In response to First US Real Estate Transaction in Blockchain: What’s Next? I received an interesting email from William Entriken.
He is working on working on the Ethereum project.
The project involves standardizing the process of transacting real estate assets on the blockchain. In techspeak that “non-fungible tokens”
Entriken wrote a short article, starting with the basics, but it gets very interesting.
Blockchain Beyond ICOs by William Entriken
Right now cryptocurrencies (just one blockchain application) get the most press, but the next applications will be much larger and more legitimate.
What exactly is blockchain?
Blockchain is a digital system for notarizing documents. Think about documents you would notarize — recording the sale of a car or house, confirming your identity for access to government services, consummating a large business transaction. The purpose of notarizing a document is to establish that a particular person agreed to a specific thing at a certain time in some way that could be used as evidence in court, if necessary. Notaries have been a professional practice since at least the 14th century as popularized in England. But recently, a new system popularized the idea of a digital notary system, and then another created hundreds of billions of dollars out of thin air.
The first digital notaries
If you have ever emailed versions of a Word file back and forth with a large team, you know this can be a painful experience. Maybe somebody forgot to turn on “track changes” and two people sent you updates at the same time which you will need to incorporate into one cohesive document. Somebody decided to make a system that tracks every version of a file and it would track every person that made each change. It did this in a way where the history is never lost which uses blockchain. This system is called Git and it is the first popular blockchain. Many companies offer a Git product including one company, GitHub, which Microsoft bought for $7.5 billion this year. But this is small potatoes. Next is Bitcoin.
Bitcoin was put into use in 2009. This is a blockchain system where, rather than notarizing your group homework assignments, somebody notarized the document “I own 50 Bitcoin”. All subsequent documents notarize a transfer of these 50 Bitcoins from somebody that has them to somebody else, or mint new coins out of thin air according to some specific rules. By the next year, these coins were worth about 0.01 USD each. Don’t you wish you bought a bunch then? Many people made copycat projects.
People have been copying this idea over and over to print their own Monopoly money and go on to convince other people that it is worth something. A website called CoinMarketCap tracks these projects and you can see these fundraising practices, usually lossmaking, in real-time. Some of these projects are real and valuable, for sure, but good fundraisers might trick you into believing a terrible project is valuable.
The most popular exchange may charge you 1 million USD or more just to make your coin available for trade — plus going on a roadshow is very expensive. “Managing” the price of your coin on an exchange is very expensive, and maybe illegal. It is not unheard of to spend half of an entire project’s money on fundraising in these ways. To learn how these fundraisers are being run, just read the United States’ laws (15 U.S.C. § 78j(b)) and regulations (17 CFR Part 240) for securities exchanges tactics that are prohibited. Many blockchain fundraising projects use creative tricks and intend to follow the the letter of the law by classifying their projects as “utilities” rather than “securities.” Don’t worry, the next blockchain applications will be much more legitimate.
Blockchain 2.0
With these hundreds of billions of dollars created from thin air and the crazy price fluctuations of Initial Coin Offerings (ICOs) for products that mostly don’t even exist, most people took their eyes off the prize. The prize is that a cheap, publicly-available digital notary is really useful for existing enterprise and government applications.
Right now in the United States it is expensive and slow to find the registered owner of real estate property and whether there are encumbrances/liens on those assets (property title search). Likewise for cars. Governments already have this information but it is difficult to request and each requestor must get the data directly from the government publisher. One stamped document from the government is insufficient, anybody that you would want to show your document should pay for their own official copy directly from government to avoid forgery. A digital notary service (blockchain) improves this process tenfold or better for government and the end users.
High-value luxury goods often come with a certificate of authenticity. When you sell your expensive purse to a second-hand buyer, they will want to confirm the certificate is valid (maybe check the hologram) before they purchase from you. You probably know a family member that could modify or reprint a certificate of authenticity using Photoshop and make it look good enough. A digital notary service makes documents that cannot be forged.
Ownership of financial assets (mortgage securities, etc.) is reported to investors quarterly for publicly traded firms/funds in the United States in a process that is opaque and can be manipulated. An audit trail of asset-backed security sales which is available to regulators (and possibly investors) would make this information available in real time. Warren Buffett calls these “financial weapons of mass destruction” and having a better accounting of them could prevent future financial crises. A digital notary service prevents records from being erased and modified when regulators show up to ask questions.
These are the new applications of blockchain that take advantage of it being a digital notary.
Blockchain “In the Future”
You might have heard about blockchain solutions that enable “machine learning” or “artificial intelligence” or maybe even “virtual reality” and “self-driving cars”. Even more ambitious projects offer to trade physical assets “without middle-men”, or to “eliminate spam”. Or the impossible, share “symptoms, diagnosis or treatment plans” while keeping them secret, and “comply with GDPR” while also permanently notarizing sensitive documents. These technologies will be ready in a few short months out, if you believe project white papers.
None of these technologies have anything to do with blockchain. The reason why some projects incorporate these buzzwords into their presentations is because the audience might be confused and forget that blockchain is just a digital notary. People that don’t understand this might think blockchain is some future sci-fi technology that works like magic.
In sci-fi movies, it is not enough to have one crazy technology, they need many to make it believable. Take the “car attack scene” in iRobot, starring Will Smith. In addition to robots, they have self-driving vehicles, artificial intelligence, and cars that spin while gliding forward, meanwhile Will Smith’s character is a cyborg that survives a full-speed, head-on collision with a wall.
If you value government transparency in recordkeeping and companies working to reduce fraud and better track assets then the future of blockchain is bright. If you think the next unicorn company will come and disrupt an established industry using a plan developed by someone who’s only business experience is writing white papers then take Warren Buffett’s advice and hire a “second advisor to make the case against the proposed acquisition, with its fee contingent on the deal not going through.”
About William Entriken
William Entriken is the lead author of the “token standard” for tracking physical assets using blockchain (ERC-721). He actively advises blockchain companies for projects he believes in and organizes Chain 76, a conference for applying blockchain to supply chain problems in the pharmaceutical industry.
Video Explanation of “Non-Fungible Blockchain”
Mike “Mish” Shedlock
Right now cryptocurrencies (just one blockchain application) get the most press.
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“Right now in the United States it is expensive and slow to find the registered owner of real estate property and whether there are encumbrances/liens on those assets (property title search). “
This is true. But it is only true because the data is split across each county in the country which keeps its county’s records in its own database. We could have a single, centralized national database that everyone can get access to and this problem disappears without the need for a blockchain.
And I’ll second what msurkan said. If you are going to have a distributed, open, blockchain database, there has to be some incentive for participants. Without that, the rest is nonsense.
But I can see an area that it might make sense, and that is international bank transactions. A replacement for the SWIFT system. SWIFT is designed to ensure a foreign bank doesn’t settle a transaction in dollars when it doesn’t actually have the dollars to do so. In a digital age, it is easy to setup an account and simply put a billion digital dollars in that account and spend away. SWIFT prevents that by keeping a database of those transactions.
But control of SWIFT gives the USA power over every other country in the world. The world could adopt an international blockchain to record the settlement of transactions in any and all currencies with each banking institution providing the function of digitally signing transactions and the resulting coins having some ancillary value between banks. Maybe some type of true international currency.
But I would guess the United States would be opposed to that kind of development, so it will probably never happen.
It’s not really just US vs them. It’s governments and their legal and financial “systems” vs freedom from being subordinated to those two. Making it unlikely that other governments are all that much more interested in a truly distributed blockchain for transfers and settlements, than the US is.
Essentially, they all want a SWIFT that allows them to be able to cut off numbered account jurisdictions. As they all, not just the US, are fundamentally in the business of stealing. And stealing requires knowing. Which requires spying and snooping. Which anonymity makes much harder.
Of course they could set up a “blockchain” that is available, and only so, to a small set of governments and their privileged banksters. But then, the trust conferred on the resulting system, depends on trust in those governments and banksters. It does not flow from the structure of the distributed blockchain in and of itself.
And, once you accept reliance on trusted parties, more traditional databases are infinitely more efficient than a distributed blockchain. The latter, after all, being developed / chosen by Bitcoin creators, specifically to avoid any trusted party reliance.
Sorry, the use of Blockchain without a tie in to cryptocurrency will never gain traction. The problem is that there is no incentive for third party ecosystems of blockchain hosts to exist without the incentive of cryptocurrency mining. All the blockchain initiatives that are decoupled from cryptocurrency all rely on some business to be the central host of the blockchain. Having a single blockchain host provider (or even a cozy federation of closely associated host providers) destroys trust in the blockchain. Tampering in the blockchain is easy when the number of entities providing hosting are small since it is easy for those hosters to collaborate, change the blockchain code, or edit the audit trail log.
When it is divorced from the cryptocurrency mining incentive the value proposition of the Blockchain falls apart.
The hard problem is insuring the initial entries on the blockchain are correct and complete. If someone enters a fake title, it will be notarized, and if any lein isn’t entered, it won’t be visible.
Logistics creates problems.
I’m not convinced having their deeds recorded in a distributed blockchain would prove all that helpful to Afrikaners whose farms get redistributed….
The problem with physical assets, is just that: They are physical. The guy with the most guns control them. Notarizing mechanisms, titles and supposed claims to “ownership” be damned.
Digital, publicly known algorithm based, currencies, are fundamentally different. At least as long as they are sufficiently anonymized to leave no physical surface for the guy with the most guns to attack.
That doesn’t mean recording claims to physical stuff in a distributed blockchain is, per se, a bad thing. At a minimum, it forces those involved to standardize the format, making it easier to accurately and completely retrieve. Versus relying on hodgepodge upon hodgepodge built on top of faded blood-brother scrolls from 14th century England…
But anonymous, digital currency, is still THE transformative use case for distributed block chains. The rest is just stuff that fits somewhere on the spectrum between “neat,” and a way to transfer money to the children of the well connected, by means of government paying through the nose for “block chain” technology their startups “own.”
^^ That is a strong assumption.
Also, governments (or at least governments that matter) will not accept tax payments in Bitcoin. Therefore, digital non-state-backed currencies will have less utility in some respects than fiat currencies.
As long as a digital currency is anonymous, transacting in it remove the most insidious and destructive means by which governments can tax you. Since they have no way of knowing how much money you make, spend, nor have…..
Most of the problems presented in this piece can be solved by having a centralized database. No need to use digital notaries. And if blockchain is so safe, why have I read stories about people having their bitcoins stolen or having an exchange taking a lot of blockchain currency into the dumpster when the exchange folds?
And don’t start on hacking. Amazon probably does a million+ transactions per day and to the best of my knowledge, no one has hacked into their system.
Seems like blockchain is a solution looking for a problem and it can’t find one.
With a distributed blockchain, German Jews would ostensibly have an easier time reconstructing who owned what, after the Nazis went in and mangled the centralized database…..
That would, of course, not prevent the Nazis from simply taking the stuff in the first place. Any more than a written “constitution” prevents our Junta from just hauling you off to Gitmo….
As long as the centralized database is publicly available in it’s entirety, suspicious and/or prudent individuals taking periodic backups, would work pretty much the same, in practice.
This does have the added advantage that it makes it abundantly clear that the guy with the gun, who is the real arbiter of who owns what, is also the guy maintaining the database of ownership. It’s all at his discretion. While a supposedly distributed blockchain record, could make it easier for the uncritical to pretend that the gun guy, somehow faces more constraints than he really does. Which would be wrong. Hence suboptimal.
Thank you for the comment, this is great. You are correct that storing information in a central database solves 99% of these types of problems.
The specific attack that blockchain defends against is modification of the audit trail. If a government recorded house deeds to a publicly-available database using cryptographic signatures that would be great. But then they could always retroactively modify a deed and re-sign it with the old date. Of course, the public could just download the database everyday to make sure nothing previously committed was changed. And then voila, you just reinvented blockchain.
Funds trusted to third parties will always be at risk to problems with those third parties. Bitcoins have never been lost because somebody guessed the password to a privately-owned bitcoin wallet.