Always Start with the Assets
Or, Can a Blockchain Solve My Problem?
People talk a lot about “blockchaining” things. People seem to be “blockchaining” everything from loyalty points, to file sharing, to diamonds, to syndicated bank loans, to the internet itself.
Firstly, let’s all stop using “blockchain” as a verb.
Secondly, here are some thoughts on how to begin when considering the technology.
In determining whether a blockchain will help you solve a problem, you need to ask yourself three questions:
- Am I dealing with assets?
- Do these assets change hands?
- Do transactions suffer as a result of third parties?
[Note: speculation is not, in itself, a defensible use case. It is not a problem to be solved.]
1. Am I dealing with assets?
Assets are items of value owned by a person or entity. Ownership is generally represented in one of two ways: through possession of the asset itself or through representation in the form of database records. Cash, stock certificates, deeds of title, gold bars, and other bearer assets fall in the former category. Most assets we think about day-to-day fall in the latter category. These are registered assets.
Registered assets can be great. They are easy to manage and access across distances and can sometimes provide certain comforts and protections for owners. But they create challenges as soon as the assets start to change hands.
2. Do these assets change hands?
Every time registered assets move, database records of ownership must be updated.
Updating ownership records centrally serves to address a problem specific to assets: we need to know that two different owners don’t have claims on them. With digital assets, this gets even harder: we need to know that they don’t exist in two places at once. This is called the double-spend problem.
Generally this is solved by a central authority keeping the official book of record of ownership. The Department of Motor Vehicles tracks car ownership. When you go buy that Lamborghini, you’ll have to wait in line at the DMV to get them to update the book of record. This is also the mandate of central securities depositories in capital markets. CSDs immobilize and dematerialize stock certificates so that transfers of ownership can happen through a book-entry system instead of physical delivery. Like banks and payment processors, the DMV and CSDs are examples of third parties responsible for digitally tracking ownership of certain types of assets.
3. Do transactions suffer as a result of third parties?
In my experience, there can be good reasons to have third parties involved in your transactions. When fraudulent charges appear on my credit card bill, for example, I like to be able to call the company and execute a chargeback.
But other times, third parties create problems. These third parties must know about and be involved every time an exchange or trade is done. This is why we end up with convoluted systems of clearing and settlement that are likely slow and inefficient and prone to human error.
Third parties might also create economic problems because they are rent-seeking. Intermediaries often charge a toll for doing the service of updating a book of record or executing a reconciliation process.
Finally, third parties create much bigger problems when you want to make a transaction that your bank, your government, or other authorities wants to censor. Or when you don’t trust your bank or your government not to confiscate your assets.
Blockchains are good for digital assets that need to behave as bearer instruments. This means no single, central authority registering ownership. This means removing middlemen or third parties involved in transactions.
The possibilities opened by this are hugely transformative to how we transact, understand ownership, and shape the global economy. But it always comes back to the assets.