What’s a blockchain?
From a purely non-technical perspective, what is the best way to relate the concept of a blockchain to a consumer audience? In terms of the actual benefits it could provide to them it seems reasonable to say that blockchains are transparent banks. Every consumer knows the value of a bank. This analogy allows them to understand the value of this new technology by associating it with something they already believe is valuable.
But why would one need a transparent bank? How would additional transparency improve the consumer experience of financial services? One obvious benefit is that we wouldn’t be required to trust anyone when we wanted to know where our money was. Given a full reserve banking system, we could verify for ourselves where our money was simply by visiting the bank. This is a very literal picture of transparency where money exists only as physical notes. It serves only as an illustration allowing us to describe some of blockchain’s consumer facing features to a non-technical audience. Given the digital nature of how we use money every day the concept of physical money sitting in a physical location seems terribly outdated.
But wouldn’t this idea have value as a functional piece of art? It could be used to demonstrate to people how smart contracts on the blockchain are providing a useful service to the general public. For some people it might help to use a physical construct as a metaphor to explain something non-physical. Anything I can do to help others grasp this concept is worth a try. Given how hard it has been to get people to see the value of TandaPay as a new type of financial innovation, I thought trying to illustrate this concept with a physical piece of art was worth an attempt. This is where I began my journey in the creation of a physical construction of blockchain art to illustrate what TandaPay does.
What’s a smart contract?
Again from a purely non-technical perspective, what is the best way to relate the concept of a smart contract to a consumer audience? In terms of the actual benefits smart contracts could provide to consumers, they seem to do two important things:
- Hold money securely
- Determine the ownership of this money based on the outcome of an event that hasn’t happened yet
How can we help consumers understand the value of smart contracts? The easiest way would be to associate their benefits with something consumers already value. Insurance is a very familiar type of contract that consumers deal with on a monthly basis. Consumers value insurance (although they may not always value their insurance carrier). But why would insurance using this technology be expected to provide users more benefits than the existing system?
This is where the concept of Tandas come in. Tandas are a type of community financing where people come together in groups for the purpose of saving and borrowing together. They allow people who don’t have access to traditional forms of banking or credit to gain some financial services based upon their social capital within their local community. In some ways they are better than banks because funds do not need to be held by a custodian of the group or another institution. Since most of us bank for free in a country where the rule of law provides strong protections to retail banking customers, we take for granted all the costs of actually running a bank. All of these costs and liabilities can be mitigated simply by using the tanda architecture. This architecture allows money to move directly from saver to borrower, essentially removing the bank as the custodian of funds from the picture.
The only problem is that the concept of a Tanda cannot be directly applied for use in insurance. This is because there is a gap between the time when a premium is paid and the time when a claim is paid. This seems to require us to bring back the use of a 3rd party to hold everyone’s premiums until they are needed to pay claims. Not so fast, we can use the TandaPay Locker to accomplish the same thing.
Previously I wrote the following:
Rather than trust a third party to hold these funds we could imagine that the group trusts a bulletproof glass safe to guard funds until the end of the month. If no one person owns the safe and if the safe is located in a public space such as a library then the safe is a suitable metaphor for a smart contract.
The community safe is transparent and it allows everyone to see the premiums placed within it. Even though anyone can see these funds it does not permit anyone to take these funds. To open the safe, keys would be required. When using the safe as a metaphor one should imagine that rather than containing a single box, the safe contains multiple safe deposit boxes, all housed within the one community safe. There would be as many deposit boxes as their are policyholders, each policyholder having their own unique key to their own box.
The community safe is not a 3rd party custodian in the same way a bank or insurance company is a custodian of funds (see caveat*). Can you spot the difference between these two concepts ❓ Both a bank and a community safe seem to hold other peoples money as a third party 🤔. Each lock box is opened by individual keys, each key is in the possession of their respective owners. If you immediately realized that individual lock boxes was the answer, then I congratulate you 🎉.
It is the individual keys which allow the participants to claim that they never entrusted their funds to a 3rd party. These keys allow policyholders to still retain exclusive access to their own funds. Smart contracts can be programmed to hold money in the exact same way. I have written previous blog posts which give a full description of how smart contracts could provide communities with insurance coverage. A functional piece of art, the community safe, could serve as a physical analogy of what the smart contract is doing with these funds in the digital realm. This is where the creation of a community safe has relevance in explaining the value of a smart contract.
The specific problem we are trying to solve is the problem of liability created when a third party becomes a custodian of insurance premiums. If we can solve this problem we can eliminate the high cost of regulatory compliance. This lowers the barrier of entry to communities who would like to provide new and innovative financial products to each other. I explain the problem in more detail in this post here where I focus specifically on three core principles:
- Blockchain technology allows us to solve the problem of regulatory liability by allowing funds to flow directly from policyholders to claimants.
- Using the blockchain we eliminate the requirement that a third party would ever need to take custody of funds which do not belong to them.
- Direct payments of money between two parties for the purpose of building an ideologically motivated community is speech and cannot be regulated.
What value could the TandaPay Locker provide to people?
The TandaPay Locker is a community safe for holding a TandaPay groups premiums. People pay their premium into their individual safe deposit box at the start of a policy period. The TandaPay Locker holds these funds for the entire month. If a policyholder experiences a loss then they receive a promise that at the end of the month they will receive a claim payment. At the end of a policy period those premiums are then used to pay claims.
Now that we understand the concept, it becomes easier to answer the question, “why would insurance using this technology be expected to provide users any more benefits than the existing system?” If you need to review the basic concepts about how TandaPay provides coverage for deductibles you can check out these posts. Here are just a few reasons why TandaPay is better than traditional insurance for covering the cost of a deductible:
- For a low monthly premium TandaPay can cover the cost of a deductible. Traditional insurance can do this only if your premiums go up by a substantial amount 💰💰.
- If no one in your TandaPay group has a valid claim in a given month your entire premium is refunded back to you 😮. When has an insurance company ever given you back your premium because they had less claims than expected?
- Exactly zero premium dollars are ever used to pay for someone else’s fraudulent claims. Policyholders never have to bear the financial cost of other people trying to defraud the system. When has there ever been an insurance carrier that could guarantee this level of protection?
- You always know who was helped by your premium. That person is always either a friend or a friend of a friend. Now you know who owes you a beer next time you guys all go out to eat 😁.
My next post will go into the weeds of how to build the TandaPay Locker and how policyholders can actually use it. This will be an actual physical object and so far it has not been easy to design and build as you can see from these pictures here. Hopefully one day it will eventually have some value. Groups of people on a college campus somewhere may actually decide to use it to cover the cost of an unexpected deductible or perhaps bike insurance. If you wish to help in this endeavor please leave a note below and I’ll be happy to contact you 🙂.
* Important caveat: In some architectures smart contracts can still function as third party custodians. The only way to remove this liability is to make sure that all accounts are reconciled at the end of each policy period. This process of reconciliation requires all accounts to return to a zero-balance. This is done by paying out all claims and returning the remainder of premiums back to policyholders as refunds at the end of every month. This is a special type of architecture known as “zero-reserve architecture.” For more information on zero-reserve architecture see: P2P Insurance at its most basic level — Which features are essential for eliminating fraud and why?