Is the blockchain a tool to control corruption? 

With Lado Okhotnikov’s, Per Aarvik’s and Sukhpreet Singh’s conclusions

A beginner tries to find information on how a smart contract or a blockchain works. The crypto investor also wants to understand how this technology works. In fact, there is no single educational concept that would provide a simple and intelligible explanation of the blockchain principle for the man in the street. This is especially true for Ethereum. You won’t find a simple human explanation of the technical process for its chain operation anywhere.

How the average person sees blockchain and smart contracts

In a simplified form the blockchain looks like this.

Neither a novice crypto investor nor, moreover, a beginner will be able to explain what is shown in the diagram above.

Let’s say we have a smart contract that stores a list of node addresses. Each time a node runs the contract function iWasHere(!) the node’s address is added to the list and the list of addresses can be read by calling the function whoWasHere(!).

Getting a deeper understanding of what exactly it means to start a smart contract on the blockchain and what exactly happens inside is quite difficult for both a crypto investor and a beginner. Having broken everything into bricks you can “get to the bottom” of the essence:

• smart contract is an algorithm, it may have the same capabilities as a regular market participant: it can receive money, send money, listen to certain events and interact with other smart contracts;
• a person can interact with a smart contract through an external interface and therefore full-fledged applications can be created on top of this “internal” interface;
• smart contracts are compiled into a bytecode i.e. EVM (Ethereum Virtual Machine) assembly instructions that are run on the EVM and each instruction contains Gas.

But even a professional won’t be able to explain this to you in the concept:

● what actually happens when someone “deploys a smart contract on the blockchain”? Is it attached to a block, e.g. to the recently mined block n+17? Then how to get access to this contract? Are you just scanning the entire chain for smart contracts with a specific contract address using Etherscan?

● what exactly happens in the chain when a random person starts the iWasHere(!) smart contract function. Is the EVM bytecode corresponding to the contract code which must be executed by calling this function added to the transaction and then recorded in the block? Who runs the code execution as such (i.e. which node will execute the actual processor cycles required to run the code on real hardware, e.g. on a human-owned processor)? Is it the node that calls the function or all the nodes in the network? If all the nodes in the network run the code then how scalable is that? What happens when there are 10,000 applications running on the blockchain at the same time? Isn’t it the same as having 10,000 applications running on every node on the network?

And now let’s move on to a logical question: if a crypto investor and a beginner do not understand how the blockchain and smart contract scheme works then what is the chance of emerging corruption and fraudulent schemes in this financial direction?

State, corruption and blockchain – how the schemes work

The World Economic Forum (WEF) in its official report has provided the first results of a blockchain study on combating corruption in public procurement.

In 2019 the United States launched the project “Transparency” which is a joint project of the Inter-American Development Bank and the Office of the Attorney General of Colombia. The project involved the creation of a test model cloud for testing the PoC concept (proof of concept, PoC – proof of feasibility) using the blockchain. The Ethereum software has been selected for the test. In 2020 a block of purchases under the state nutrition program for starving children in Colombia (Programmed Alimentación Escolar) was completed.

The goals for studying the possibilities and limitations of the blockchain technology use for counteracting corruption schemes in public procurement have been determined under the project. In particular, the schemes have been tested according to the selected data access models – an exclusive technique (permissioned) or an inclusive scheme (permissionless).

Four stages have been  determined in all public procurement procedures (these are mandatory in the countries all over the world): planning, bidder selection, evaluation of each bidder, implementation and monitoring. The corruption components of the 2nd and 3rd stages have been considered in the Transparency project – the calling for bids and their evaluation from potential vendors.

The software that counteracted corruption schemes has been used under the project. But at the same time the bidders did not know about the system components. The software has been based on 5 components.

1. Permanent protection against external intrusion to the records about all possible actions.
2. Real-time transparency and accountability framework.
3. Automated processes using “smart contracts”.
4. Reducing the probable dependence on discretionary decisions that can be made at the level of performers represented by the state authorities or directly by the process participants.
5. The principle of expanding the civil society representatives’ involvement in the process.

The most difficult moment was to determine the software compliance. Considering the specifics of public procurement in Colombia the thirteen stages of bid selection and evaluation have been identified taking into account the studied software:

• vendor registration using “hidden ID – vendor”;
• initial tender offer publishing using “smart contracts” for the tender;
• public discussion using the “hash” recording mode;
• final tender offer publishing;
• cancellation, withdrawal or new procurement with entering the justification for each case;
• bidding start using hidden encryption based on a smart contract;
• bidding end;
• rates disclosure (the software will prompt you to disclose ID);
• initial tender offer evaluation (with publication);
• public discussions of initial evaluations;
• final tender offer evaluation;
• public discussion of the final bids evaluations;
• publication of the final decision.

Naturally, all these processes have been carried out using software based on “smart contracts”. The positive and negative points have been identified based on the inclusive and exclusive blockchain model.

*- in the blockchain the information about vendor is open which already raises the question of corruption presence;

**- it is required to bring the legal and regulatory framework of the cryptocurrency use as well as to train participants in public procurement.

***- there is no need to train bidders, change or adapt the system in order to comply with the requirements of local legislation.

If you look closely at the table the corruption model is presented almost by 100% in an exclusive form. In an inclusive form the corruption model is presented only at some stages.

Is corruption in the blockchain inevitable now?

The report authors published a request for proposals system model where they recommended using a hybrid scheme that includes both inclusive and exclusive models. 

The WEF, in turn, has provided a comprehensive research report for review which was recommended for implementation in those countries of the world that counteract corruption schemes. The same report provides extensive information about publications on the specified topic (about corruption, blockchain and smart contracts).

Earlier the experience and practice of the following authorities have been studied in detail:

● Asian Development Bank;

● Supervisory body on electric power control in South Korea;

● The practice of one of the administrative districts of Seoul, the capital of South Korea.

The WEF project has become the first serious report which, in fact, openly states that there can still be corrupt components in the blockchain and smart contract and the antidote is still very weak at the current stage.

In fact, the study authors believe that the hybrid model for the blockchain in the form that was used can only prevent certain corrupt practices from a very extensive tool arsenal. 

The study authors suggest using blockchain to combat corrupt practices, such as lack of transparency in procurement or changing procurement documentation in favor of one participant. However, these problems can be solved without blockchain by improving the existing electronic public procurement systems. For some reason not a word has been mentioned about this issue in the studies.

In addition, some corrupt practices, such as supplier collusion and bribery cannot be prevented by technological solutions alone. A more significant potential of the blockchain may be in its use for contract payments in order to counteract corrupt practices associated with improper advances and subcontracting. However, this issue requires further research and development especially in relation to the use of crypto currencies.

Will blockchain implementation kill corruption in the future?

As you can see the “magic pill” against corruption in the blockchain has not yet been invented. To be more precise at some stage the influence of corruption schemes is still possible – somewhere to a greater and somewhere to a lesser extent.

But still one must agree with the opinion that smart contracts and blockchain have managed to make a hole in corruption around the world. Why are many world governments still unwilling to digitalize their economies? As a rule, it becomes clear on the example of the third world countries where there is corruption and the population suffers from it and the crypto industry is in its infancy or it does not exist at all.

Expert opinions

Lado Okhotnikov, CEO of Meta-force.space (former Forsage.io)*

The essence of the blockchain is a ledger. The system ensures that all participants in the chain have the same ledger and constantly synchronizes it with the rest of the computers in the chain. This is the essence of the technology –  everyone has the same ledger. If the part of the blockchain has data different from the most of computers then the system will replace the erroneous data with the correct ones. Thus, only the real data of actual performed operations will remain in the chain. As well as the data about the real balances in the system participants’ wallets.

“Thus, the blockchain is a guarantee of an honest settlement system. And that’s all. If a tender is announced with the conditions entered in the ledger then only those who actually ensured compliance with the tender conditions will be able to participate in it. But the questions may arise at the stage of entering conditions into the ledger. Have all conditions been entered or only a part of them?” – as Lado Okhotnikov counts. 

In other words, I personally believe that the very formal tender holding by itself using the blockchain does not provide any guarantee against a corruption component. You need to deeply understand which conditions were published in the ledger by the tender holder in the form of a smart contract and which were hidden and why.

*taken from here

Per Aarvik, University of Bergen, Social Sciences, Alumnus*

Blockchain as an anti-corruption tool. The technology behind bitcoin and other cryptocurrencies was supposed to end poverty, eliminate corruption, and provide financial inclusion for all. The very financial institutions it was created to exclude are adopting the technology to increase transactions’ security and reduce costs. Its degree of success is more contextual than related to the technology itself.

*taken from here

Sukhpreet Singh, CEO Gyan Consulting- Enterprise Blockchain*

Corruption is a persistent challenge faced by governments around the world. It erodes public trust, undermines economic growth, and threatens the rule of law. In recent years, blockchain technology has emerged as a promising tool for promoting transparency and accountability in government. By using blockchain to store and verify data, governments can create a tamper-proof record of transactions, reducing the potential for corruption and fraud.

*taken from here