Consensus Certifications - A Product Certification DAC *revised*

[wasthatawolf]

This proposal was originally written for an audience unfamiliar with bitcoin.  Please forgive the simplified explanations when it comes to distributed ledger technology...


Consensus Certifications

Consensus Certifications is a proposal for a new decentralized autonomous company based on Bitcoin's distributed ledger (blockchain) technology.  It is designed to facilitate an efficient and cost effective method for certifying that any product meets the specifications of any existing standard or code.  This model allows anyone to implicitly trust that all certification examinations on any given product were performed completely and correctly.  Product certifications are weighted based on the reputation of the person(s) who performed the examination and the person(s) who verified its accuracy and completeness.  This article will focus on the certification of building materials in the construction industry, but the model can be applied to any industry where standards and requirements are enforced through the trust of a centralized certified body.


Background

Standards and codes are published guidelines that manufactured products and systems must adhere to within different jurisdictions.  For the last century, most municipalities and local governments around the world have depended on standards and codes to promote safety and good practices by discouraging substandard products and poor workmanship.  These jurisdictions have determined that to trust a manufactured product meets a certain standard requirement, a competent third party must examine the product and present the results of the examination.  If all standard requirements are met, the product is considered certified.  This process, in general, is performed by degreed engineers or certified technicians.

For more information on Standards Organizations, see http://en.wikipedia.org/wiki/Standards_organizations
For more information on Product Certification, see http://en.wikipedia.org/wiki/Product_certification

The current system consists of a handful of certified bodies (companies and trade groups) that put their name and reputation behind person(s) who perform the product examinations. 

If the certified body is a company, the person(s) performing examinations are either employees or an approved independent lab.  Trade groups generally require that a person successfully complete a training course or hold a specific license to perform a certification examinations to their published standards.  It is because of the longevity and reputation of these certified bodies that local industries and governments trust products certified by them meet the desired safety and performance requirements. 

An example of the certification process in the existing system:

• Manufacturer A wants to sell their products to City B.
• City B requires those products are certified to the standards of Company C.  City B has chosen Company C because its standards are broadly accepted.

(It is important to note, Company C’s product standards are broadly accepted because they are publicly known and have been proven adequate over time.  Almost all standards are published and can be obtained freely or for a small fee.)   

• To obtain the required product certification, Manufacturer A must purchase an examination of their product from Company C
• Company C performs the examination, and if the product meets the requirements  it is considered certified.

This centralized approach requires a high level of trust in a single certified body.  Because trust in one organization is not desirable, jurisdictions generally require one or two additional certifications from other recognized certified bodies.  This results in a significant, seemingly unnecessary cost to manufacturers because they are required to purchase additional, nearly identical, certification examinations to satisfy jurisdictional requirements.  These established certified bodies are historically slow moving in the field of innovation and have very little incentive to improve upon existing standards.  Their perceived value increases primarily with their longevity and market saturation. 


A New Trust Model

First, identify the needs of each stakeholder involved:

• Manufacturers want to sell products
• Jurisdictions need safe, reliable products and systems
• Certified bodies need compensation to develop, maintain and update product standards

For all of the above needs to be met, there must be trust between all parties and shared liability between the manufacturer and the certified body.  The Consensus Certifications model improves upon, and greatly reduces the cost of, the “trust factor of safety” that is currently achieved by requiring multiple certifications.  It also facilitates a system where liability can be spread among existing certified bodies, reducing exposure for each.  By utilizing the distributed ledger technology introduced by Bitcoin as well as cryptographic public and private keys, Consensus Certifications can enhance the current system by providing a trusted, global certification network.  Like Bitcoin, the all data on the network is decentralized and distributed to all participants to provide transparency and prevent forgery.

Some advantages over the status quo:

• The Consensus Certifications system is built on the reputation of each participant and incentivizes all participants to be honest and play by the rules; making it more profitable to be a good actor than a bad actor.
• Allows the certification transaction to happen directly between manufacturers and independent contractors and auditors while still providing a strong level of trust for jurisdictions.
• Each independent contractor and auditor must obtain vouchers from existing trusted parties (existing certified bodies, universities, trade groups, etc.) to establish their reputation on the network.  This spreads liability across all certified bodies without requiring each one to perform or certify the actual examination work.  This gives certified bodies more incentive to create and improve standards and training instead of focusing on repeatedly testing products to existing standards.
• Creates a decentralized product certification catalogue that’s transparent, permanent, and accessible globally for free.
• Allows products to be Approved or Certified anywhere to any existing published standard.
• Certifications can be timestamped to force manufacturers to recertify their products at specific intervals
• The market determines the real value of each certification using a "trust factor of safety".
• Each participant has their own public key and corresponding private key.  These keys can be generated automatically but become associated with individuals and organizations once verified by the keys of an existing trusted party.
• The Consensus Certifications system requires multi-signature certification transactions for a product to appear as “Certified” on the network.  This prevents fraudulent certifications.

Network Tokens and the Decentralized Certification Market

Like Bitcoin, this network utilizes scarce, fungible tokens.  The network tokens are to be used by manufacturers to pay for certification examinations by compensating the engineers contracted to perform the examination as well as engineers contracted to audit the certifications before they’re issued.

A Decentralized Certification Market within the system is utilized by manufacturers’ to post transactions containing information about the product they would like certified and the standard requirements the products must meet.  An addition, they must specify X number of auditors that will review the examination reports prepared by X number of certifiers.  The more auditors and certifiers (and the higher their individual reputations), the more valuable the certification.  The number of certifiers and auditors required for each certification will be determined by market forces and end user requirements. 

Independent certifiers will bid on the transactions posted by manufacturers for examination work.  This should reduce or nearly eliminate any price fixing by participants.  This is because the risk of the work not being accepted (explained later) and the potential for participants to lose their compensation will eliminate bids that are too low to complete the work with a sufficient level of quality.

A second market will exist within the system where auditors can bid on reviewing completed test reports that have been submitted by certifiers on behalf of the manufacturers that have contracted them.  This layer of auditors eliminates the need for the reports to be reviewed directly by a certified body.  A predetermined number of auditors is required to sign onto the transaction to certify that the examination report and associated testing is valid before the product appears "Certified" on Consensus Certifications’ distributed catalogue. 


The Value of Trust

To participate in the Consensus Certifications system as an auditor or certifier, each participant can have their experience and expertise vouched for by another trusted participant on the network.  That participant could be a university, industry group, or even the current established certified bodies themselves!  This idea of a third party vouching for the certifier is not too different from the current system, however, once a certifier is vouched for, that voucher is instantly known and verifiable by the entire network.  The more vouchers a certifier has the more valid and trustworthy their reputation.  Certification transactions may require that a certifier have more than one voucher (university, standards agency, and an independant liability insurance company, for example).  These vouchers are visible to every participant in the network so their individual value will be determined by the market.  The trust voucher would be initiated by a transaction sent from the reputable participant to the participant unknown to the network.  Trust voucher transactions can be timestamped to expire at a predetermined time in the case of an insurance policy.

It would also be possible for voucher organizations to terminate their trust of individual certifiers or auditors by sending a second transaction from the voucher to the vouchee with any information as to why they terminated the trust.  This could be as simple as the certifier or auditor dropping their individual coverage at one liability insurance company and picking up new coverage at another.  Because this history is recorded permanently in the system, it will encourage good behavior.

As time goes on, the “trust factor of safety” of each certifier and auditor increases or decreases based on the amount of accepted work they have performed on the network as well as the value of each active voucher.

This new system can calculate a “trust factor of safety” to quantify the degree of trust one can place in the validity of the certification examination.  This calculation would consist of the level of trust placed on each party: the manufacturer, certifier(s), and auditor(s).  Trust levels will take into account:  number of certified products (manufacturers) and the amount of accepted certification work as well as active vouchers (certifiers and auditors).

This method is far more cost effective than requiring multiple, similar certifications from different certified bodies.  The trust level is greater simply because the end user’s trust in the certification is based on the individual reputations of the manufacturers, certifiers and auditors instead of implicitly trusting that multiple, redundant examination processes were performed honestly and correctly simply because the certifiers were hired or contracted by recognized certified bodies.


A New Certification Process

The certification process will be facilitated by three transactions on the network:

• Proposal for Examination by Certifiers - submitted by manufacturers then signed by certifiers
• Proposal for Examination by Auditors - submitted by certifiers then signed by manufacturers and auditors
• State of Certification - submitted by each auditor then signed by manufacturers and certifiers

First, the manufacturer submits a Proposal for Examination by Certifiers transaction request with a starting bid to perform the work and signs it with their private key to show that it’s valid but with no stated recipient.  This request then solicits bids from known, reputable certifiers on the market and bids can be accepted by the manufacturer by re-sending the same transaction but with  the agreed upon cost (including number of auditors and max audit fee) which is held in escrow within the system with the transaction signed to be signed by both the certifier and manufacturer.  This amount can be increased by the manufacturer by sending more tokens to increase the certification cost or max audit fee, but it can never be decreased.  Transactions can be cancelled at anytime before they are signed by a certifier but never after.

Once the initial transaction is signed by the manufacturer and certifier, the examination process is performed in the traditional way.  Products are examined and tested at the manufacturer’s location or a third party qualified lab is contracted (associated costs to be determined by the manufacturer and certifier in the initial transaction).

Once work is performed, the examination results (along with all supplemental product and test facility information) are prepared by the certifier and presented to the manufacturer.  There are two possible results: products meets standard requirements or products do not meet standard requirements.

If the product does not meet standard requirements, then the examination results in no certification.  This situation is interesting because traditionally we depend on trust and reputation for this interaction to take place amicably.  The manufacturer doesn’t want to fail the examination and the certifier, for the most part, does not take joy in failing the the manufacturer’s product.  In the Consensus Certifications model it is precisely the individual trust and reputation of each party that are affected by dishonesty in this interaction.  In fact, dishonesty is disincentivized because if both parties agree on the failed examination, the certifier submits a State of Certification transaction that can be signed by the manufacturer only and results in unlocking the escrow and sending the examination fee to the certifier and the audit fee back to the manufacturer.  If they cannot agree, then the tokens that are held in escrow cannot be unlocked. 

If the product meets standard requirements it is posted to the network by the certifier in the form of a Proposal for Examination by Auditors transaction.  This is sent back to the manufacturer and is linked to the initial Proposal for Examination by Certifiers transaction.  Once signed by the manufacturer, it then appears on the audit market. 

Auditors then bid on the work, with bids starting at the initially agreed upon audit fee by the certifier and manufacturer.  It’s in the best interest of the certifier and manufacturer to be aware of the current cost of auditing so as to remain competitive and have their work completed in a timely manner by including the appropriate audit fee in the initial Proposal for Examination by Certifier transaction.  When auditors are chosen, much like with the initial transaction, this transaction must then be re-sent by the certifier and accepted and signed by all parties: the manufacturer and the specified number of auditors.  This allows the manufacturer to have a say in choosing auditors to review the certifier’s work without allowing the manufacturer the ability to change it.  Each auditor reviews the examination report independently and provides their own independent conclusion.

After being audited, the results can be one of two things:

1.  Questionable/Unacceptable Test Report

If any auditors show issue with the results (or with the other auditors involved) they can refuse to submit a final State of Certification transaction to the manufacturer.   The examination report must then be resubmitted to the audit market but with the history that the first audit came to the conclusion it was unacceptable. 

After three unsuccessful audits or when the max stated audit fee is reached, the tokens held in escrow in the initial transaction are automatically redistributed to all network token holders as dividends.  This keeps the manufacturers honest because they don't want to waste their money or have a reputation of questionable testing which may raise their cost of future certifications.  It keeps the certifiers honest because they don't want to risk not being compensated for their examination work by not performing the task correctly or adequately.  The auditors are kept honest because there are multiple audits being performed simultaneously and it will become apparent if a particular auditor is "rubber-stamping" reports because their audit history and its relationship to the history of other auditors will be visible by all network participants.  It is also in the best interest of the third party vouchers to perform their own audits of the entire process.

2.  Acceptable Test Report resulting in certification

If all auditors agree on the results by each submitting a State of Certification transaction to the manufacturer, which were that the product DID meet the requirements,  then the certifier signs each State of Certification transaction and the initial funds held in escrow are released to the certifier and the transaction is added to the network as "Certified".  Any remaining audit fees will be returned to the manufacturer.  The manufacturer now has a public record of their certification within the Consensus Certifications system that is backed up by the reputation and trust of the parties involved in the transaction.


Establishing a New Paradigm

In this model, all stakeholders hold equity in the system at some point in the process and can choose to invest in the system itself by simply buying and holding tokens.  A difficult aspect of establishing this type of model is the initial distribution of network tokens.  This can be accomplished by a Kickstarter-type fundraising (acting like an IPO) by allowing direct investment by anyone over a certain time period.  In addition, a large distribution of tokens could be distributed to universities, current industry groups and their group members, current industry certified bodies, property insurance companies, contractors, manufacturers, and other potential stakeholders.

So, why should we so drastically change our current model if it seems to be working?  The current certification model discourages innovation and collaboration among certified bodies and encourages them to keep costs high to reduce competition and maintain a significant barrier to entry.  The new system encourages existing certified bodies to create new revenue models based on training and standards development.  The responsibility of product examinations is shifted onto the individuals that are actually performing the examinations.

The goal of every stakeholder in the Consensus Certification network is to maintain a trusted and honest system that is accepted by local governments, manufacturers, and across industry.  Since manufacturers must buy tokens to participate in the network and certifiers must sell tokens to be compensated for their work it is in each party's best interest to do good work and stay honest to not risk the value of their stake in the system.


Conclusion

The certification industry is very mature and established and it is unlikely the Consensus Certification system will be adopted willingly and without a fight.  It is simply an attempt to show that by breaking down the process to its individual parts and aligning the needs of the stakeholders; we can achieve much greater levels of trust at much lower costs by decentralizing this historically centralized industry.