The Future of the Blockchain: my DevCon IV talk.

This year October 31 at the DevCon IV I gave the first talk on the Smart Property Register — the Mattereum innovation, which I think is going to bring about the next wave of blockchain adoption and will finally enable us to connect smart contracts to the real world. The talk was titled “how to control the material world with smart contracts?” but it’s really about the future of the blockchain: why it’s necessary, why it’s inevitable, and why (in the long run) it wins.

Please watch the video, read the transcript below or read our summary white paper on it and drop us a line to info@mattereum.com if you’re interested. The pdf with the slides is here.

Transcript:

Some of you may remember me from the early days of Ethereum, I came in to manage the project release around late 2014, spent about the year at the Foundation, and I have been pretty quiet for a couple of years, because I was working on a big, unsolved problem. When I was still at the Foundation, I started building outreach to the City of London legal community, because I knew that we were going to need some way of enforcing smart contracts as legal contracts, and the template that I was working from was Ian Grigg’s Ricardian contract model. So this entire talk is basically an update of the Ian Grigg Ricardian contract model, from the perspective of trying to turn that into a generically available technology which we can use over the ecosystem for basically everything where we need to touch what we call fiat assets. So basically I spent a lot of time rolling around with lawyers, and this is what I have learnt.

The first concept is the concept of a fiat asset. We have a nice, clean compartment for crypto assets, we all kind of know how that works, we know that possession of the keys is possession of the asset and all the rest of this. Fiat assets are the assets that are controlled by governments, and a nice way of thinking about it is if the legal status of the asset changes when you cross a border with the asset, it’s a fiat asset. If I take my wallet out and I put it on the street in London, 20 minutes later my wallet is gone; if I take my wallet and I put it out on the street in Saudi Arabia, I come back in two weeks and it’s surrounded by traffic cones. That is an example of a fiat asset, the local government’s regime directly controls how the asset works. The asset is in a sense produced by the governance of the material world that the nation state provides, and this is the world of fiat. Now, fiat is not just fiat currency: it’s houses, because there are national property registers, it’s cars, it’s anything that has regulation attached to it, that’s the fiat world. So the question is how do we control fiat assets with code? Simple enough.

I want to put this in the context of global trade. Right now something like 50% of global trade goes over high-frequency trading systems, which are basically enormous server farms where they measure out the cables to the trading computers basically to the millimetre so that nobody gets an advantage in trade because they’ve got a shorter cable and they could make decisions faster. We’re in an age when nearly all of our really big global systems are directly affected by the speed-of-light delay. GPS works on the speed-of-light delay, HFT is optimised for speed-of-light delay, Google Spanner gives you a seven-millisecond window in which a transaction could have happened, so they just built a little delay in and that’s why things at Google Docs don’t get screwed up when you use them internationally. And we’ve got blockchain which solves the light-speed-delay problem, which prevents us from synchronising the computers, with a batch, a block: 10 minutes for Bitcoin, 15 seconds for Ethereum — that’s there to manage the speed-of-light delay.

So my contention is that global trade is either going to be completely centralised, or you’re going to have to synchronise computers internationally to conduct global trade, and for that it’s either going to be a blockchain or something equivalent. So I’m completely convinced that the synchronisation of the world’s computers for all purposes of global trade is going to wind up on a blockchain or a closely equivalent technology. This is the big game, this is what we’re chasing, and in that process we can either wind up with a better world, because that same system tracks carbon, tracks slavery, tracks environmental pollution, tracks political oppression in the regimes in which these things were produced, or we can have a global system that washes all hands, anonymises all payments, and leaves you with no recordkeeping. So how we implement this transition from paper-based trade to computer-based trade is hugely going to affect the everyday economic reality for the entire planet. This is a fight that is worth us participating in, and it’s a fight that it’s important that we win.

The balance of power that shapes global trade is a complex, adaptive system: it’s a set of multiple competing forces that are struggling for control of society. We are essentially in the people part of that group. We’re not a single enormous global faceless corporation run by one massive shareholder; we are actually an assemblage of the people. So our position in this is that we the people attempt to represent a better future, by implementing a set of technologies that give us access to a better world and that economically outcompete competitors for that role. One way that I talk about this is Star Trek loyalists or cultural loyalists: we’re kind of the science fiction faction that are trying to get to a preferable future, and to get there we have to outcompete the state and the corporations to arrive there. This stuff is all extremely political. We’re not less political than the Bitcoin community, we’re just a little slower to figure out what our values are. But it’s the same game, it’s just we’re going after a much, much wider spectrum of activities than just competing with state-issued currency — it’s a much broader perspective.

So, this is our issue: we are having a horrible problem breaking out into the real world so that we can use smart contracts to control fiat assets. Until we solve this problem, we are not fully empowered. We can’t get hold of the future and shape the future, because as soon as we get outside of the world of smart contracts, outside the world of crypto assets, we’re suddenly powerless, the magic stops working, we hit a threshold and we can’t get past it. What I’m going to tell you is I’ve breached that threshold, but the solution is kind of ugly. [laughter] I know how we get to the real world now, I know how to control it with smart contracts. Some of you are going to hate what I have to say, some of you are going to love it; please, if you find a better way of doing it, let me know, but let’s go.

$50 trillion of assets a year, I’ve already talked about the size of this. It’s worth noting that B2C on credit cards gave us three of the world’s five biggest companies. B2B is conservatively 20 times the size of the entire B2C ecommerce market, it’s a vast pool of transactions, and if we could figure out how to get into that market, it’s a very, very big game. The entire ecommerce game is about $2.5 trillion of transactions a year. There’s a vast space next door which is completely underserved, because credit cards are no good for B2B payments. This is all of the real-world stuff: 200-acre robot ports, tied together by paper contracts and bills of lading. If we can figure out how to get into this game, we become a global economic superpower and our values become amplified; if we can’t get into this game, we remain relatively marginalised in an environment which is increasingly going to be regulated by people who don’t like our values. We have to move into the real world.

The first thing that we need to be able to do is we need to be able to identify real-world assets in a way that’s unique enough to get control over them. We need the equivalent of IP addresses, we need the equivalent of DNS, we need the equivalent of cryptographic hashes. And the world is already filled with assets that have these numbers, and there are lots of numbering schemes to give assets numbers. These numbering schemes are under constant attack: the top one is a bank note, the middle one is a car registration number, the bottom one is a laptop number. All of those kind of structures are constantly under pressure from things like counterfeit goods. but even if you just start the game with these numbers, it puts you at odds with the real world. If you can then make these numbers properly cryptographic and bind them to a chain at point of manufacture you get better in the world, and there are lots of projects working on that for things like drug delivery. So it’s not that the real world is unenumerated and unidentifiable; we can actually get hold of things. The problem is that if we get hold of things without an appropriate binding to some kind of legal entity, you don’t have any ability to control the asset, you can identify it but you can’t control it.

So the first piece of new stuff that we’re building out is a thing called an asset passport, and an asset passport is basically digital identity documents on the self-sovereign model, more or less, for assets, and it’s implemented to handle the kind of squishiness of the real world using a set of staked partners that do things like value the asset, identify the asset, verify the asset doesn’t have more than one owner and these kind of processes. So you have an asset, you take all of the relevant legal facts about the asset, you attach a stake to each one of the legal facts in case the fact is wrong, and then you bundle all of that up into a nice, machine-readable bundle. This asset passporting process is the first step in getting an asset onto the blockchain and under smart contract control. Does this make sense so far? That’s a pretty easy thing to conceive of, there’s no magic there, we haven’t hit the hard part yet.

The second thing is automated custodians, this is where the fun begins. A custodian is a corporation or a trust, it could be something like a bank, and it has the legal requirement of owning an asset as a proxy for some other actor in the system. These things are all over the commercial world, they handle, goodness knows, billions or trillions of transactions a year, there are an unenumerated number of these things, and different jurisdictions handle them in very different ways. So the job of the custodian is to look to the digital world as if it’s a smart contract, and to the analogue world as if it’s a paper contract. So it’s basically the structural equivalent of the Ricardian contract. The Ricardian contract has a digital component which is a smart contract, it has an analogue component which is paper contract, and it relies on an arbitrator to interpret both sides of that in a successful way, and that puts a lot of load on the arbitrators, it’s very hard to find qualified arbitrators. In this model, rather than having that element which has a foot in both worlds, be instantiated as a contract pair~it’s instantiated as a legal institution. One side of the institution looks like a smart contract, you call the contract and it does things, and the other side looks like an analogue institution which has a full set of regulatory licenses.

So this thing is the adaptor between the smart contract world and the legal world, and what works to make that happen is a concept that we take from the crypto world which is staking. These things have extremely strong contracts, insurance, indemnification, regulation, dispute resolution, arbitration, every single mechanism you can use to make sure that the automated custodian does exactly what the smart contract tells it to do is deployed, to give us a nice, clean interface between the fiat world and the crypto world. In this direction, this is a unidirectional interface, you write to the material world by writing to this smart contracts that drive the automated custodian. Now, at this point, what we’ve introduced here is a point of centralisation. So if you imagine a single automated custodian for the entire planet, you can see that that might have some issues, I’ll come back to that a little further in. Does this all make sense so far? Because the legal machinery around building these things is seriously non-trivial. That is a very complex legal object: multiple layers of corporations, complex legal instrumentation, different jurisdictions implement it in different ways… It’s a really, really serious piece of work to build one of these things.

What comes out of that is that assets which have passports and which are embedded inside of a custodian are now what we would term smart property. Smart property is where you take an asset, take an object, you bind it to a set of metadata, which is the asset passporting process, so now the object is for example searchable: you could figure out where it is and who owns it, because you can interrogate the metadata which is on-chain. If the asset chooses to publish a set of essentially API hooks, a set of contract endpoints that you can hook, you could then do things like buy the asset directly on-chain, and as long as the asset is correctly lodged with a custodian, as soon as you put the money into the smart contract you’re now the legal owner of the asset. And that works equally well for a single asset as it works for a house or a portfolio of stocks or anything else, because the legal machinery of the custodians is able to correctly address any legal object. All fiat property has the necessary handles to be embedded in a custodian, and at that point as long as you’ve got the correct smart contracts and the correct legal contracts, you can use the existing machinery of state to get hold of any physical asset and turn it into a blockchain-addressable asset. It’s a ton of legal work, but the engineering is sound and you can actually do this.

What this gives you is a world in which the fiat assets are as easy to access as URLs. You could, in theory, in fact drive one of these automated custodians using standard Web technologies, you could just publish a bunch of APIs, but the problem then is by the time you’ve built the necessary security and identity machinery around those APIs, you might as well have used the blockchain. It builds a very, very different model of how we think about the world. So I’m going to run through that again: you start with a bare piece of fiat property that you cannot address on-chain because it has no identity, there’s nothing to talk to. We attach a set of metadata to that on-chain, that gives us a way of indexing the object, we can talk about the object; we still don’t have control of it, but at least we now know it exists. We take control of it by giving it to an asset custodian, and that custodian is automated to the point where what the smart contracts tell it to do it legally performs or it pays, a very ordinary model inside of the crypto universe, and we bind the asset to the smart contract using the legal authority of the custodians.

At that point, we now have real control of assets. Those assets then form a category of things called smart property, and the smart property assets can do whatever you tell them to do. That is a way of totally unifying the physical and the digital, from the perspective of both the blockchain where you’re writing out into the real world, but also from the perspective of the governments that control so much physical matter. Because these systems look to the real world exactly like the real world. An automated custodian is just a custodian, and there are thousands and thousands and thousands of custodians. So it’s a seamless integration, it’s not that there’s a clunky bridge. What we have is a container, which is a set of legal engineering and smart contract engineering and contract engineering, which takes all of the messy mismatches between the crypto world and the real world and manages them in a completely controlled environment. So it’s not that there’s no complexity there, it’s not that there’s no trickery, it’s not that the real world and the fiat world are the same place; it’s that you build a set of machinery which matches these expectations in a way in which makes the contracts completely coherent across both the fiat and crypto domain.

In software engineering you’ve all seen systems that work that way. In any situation where you have two technologies which are of completely different generations, you wind up having to build a bunch of difficult, complicated interface code; anytime you interface with legacy systems you wind up with legacy system adaptors. So this model, the smart property registers and the asset custodians and the passports, that is the equivalent of the legacy adaptors, which give us direct access to the namespace defined by the nation states. It’s a way of taking all the assets which are currently under nation state governments, making them visible on-chain and moving them around. This is the key, it’s the magic, to enable us to get into the next step of blockchain growth, this is the adoption mechanism; until we can touch the real world, we can’t go anywhere.

The security token model which is currently getting so much play is a very simplified model of doing this. We take a single legal right, which is the ownership of an asset, we figure out how to get that legal right correctly represented on-chain as a security token, and then we use the standard tokenisation machinery to bring these things to market. That takes just a single legal right and automates it in an on-chain way, but all that allows us to do is own things and build portfolios of property. It doesn’t generate any kind of new functions, you can’t use it to start new businesses, it’s just the ownership function.

What we really want to be able to do is something much bigger and more complex. What we want to be able to do is take all of the functions that a thing could have and build machinery around those functions. So if you have something like an apartment, you could buy it, you could sell it, you could rent it, you could auction it, you could rent it on short terms like a an Airbnb model, you could contract out the maintenance on it… There must be 50 different legal rights associated with an apartment. So what you want is to be able to bring that entire suite of legal competences into a smart contract environment where you could get the entire set. What that gives us is what we think of as being smart property. It’s the ability to fully drive the APIs of the real world from blockchain smart contracts. You could sort of imagine the wallet software, where you take something out of your phone, and it gives you an interface that looks like a property screen from an MMO: here’s all the stuff that you own, you take the bicycle, you drag it to your friend’s face and you say, “Lend,” and it just goes off and does the set of transactions that transfers the necessary rights so that the bicycle is your friend’s until he gives it back to you, and that gets rid of all the insurance liability if your bicycle breaks. You take your house, you drag it to “securitise”, it hands you back a wallet full of security tokens, and you can then sell some of those to somebody that you owe some money to.

All of those kinds of models become possible, because we don’t just do a shallow transformation of the physical into the digital where we just do the ownership rights; we want to take all the use rights as well. And you can see that this model completely wraps around the utility token model, because the utility tokens then bind directly into the material world, because those are the tokens that you give people when you want them to use the asset, and the security tokens are the tokens that you give people when you want to own the asset, and ownership and use are two different contractual rights. It took me a long time to learn how to think about law this way, it has been a very hard learning process because I have no legal background at all, I came into this as a nerd, and what I eventually realised was that lawyers are simply the programmers for the real world. And the real world is a nasty, squishy, imprecise place, so the lawyers are basically constantly writing error-handling code… [laughter] [applause] A paper contract is about 90% exception handling and about 10% logic, and that’s just because the real world is really squishy.

So when you actually get to know the lawyers — and, you know, it’s a process [laughter] — what you discover is they’re just programmers that weren’t given computers young enough; you accidentally become a lawyer, and five years later you’re like “Damn, I should have become a programmer!” My Chief Legal Officer Christopher Wray, who figured all of this stuff out, is an extraordinarily nerdy man and only very narrowly avoided becoming a programmer. That’s part of why we have this system working, is because what we’ve built was a culture which was fully tech and fully law, and that was basically two years of conversations around my dining room table, really getting to the point where everybody spoke everybody else’s language well enough to come up with something which was a genuine fusion of code and law. Once you understand that the processes which generate law and the process which generate code are the same kinds of people solving the same kinds of problems, just with a two different eras of technology, we could basically begin to back into law in the same way that we’re backing into legacy systems like SAP. If you’re doing integration with ERP systems, and you put the asset control logic that currently runs capitalism connected to the blockchain, you could do the same thing with law; it’s just a case of getting fully immersed enough, to the point where it begins to look like one thing rather than two, and this is basically the core of what we spent our time doing.

It takes a long time to make these kind of problems soluble, and the next thing that we have to do as a community after this is governments. Because if we could figure out how to cut a deal with the lawyers where becomes a single system, we ought to be able to do the same thing with the state or any other standing institution; it’s just a question of getting deep enough into the understanding of the systems, to understand that we’re all trying to solve the real-world problems in a way that works in the real world. It’s just that as the real world changes you get different generations of solutions, and all these different generations of solutions are kind of running on top of each other, and this is the complex system of society. If we want to interact with that complex system, we have to make deals and form partnerships with these entities, and that involves understanding their logic and understanding their historical period.

Governance protocols. If we take something like a Stradivarius violin, and we very nearly had one with us today but we hit some logistical problems, you need to protect the thing’s value because it’s hundreds of years old, which means you need to be in a position where it’s properly maintained and cared for. If it needs replacement of one of the parts which wears out with play, you need to make sure that it’s done by a proper person. Who is going to decide it’s a proper person? So making the assets such that they’re protected over time, whether it’s rainforests or violins, you need to take a ton of time to design governance structures, so that the owners don’t put short-term interests ahead of long-term interests and damage the assets that they’re custodians of. Because I don’t want us to build systems which basically turn into cutthroat capitalism, where we have leveraged buyouts followed by asset stripping; we want this to be a system where things are put under long-term custodianship and management so that they are cared for for the future. We need that approach both for historical artefacts, we also need it for cultural artefacts, we need it for environmental artefacts. How are we going to do things like correctly tax carbon? Probably there will be a blockchain in there, you want to be able to take the rainforests and put them under real governance structures.

The final thing is centralisation and decentralisation. Building protocols where the automated counterparties, the automated custodians are reliable enough that you can use them on smart contracts and not wind up with a ton of error, where error implies dispute, which puts us back in the Ricardian model where we’ve got to go to arbitrators and all the rest of that stuff, being able to get this stuff correct requires that all of the custodians and all of the other actors in the system are doing things like providing title insurance, all of those actors have to be at an extremely high level of professionalism in the analogue world. The analogue world actors have to be the best possible analogue world actors, and we need to make sure that as we grow these systems out we’ve got the appropriate certification, training and technology packages, to make sure that the analogue world actors are not stealing things out of the custodians and then screwing with the dispute processes by bribery.

If you want to think about doing business in developing world countries, where we really desperately need effective trade infrastructure, there are enormous pools of assets in developing world countries that could be used to stake and secure smart contracts that would enable trade. If you’re selling goods from a factory, if you stake the factory itself on the performance of those goods, it’s much easier to do business with you than if you’ve got nothing but a promise, and that ability to anchor deals against hard assets allows us to work in low-trust environments. Those kind of competences require the entire analogue system to be as good as it can possibly be, or we’re constantly in dispute and disputes are expensive. So our big challenges as we go forward are finding the correct set of partners on the analogue side, to build analogue systems which are fully integrated and compatible with the blockchain reality.

We just published a whitepaper, it explains a lot of the logic, it explains a lot of the legal reasoning, it gives a really good idea of how these systems work. There will be a whitepaper, very likely associated with a fundraising event at some future point. That stuff is not happening yet — if you hear anybody say that it’s happening, it’s not happening — but at some point the intention is that there will be tokenisation of these things, if we could find legal structures that we like for it, that is TBA. I guess that is all I had to say — thank you very much! [applause]

Question: Thank you, Vinay. Do you have any measures in mind to prevent the centralisation of custodians?

V: My expectation is that the custodians will turn into marketplaces, with extremely strong oversight from the community. So in any situation where you think that the custodians are becoming centralised, that creates an opportunity for a second custodian to enter the market, because nobody wants a centralised custodian. So I think what you get is community-enforced antitrust regulation. The other possibility is that we build market machines which punish custodians that get too large by for example taxation, so we could build antimonopoly machinery directly into the underlying contract frameworks.

End of transcript.

Thank you for reading!

If you have any questions you can email us at info@mattereum.com or join our telegram group where our team can address them.

Read and share our Summary White Paper that goes into some more depth on the concepts I’ve been talking about here.