Electronic Commerce

Electronic Commerce
Initially, the Internet was designed to be used by government and academic users,
but now it is rapidly becoming commercialized. It has on-line “shops”, even
electronic “shopping malls”. Customers, browsing at their computers, can view
products, read descriptions, and sometimes even try samples. What they lack is
the means to buy from their keyboard, on impulse. They could pay by credit card,
transmitting the necessary data by modem; but intercepting messages on the
Internet is trivially easy for a smart hacker, so sending a credit-card number
in an unscrambled message is inviting trouble. It would be relatively safe to
send a credit card number encrypted with a hard-to-break code. That would
require either a general adoption across the internet of standard encoding
protocols, or the making of prior arrangements between buyers and sellers. Both
consumers and merchants could see a windfall if these problems are solved. For
merchants, a secure and easily divisible supply of electronic money will
motivate more Internet surfers to become on-line shoppers. Electronic money
will also make it easier for smaller businesses to achieve a level of automation
already enjoyed by many large corporations whose Electronic Data Interchange
heritage means streams of electronic bits now flow instead of cash in back-end
financial processes.We need to resolve four key technology issues before
consumers and merchants anoint electric money with the same real and perceived
values as our tangible bills and coins. These four key areas are: Security,
Authentication, Anonymity, and Divisibility.


Commercial R&D departments and university labs are developing measures to
address security for both Internet and private-network transactions. The
venerable answer to securing sensitive information, like credit-card numbers, is
to encrypt the data before you send it out. MIT’s Kerberos, which is named
after the three-headed watchdog of Greek mythology, is one of the best-known-
private-key encryption technologies. It creates an encrypted data packet,
called a ticket, which securely identifies the user. To make a purchase, you
generate the ticket during a series of coded messages you exchange with a
Kerberos server, which sits between your computer system and the one you are
communicating with. These latter two systems share a secret key with the
Kerberos server to protect information from prying eyes and to assure that your
data has not been altered during the transmission. But this technology has a
potentially weak link: Breach the server, and the watchdog rolls over and plays
dead. An alternative to private-key cryptography is a public-key system that
directly connects consumers and merchants. Businesses need two keys in public-
key encryption: one to encrypt, the other to decrypt the message. Everyone who
expects to receive a message publishes a key. To send digital cash to someone,
you look up the public key and use the algorithm to encrypt the payment. The
recipient then uses the private half of the key pair for decryption. Although
encryption fortifies our electronic transaction against thieves, there is a
cost: The processing overhead of encryption/decryption makes high-volume, low-
volume payments prohibitively expensive. Processing time for a reasonably safe
digital signature conspires against keeping costs per transaction low.

Depending on key length, an average machine can only sign between twenty and
fifty messages per second. Decryption is faster. One way to factor out the
overhead is to use a trustee organization, one that collects batches of small
transaction before passing them on to the credit-card organization for
processing. First Virtual, an Internet-based banking organization, relies on
this approach. Consumers register their credit cards with First Virtual over
the phone to eliminate security risks, and from then on, they uses personal
identification numbers (PINs) to make purchases.


Encryption may help make the electric money more secure, but we also need
guarantees that no one alters the data–most notably the denomination of the
currency–at either end of the transaction. One form of verification is secure
hash algorithms, which represent a large file of multiple megabytes with a
relatively short number consisting of a few hundred bits. We use the surrogate
file–whose smaller size saves computing time–to verify the integrity of a
larger block of data. Hash algorithms work similarly to the checksums used in
communications protocols: The sender adds up all the bytes in a data packet and
appends the sum to the packet. The recipient performs the same calculation and
compares the two sums to make sure everything arrived correctly. One possible
implementation of secure hash functions is in a zero-knowledge-proof system,
which relies on challenge/response protocols. The server poses a question, and
the system seeking access offers an answer. If the answer checks out, access is
granted.In practice, developers could incorporate the common knowledge into
software or a hardware encryption device, and the challenge could then consist
of a random-number string. The device might, for example, submit the number to a
secure hash function to generate the response.


The third component of the electronic-currency infrastructure is anonymity–the
ability to buy and sell as we please without threatening our fundamental freedom
of privacy. If unchecked, all our transactions, as well as analyses of our
spending habits, could eventually reside on the corporate databases of
individual companies or in central clearinghouses, like those that now track our
credit histories. Serial numbers offer the greatest opportunity for broadcasting
our spending habits to the outside world. Today’s paper money floats so freely
throughout the economy that serial numbers reveal nothing about our spending
habits. But a company that mints an electric dollar could keep a database of
serial numbers that records who spent the currency and what the dollars
purchased. It is then important to build a degree of anonymity into electric
money.Blind signatures are one answer. Devised by a company named DigiCash,
it lets consumers scramble serial numbers. When a consumer makes an E-cash
withdrawal, the PC calculates the number of digital coins needed and generates
random serial numbers for the coins. The PC specifies a blinding factor, a
random number that it uses to multiply the coin serial numbers. A bank encodes
the blinded numbers using its own secret key and debits the consumer’s account.

The bank then sends the authenticated coins back to the consumer, who removes
the blinding factor. The consumer can spend bank-validated coins, but the bank
itself has no record of how the coins were spent.


The fourth technical component in the evolution of electric money is flexibility.

Everything may work fine if transactions use nice round dollar amounts, but that
changes when a company sells information for a few cents or even fractions of
cents per page, a business model that’s evolving on the Internet. Electric-money
systems must be able to handle high volume at a marginal cost per transaction.

Millicent, a division of Digital Equipment, may achieve this goal. Millicent
uses a variation on the digital-check model with decentralized validation at the
vendor’s server. Millicent relies on third-party organizations that take care of
account management, billing, and other administrative duties. Millicent
transactions use scrip, digital money that is valid only for Millicent. Scrip
consists of a digital signature, a serial number, and a stated value (typically
a cent or less). To authenticate transactions, Millicent uses a variation of the
zero-knowledge-proof system. Consumers receive a secret code when they obtain a
scrip. This proves ownership of the currency when it’s being spent. The vendor
that issues the scrip value uses a master-customer secret to verify the
consumer’s secret. The system hasn’t yet been launched commercially, but Digital
says internal tests of transactions across TCP/IP networks indicate the system
can validate approximately 1000 requests per second, with TCP connection
handling taking up most of the processing time. Digital sees the system as a way
for companies to charge for information that Internet users obtain from Web
sites.


Security, authentication, anonymity, and divisibility all have developers
working to produce the collective answers that may open the floodgates to
electronic commerce in the near future. The fact is that the electric-money
genie is already out of the bottle. The market will demand electric money
because of the accompanying new efficiencies that will shave costs in both
consumer and supplier transactions. Consumers everywhere will want the bounty of
a global marketplace, not one that’s tied to bankers’ hours. These efficiencies
will push developers to overcome today’s technical hurdles, allowing bits to
replace paper as our most trusted medium of exchange.