Project Machu Picchu White Paper 2024, part 1

credit maksym-ivashchenko-LVDTuA_cbTM-unsplash

(version OCTOBER 2024)

What is Machu Picchu?

Machu Picchu is an open-source, collaborative project focused on leveraging 21st-century technologies to improve the livelihoods of vulnerable populations.

Watch the 10-minute video here: https://youtu.be/z1ylfi60ES0

Machu Picchu replicates age-old community-based financial safety nets, using 21st century tools. The project addresses several key needs:

• Solidarity-based protection from unpredictable risks such as weather, accidents, and health.
• Private financial support for predictable events like marriage, old age, and funerals.
• Modern humanitarian organizations’ need for in-depth data about the target populations.

Currently, centralized solutions like insurance and banking, which are cumbersome and costly, attempt to meet these needs but often fail to engage the target communities. Managing centralized data is also inefficient and prone to errors. Machu Picchu employs the following modern technologies to address these challenges:

• Blockchain smart contracts for decentralized, trustless transactions.
• Ethereum Account Abstraction (ERC-4337) integrated with SMS or USSD messaging to abstract from quasi illiterate end users the complexity of blockchain key management, signatures, and business logic.
• Decentralized Finance (DeFi) smart contracts for community-based risk sharing.
• AI word embeddings and vector databases to model community relationships, enabling risk-sharing among similar individuals.
• Earth Observation and blockchain voting for climate-related risk assessments.
• AI anomaly detection combined with Earth Observation to anticipate agricultural risks.
• Decentralized IPFS storage for securely maintaining user profiles.

These technologies have proven effective in other applications and are open-sourced. Machu Picchu’s innovation resides in combining them to recreate ancestral financial practices, empowering communities to manage their own financial security.

The pains

The primary challenges of applying conventional insurance to low-income populations include:

• Risk Transfer: Conventional insurance operates on risk transfer between two economic agents. A risk-averse party pays a more risk-neutral agent (the insurer) to assume a risk. When a loss occurs, verified by a third party, the insurer compensates the insured. However, risk transfer is prohibited under Islamic “Shariah” law.
• Risk Sharing: In contrast, risk-sharing involves all members of a community pooling resources to compensate any member who incurs a loss. The risk is distributed across the community, which aligns with “Shariah” principles.
• Enforcement Issues: Enforcing commitment in decentralized risk-sharing models is challenging. In contrast, with risk transfer, the insurer bears sole responsibility, making it easier to enforce compensation obligations.
• Financial Mismanagement: Given the substantial sums involved, there is a risk of irresponsible financial behavior or misuse for the benefit of the insurer. Regulatory authorities impose significant reporting and oversight requirements to ensure commitments are met, which inflates insurance costs.
• High Supervision Costs: For the poor, the small sums involved in risk transfer are often outweighed by the high costs of supervision. This is particularly true in crop insurance, where risks are frequent but coverage amounts are low. Health insurance, however, offers higher profitability due to larger potential payouts.

Because of the difficulties of enforcing risk-sharing commitments, insurance remains the only viable solution officially recognized by authorities. Even systems labeled as “mutual aid” are legally classified as insurers due to this enforcement issue.

The solution

A solution exists to enforce risk-sharing commitments within decentralized communities using blockchain technology: individual commitments are represented by one or more blockchain smart contracts, which ensure automatic enforcement once deployed on the blockchain.
The following explains how this approach works:

• Decentralized Finance (DeFi): In conventional financial systems, trusted intermediaries with significant financial resources execute transactions according to protocols set by regulatory authorities. These middlemen must adhere to strict rules and oversight. In contrast, DeFi operates without intermediaries. Each participant is represented by a smart contract that manages their personal liquidity pool. The agreed-upon DeFi protocol facilitates the transfer of liquidity between these pools automatically, removing the need for centralized control.
• Crop Risk Assessment using Earth Observation: With the availability of high-quality satellite images and open-source satellite image analysis libraries, crop risk assessment can now be performed at minimal cost. This advancement enables the use of satellite imagery to support collaborative efforts in assessing crop risks, improving the accessibility and affordability of this crucial data for agricultural decision-making.
• Enhanced Risk Profiling: DeFi can be further improved with AI-driven risk profiling. By using word embedding techniques, free-form text is transformed into multi-dimensional vectors that represent individual profiles. The proximity of these vectors indicates how closely related individuals are in terms of risk, enabling more accurate financial ratings and community-based risk sharing.

Risk Transfer — Risk Sharing

This combination of decentralized finance, blockchain smart contracts, Earth Observation and AI enhances the reliability and scalability of risk-sharing systems.

The challenges

Until recently, technical limitations made implementing these solutions impractical:

• How can someone who is illiterate interact with blockchain protocols?
• How can a person-in-need access or understand satellite imagery?
• How can they use digital currencies (like cryptocurrencies) in daily life?
• Both blockchain and AI technologies are computationally intensive, making them seem out of reach for low-income communities. Additionally, because immediate relief takes priority, aid organizations continue to rely on outdated technologies, some of which are over 50 years old.

However, the landscape is changing. Cellular access is expanding, governments are rolling out Central Bank Digital Currencies (CBDCs), and open-source software libraries are available for integration into global solutions. Moreover, hardware manufacturers now provide low-cost single-board computers and solid-state drives that require less than $20 worth of electricity annually .

Project Machu Picchu capitalizes on these advancements to create accessible, modern solutions for persons-in-need. Read on… (link)