses are recorded in the Bitcoin blockchain.
Updating the blockchain is managed by a network of hubs, i.e. a network of computers controlled by independent bodies in a decentralised system. Each hub can be seen as a computer which:
● contains a local copy of the blockchain;
● receives users’ transactions;
● decides with other hubs in the network which transactions should be added to the blockchain.
Bitcoin was the first important implementation of a blockchain; since then, many other systems based on this technology have been developed. The concept of unalterable ledger has inspired new ways of using the technology in addition to the exchange of crypto-currency created by Bitcoin by making the following possible:
● saving of unobjectionable messages;
● exchange of assets;
● Digital Right Management;
● automatic implementation of programmes that function as contracts (Smart Contracts).
image from the ARUP Report “BLOCKCHAIN AND THE BUILT ENVIRONMENT” (page 11)
Key steps on how a blockchain-based application works.
These steps consist of real world and blockchain actions. It is possible to automate 4 out of 5 of these steps through smart contracts.
Smart Contracts are of special interest for world business and the engineering sector. They aren’t contracts in the legal meaning of the word but software belonging to the blockchain that can be used for different purposes, such as simply establishing agreements between the participants in financial transactions, agreeing their methods of payment or automatically implementing the clauses of multi-lateral agreements.
Smart Contracts are carried out by a decentralised computer network which uses consensus ‘protocols’ so that the sequence of actions arising from the application of the contract can be established. The result of the implementation of this code is a system that allows the automatic performance of what represents a contract, i.e. an agreement between the parties, without the intermediation of third parties, and without the need for a lawyer to draft the complex legal clauses, a notary to ratify the signatures or a guarantee body to deposit a copy of the contract. In essence, it is a software code that reduces the risks of errors or manipulation and thus generates greater trust between the parties.
Before a technology like blockchain came into play, contractual tools of this type could not be used as they would have had to be kept in separate databases. With the invention of the database shared through the blockchain, Smart Contracts can use auto-implementation methods and the parties involved have the chance to authenticate the result instantly. Approvals, calculations and other elements of negotiations become automated and don’t need intermediaries.
The use of Smart Contracts in Italy was recently legally sanctioned with the Decreto Semplificazioni (Simplification Decree) approved recently by the Lower House of the Italian Parliament, which has at long last provided legal definitions and guidelines for blockchains in general.
The new legislative provisions in the Simplification Decree connect to other, existing laws such as the Digital Administration Code, and can finally lead to the spread of deeds and contracts in distributed ledgers giving them full legal validity. The translation of these directives into real action is the responsibility of the Agenzia per l’Italia Digitale (AgID – Digital Italy Agency) which will indicate the technical standards that such technologies must have to fall within the definitions established by the Chamber of Parliament.
Thus, the aim of the AgID’s work will be to make the memorisation of a computer document in a blockchain ledger fully recognised legally, in particular giving legal value to electronic time validation. The implementation of these ledgers would automatically bind two or more parties on the basis of their predefined effects, as in the case of Smart Contracts that fulfil the requisite of the written form subject to computer identification of the parties concerned.
Blockchain and collaborative engineering
In my role as CEO of TE.X Engineering, I’m personally involved in seeing the achievement of these decentralisation principles, making a contribution to the revolution in collaborative engineering with the aim of helping thousands of professionals and companies in the AEC sector to work together and make their processes more effective and safer.
TE.X is working on a platform called Score, a semi-acronym standing for Smart Collaborative Engineering. It is the result of a research and development project whose aim was to allow each professional and company involved in a public tender or a design team to be certain that the rules underwritten through the signature of a Smart Contract are respected.
The platform is currently a Beta version and will be officially launched in May 2019. The project is the result of the expert partnership between TE.X, Tecnolav and the University of Cagliari, Department of Mathematics and Informatics, and receives funding from the European Union, Italian Republic, and Sardinia Region (Por-Fes) (*).
Staying in the design world, ARUP, the well-known British multi-national leader in the AEC sector, is one of the most advanced companies in the study of how blockchain technology can be applied to a wide range of activities – from the design of Smart Cities to transport, the management of the supply chain to the circular economy (see the recently published report indicated in the notes to the article).
image from the ARUP Report “BLOCKCHAIN AND THE BUILT ENVIRONMENT” (page 11)
Key benefits of blockchain for the built environment.
The main applications of the blockchain in engineering that we are working on and intend to develop in the coming months are:
- Creation of an interconnected system of public and private blockchains. This will allow the generation of an ecosystem that simplifies the interaction between all those involved, who will gain enormous benefit through the interoperability, and makes it more efficient. In addition, decentralisation, created due to the automation of most of the decisions, reduces the power of central authorities and increases the chance of users to make a contribution to the process.
- As a result of these innovative applications, a new engineering marketplace will develop that allows new co-operations to be started, also with companies and professionals external to current established relations, thus enabling:
● young professionals to enter the world of work more easily;
● engineering companies to extend their business;
● customers (including the Public Administration) to find a wider range of companies to entrust with assignments and to find them more quickly.
- Creation of a digital public procurement system which can benefit from the use of blockchain technology. An automatic or semi-automatic system of assigning tenders is created which operates without the aid of a specific Bid Commission in which the decisions result from previously implemented mathematical consensus algorithms (consensus mechanism). The following benefits can thus be obtained:
● standardisation and transparency of proceedings;
● simplification and elimination of discretional power and corruption;
● assignment in real time;
● fast, automatic resolution of any disputes;
● exponential reduction of procedural costs;
● application of meritocratic criteria. The guarantee of obtaining the highest quality from the winner of the tender;
● creation of a Distributed Autonomous Engineering Enterprise which makes company processes more efficient, simpler and more automated through a private Blockchain platform.
- Creation of a dedicated platform (sidechain) to optimise management of individual projects. Project management is decentralised through Smart Contracts; the main steps are validated by miners and traced in the ledger. Micro payments are made using specific consensus algorithms connected to the BIM model.
- Organisation of the Works Management office (D.L. 4.0) through a decentralised management and control system made more effective through the application of blockchain technology.
- Implementation of a specific new hub/miner service for engineering works, created to assist the general contractor’s work in all the crucial steps of the design, development and management process of the work. This service will take care of the creation, implementation and management of all the consensus algorithms necessary to ensure achievement of the desired aims of each step.
image from the ARUP Report “BLOCKCHAIN AND THE BUILT ENVIRONMENT” (pag 7)
The current state of blockchain maturity for the built environment.
Application of the blockchain in the AEC sector can enable the construction of a pioneering digital ecosystem as a result of the contribution of many professionals in developing the most effective way of managing design together – an innovative, important and decisive challenge for the professional future of both individuals and the whole sector
(*) Aid for research and development projects – POR FESR Sardinia 2014 – 2020 Axis 1 Action 1.1.3, Strategy 2 ‘Create work opportunities favouring company competitivity’, Operation Programme 3 ‘Company competitivity’