2019 Q1: Bitmark CEO’s Observations to our Investors

To: Bitmark Investors & Advisors
From: Sean Moss-Pultz

Note: This article series is taken from Sean’s quarterly letters to Bitmark investors. We share them publicly one quarter after they are written to give everyone a deeper, transparent look at Bitmark’s perspective of the world.

Dear Investors & Advisors

Typically, at this point I write about my perspective on the industry and the trends I see. This time I wanted to share something new. While working on the pitch deck for this financing round, I used the Facebook / Cambridge Analytica scandal as the example of why we need property rights for data. But as you know, Bitmark is focused on music and health. It bothered me that I presented solutions for industries not related to my stated problem. So this got me thinking about a potential solution to Facebook (specifically: what could be a viable alternative social network?). Could Bitmark play a role there, too?

Facebook has 2+ billion users. CryptoKitties, a popular game built on Ethereum, ground to a halt at just 60,000 users. Yet as far-fetched as it sounds, I think it’s rational to say that the only viable competitor to Facebook would be a social network built on a public blockchain.

Assuming the scaling and UX challenges facing public blockchains could be solved, what would make sure that blockchain-based social media platforms didn’t just replicate the same fake news / privacy issues we have now with Facebook, albeit on a different software architecture. (That’s what happened with the ICOs — they just recreated the worst of Wall Street.)

In what follows, I’m going to tell you why the solution to the Facebook problem is private property rights for data. Property rights must be neutral and decentralized to work at global, Internet scale. And this requires a public blockchain, otherwise our rights would be centralized under Facebook.

Social networks started as places for individuals to share digital content. They made the Internet popular and personal — a truly real-time many-to-many mass medium connecting nearly every person on the planet. Getting a message out previously required technical skills and web servers. Social networks made it easy and free for anyone. And this created communities of billions of people exchanging digital assets and data at rates never seen before. Yet the business models of social networks have created equally growing social costs.

Post Cambridge Analitica, I think you’d be hard-pressed to find anyone (even in Silicon Valley) who is not nervous about social media. The media itself can’t stop talking about data breaches and privacy violations. Governments, especially in Europe, want to know what BigTech know about us? What exactly are these “algorithms” that feed us information, suggest things to read/watch, and return our search results? Do they respect our rights? Or are they manipulating us? In short, people everywhere are starting to care about transparency and control of the personal data that gives social networks their value. The heart of this issue is property rights.

In order to have a truly global, digital economy, users of any Internet resources — whether they be media, domain names, or especially personal data — must agree upon control of those resources across trust boundaries. Trust boundaries can be geographic, legal, and especially technical (amongst servers). The only historically enduring mechanism for facilitating the agreement of control of resources across trust boundaries is property rights.

The cost of defining, monitoring, and enforcing property rights across trust boundaries are termed transaction costs. Institutions play a key role in determining transaction costs. Economists argue that “good institutions” lower transaction costs for society by providing equal opportunity access to secure property rights, thereby leading to economic prosperity. If rights are more clearly defined and fully respected across trust boundaries, transaction costs are low. If rights are ill-defined and poorly respected across trust boundaries, transaction costs are high — both in terms of economic costs but also social costs (negative externalities).

If we evaluate a social network like Facebook as institution to see how they’re doing, it is unfortunately quite obvious that we are currently stuck in the second scenario where rights are ill-defined and poorly respected across trust boundaries and individual and social transaction costs are high. What would it take to preserve the benefits of social media but also move us towards the first situation where property rights are more clearly defined and fully respected across trust boundaries and transaction costs are low enough to guarantee global equity and fair access to all?

This brings us back to public blockchains.

Blockhains allow for the creation of new resources such as money, tokens, data, and smart contracts. All of those resources would be necessary to build a social network on a blockchain. And all of those resources would need secure property rights to cross the many different trust boundaries of a global social network.

Bitmark secures property rights for data by coupling law with code. Property rights are often referred to as a bundle of rights:

  1. The right to use the resource
  2. The right to earn income from the resource
  3. The right to transfer the resource to others
  4. The right to enforce property rights to the resource

We use specific legal contract to describe the (above) rights bundle and map them into code that can be recorded and executed by financial institutions or code that can be executed on a blockchain, aka “smart contracts.” In the music royalties system we built with KKBOX, streaming payments (income rights) are executed as bank transfers. In the diabetes data trust with H2, researchers run computations (usage rights) on personal health data and we use Bitcoin (smart contract payments) to reward individuals for their data contributions.

I need to make one point clear: contracts, legal or “smart,” aren’t the same as property rights. In fact, anything based on contracts cannot be “perfect.” For starters, it’s extremely difficult for contracts to cross trust boundaries. But there’s a more subtle, important issue known as incomplete contracts theorem. The basic idea is that contracts cannot specify what is to be done in every possible contingency. Therefore, we need some outside framework to fall back on for interpretation. This is what property rights provides. Even when we have a diverse set of fully debugged smart contracts, we’re still going to need property rights so that we can make corrections and adjustments for what humans really intended to happen.

What does an alternative social network look like? We are working on this with HTC for key management and DT42 for sharing personal and environmental data. (I’ll have more details in the next update.) This builds on our health data trust architecture and what HTC has done with their Exodus project. I’m pretty confident that the architecture we use could, one day, give any centralized social network a run for their money. But it can do even more. Any time where data needs to be exchanged in a way that respects privacy, ownership, and transparency of algorithms can benefit from this architecture.

This is why I’m so excited Bitmark and our role in solving some of the most urgent problems of our time. By securing property rights on a global scale, we can bridge existing institutions that have stood up for hundreds of years with these new public blockchains that have equal access with low transaction costs. In my opinion, this is the best of both worlds.

That’s all for now. If you have any questions, please give me a call.

Best,
Sean

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