Open Co-op LLP Project Proposal
(opencoin)

Introduction

Open Co-op LLP was founded in 2004 by Gary Alexander, Senior lecturer at the Open University ICT department, Tom Salfield, BSc in Philosophy and Rconomics (LSE), Josef Davies-Coates, BSc in Social Policy (LSE) and Oli Sylvester-Bradley, BSc in Sustainable Design (Center for Alternative Technology).

The open coop was setup to support other cooperatives and social enterprises and to create an international trading network. Intensive research was undertaken, and a community around the website (http://open.coop) formed and is maintained up to now.
In 2007 Joerg Baach, freelance technologist for social software, joined the open co-op with the plan to make a new payment system for the internet.

At the moment two products are in development:

• an online collaboration system, which is targeted at cooperatives and social enterprises.
• opencoin, an electronic currency system, targeted at business internal use, community systems and payment providers.

The opencoin project is the focus of this project proposal.

Business model

The Commercial Proposition

opencoin is an innovative system system for creating secure online cash. Maintaining the security of an online money transfer system is typical highly costly and much of the know-how is concentrated in large firms, such as PayPal, who have invested many millions in their technology. This has lead to a highly concentrated market with only a few large providers. Consequently online money transfers are currently expensive and become prohibitive when dealing with small payments. It isn't worth while to transfer 20p because the charges would be higher than that. This in turn is prohibitive of various micro-payments solutions where many small transactions could create great value. An example would be charging very small amounts of money for sending an email. If there was a charge of 0.001 pence per email sent, it is unlikely this would have a significant effect on the cost of an email to an individual or even a corporate user. However for a spammer this cost would be the difference between profit and loss, thus pricing spammers out of the market. This is just one example of the potential benefits of electronic micro-payments.

Understanding the commercial value of opencoin begins with the realisation that computer security is never absolute. Instead, security professionals try to ensure that the cost of breaking into a system is higher than the value of what could be gained through the act. In the case of the current major online payments providers they have a set of central servers which maintain the values of all the accounts, but still have to be accesible trhough the internet. By compromising a system like this a criminal can gain massive amounts of money and/or valuable data. Hence criminal networks put in many millions of dollars to compromising the servers and systems of the major online payments providers.

In the opencoin system, since individuals hold cash, security of money holdings is distributed to those who have the money (much like cash might be kept under people beds in regimes where the banks have been historically unreliable). Since the cost of breaking into millions of systems will be much greater than breaking into just one, and the value of an individuals holdings is likely to be much less than that of a large payment provider, opencoin will dramatically reduce the cost of maintaining a secure money transfer system.

Revenue Streams

There are diffent multiple potential revenue streams from the development of the opencoin system.

• 'Running A Currency issuer (Mint)' - the cost for issuing electronic coins to the user can be set by the issuer.
• Microfinance and international money transfer - It is now the case that 3 times as many people in the world have a mobile phone as a bank account. The ratio is higher if we consider the developing world alone. If people could hold cash on their mobile phones and pay one another at very low cost using the opencoin system we could potentially enter this high growth market.
  
• 'Marketplace for digital coins' - if there is more than one organisation issuing electronic coins, some issuers will be trusted more than others. There will therefore be a need be for trading these coins against each other, as it is now done with currencies in a currency market.
• Consultancy - Assuming our proof-of-concept is successful, businesses will need consultancy for integrating the opencoin system in to their webshops and other online payments operators will want to adopt the same technologies to reduce the cost of their operation.
  
• High quality wallets - there is always room for improvement, and users might be willing to pay for easier more usable wallets or wallets with extended features.
  

Project Detail

opencoin is going to be a system to support electronic cash, for low cost, anonymous, money transfers. In the opencoin system an issuer mints electronic coins, users store them in their electronic wallets and exchange them with other wallets. Users may be end users, businesses, websites etc.

Anonymity
With real banknotes it can not be traced how people spend their money. This is one of the key properties of cash. With account based systems (e.g. credit cards, bank transfers, paypal) all transactions are traceable, leading. In opencoin the electronic coins are not traceable, therefore users have the same privacy as with banknotes. We will also experiment with variations of the system in which anonymity can be compromised if certain conditions are satisfied.

Peer to peer
Everybody is a user in the system, and is able to receive and spend coins. Business to business, intra-organisational, and user to user money transfer are all possible.

Wallets everywhere
Electronic wallets can be implemented on mobile phones, in web browsers. It could also be used on a webserver or by other means.

Micropayments
The unit of a coin can be of any size, from very large amounts to very small one. Using opencoin it will be possible to allow micropayment, e.g. pay 0.1 pence per page on a newspaper site.

Coins
An issuer can choose freely what to base the electronic coins on britsh pounds, businesses internal currency, LETS (local exchange trading schemes).

Cheap transfer
Running an opencoin system, acting as an issuer, can be relatively cheap, allowing for much cheaper transfers than current systems, which tend to run at 2-3% of the amount transfered.

Details

The project has three different areas

Software development

In order to run an opencoin system, two components are needed: server side software for issuing the electronic coins and redeeming them (issuer software) and software for the clients to handle the coins, to exchange and make payments (wallet). The project aims at getting to prototype stage for both components, which would allow testing the system and evaluating the user experience.

Continuing cryptographic research and audit

The core of the system is cryptographic software and protocols. Even small mistakes in design or implementation of the cryptographic elements would make the system attackable by an outsider. The current existing protocols would need some extension, the possibility of the extension depends on their effects of security. Therefore an academic cryptograhpic researcher would be needed on an ongoing basis to help design the protocols in a secure way, feed back into the implementation process and research new issues arrising out of the ongoing development.

Legal research

In order to commercialise this technology we will have to have a clear understanding of the legal and financial regulations around running a payment provider. In the UK this will involve research into FSA regulations concerning online payments as well as company law and banking law.

The different business scenarios might have some legal dependencies, and might need some specific (legal) setup. The way the system is implemented might have effects on the legal side, and the legal setup will have effects on the system design. This can even go down to the level of cryptographic protocolls.

The three different areas are closely intertwined, with one influencing the other through the whole development - a shift in the legal setup might require changes to the software development, which would need to be audited etc. If the continuing cryptographic research finds an issue, the software needs to redesigned, which will have legal implications.

If the system is successful designed, implemented and setup, a new business model would be proven by the Open Co-op which would in turn enhance the market for micropayments in particular and payments in general.

Need for Project

The opencoin project represents a huge commercial opportunity for the Open Co-op LLP and if successful could be instrumental in decreasing transaction costs of online payments and increasing competition in the online payments market. The Open Co-op would need support from the SME Innovation Programme in order to facilitate the initial phases of the project. The initial phase relies to a large extent on the academic input, while later stages are much more business oriented. Even though the Open Co-op has spent some significant time on researching the topic, evaluating existing system, running some early software tests, support from the SME Innovation Programme would enable us to complete the first steps, and reduce the time to market. Since the initial research is high-risk investment, it would be hard to raise the investment without at least a portion of grant funding.

Academic Involvement

Cryptographer

The theoretical design of the protocols is needed as well as research of implementation related issues, as the correct setup, enhancement and structuring of the protocols and components is crucial to the overall security of the system. Continuing audit of the different building blocks of the software is required, as mistakes need to be spotted and corrected as early as possible , and ongoing advice on the cryptographic elements of the system will be needed.

There is already significant scientific and academic work in the cryptographic model which Open Coop LLP intends to exploit. E-cash as invented by David Chaum in the 1970's has sparked a lot of interest in the academic world so far, and early announcements got good feedback from key players in the cryptographic field. Enhancing the system and bringing it to use requires extensive practical testing, and peer review from the scientific community.

In order to allow conditional traceability of the electronic coins (according to the needs of a payment provider) the underlying cryptograhic protocols have to be enhanced. There are ideas and concepts of how to do this available within the academic community and the Open Co-op LLP but the practical feasability of those will only become evident during the implementation phase. The academic working on this project should research the protocol enhancements, doing risk assessments, and making adjustment to the protocol as required during the development. The academic would ideally publish the protocols to the academic world for peer review.

Legal & Regulatory

The technical, cryptographic, legal, and regularory aspects of this project are intertwined (see above). A legal expert with a profound understanding of financial services regulation issues particularly with regards to the internet, would be needed to feedback continously into the project, with specific regard to the legal setup for running an issuer, the legal situation of the clients, and the required setup to allow legal issue for as many use cases as possible.

As no digital cash system has found wide use so far, so in some ways we may be entering unchartered legal terroritory as is the case with many Internet inventions. The legal arguments would need research and publication in the academic world.

Project Outputs

• Prototypical implementation of the opencoin system - issuer and wallet
• Cryptographic understanding and documentation of the system and publication in the academic world, therefore increasing trust in the system
• Understanding of the legal and regulatory implications of various payment solutions
  

Through achieving these goal, the Open Co-op would gain:

• the chance to deploy a opencoin system for real world testing
• better understanding of the business opportunities
• a system to use directly for business growth as well as to incorporate into other projects
• move towards an investment-ready state
  

Work Breakdown

A project/cost plan is attached to the project description. The main activities/outputs are highlighted in this table:

The project will begin on 1st August 2007 and will be completed by 1st December 2007.

	SME Activity & Outputs	Academic Activity & Outputs
Phase 0	Research and documentation of existing systems	Research setup of existing technical and legal publications relevant
Phase 1	Initial proof of concept implimentation, without the enhancements of the cryptographic setups. Output: running issuer software and command line driven wallet	Evaluation of the protocolls (crypto) First legal research of the system from the perspective of the different business models (legal) - feeding back to phase2 of the sme activity
Phase 2	Enhancing the system with regards to protocols, implementation on a proof of concept level	Research of the extensions (crypto) Peer review of the extensions (crypto) Research of the proposed enhancements (legal)
Phase 2.1, 2.2.	Iteraton of the work in phase2, until a satisfactory designed is reached	Reiteraton of the work in phase2, until a satisfactory designed is reached
Phase 3	Creating the necessary graphical interfaces and components that allow 'end users' to use the system	Publication of the extensions to the scientific community (crypto) Publication of the legal learnings to the community (legal)

What are the key risks associated with the project?

On the key risks are:

• We may not be able to find a legal setup that allows easy (and profitable) use of the system for SMEs
• Errors in the implementation of the cryptographic elements, rendering the system useless
• Errors in the design and implementation of the enhancements, rendering the system useless

Cost Breakdown / Time planing

	days	days	days	GBP
Task	open coop	crypto	laywer	Cost		other cost for open coop	Duration	Project time	Start	End
Project Management									01.08.07	30.11.07
Overall co-ordination	5			£3,000
Software Dev. management	2			£1,200
Academic Project Management		2	2	£1,600
					£5.800	£420
Phase 0									01.08.07	10.08.07
Research and documentation of existing systems	4			£2,400			9
Research setup of existing technical and legal publications relevant		4		£1,600			9
Research setup of existing technical and legal publications relevant			4	£1,600			9
					£5.600	£240		9
Phase 1									11.08.07	03.09.07
Initial proof of concept implementation	10			£6,000			23
Specification and writeup of protocolls	3			£1,800			7
Evaluation of the protocolls and feedback		2		£800			4
First legal research of the legal construction			4	£1,600			9
					£10.200	£780		23
Phase 2									04.09.07	22.09.07
Design of the protocoll enhancements	8			£4,800			18
Documenting the enhancements	3			£1,800			7
Implementing the enhancements	5			£3,000			11
Evalution of the extension and feedback		3		£1,200			7
Organizing writeup on the web		4		£1,600			9
Research of the legal implications and necessary changes			4	£1,600			9
					£14.000	£960		18
Refactoring, reiteration of phase2									23.09.07	28.10.07
Reiteration	15			£9,000			35
Consultation/Feedback to open.coop		1		£400			2
Consultation/Feedback to open.coop			1	£400			2
					£9.800	£900		35
Phase 3									29.10.07	30.11.07
User interface programming	14			£8,400			32
User interface design	10			£6,000			23
Publication		3		£1,200			7
Publication			4	£1,600			9
					£17.200	£1.440		32
Sums	79	19	19		£62.600	£4.740		117
Cost per day	£600	£400	£400
Sums cost	£47.400	£7.600	£7.600	£62,600
Open coop work total	£47.400	70%
Open coop other cost total	£4.740	7%
Academic work total	£15.200	23%
Grand total	£67.340
Grant sought	£30.000
Open coop input	£37.340