Part 5: Understanding the Blockchain

Going beyond money: open, borderless, neutral, and censorship resistant exchange.

(Part 4 was about How Blockchain privacy protects consumers while thwarting mass surveillance. What follows is the last article in this Understanding the Blockchain series for the curious, non-technical reader.)

To quickly recap, blockchains allow for exchanging assets without central intermediaries. So far we have discussed what makes them unique:

  1. Information is stored, using cryptographic hash chains, such that it’s virtually impossible to add, remove or change without being detected by others.
  2. Consensus is reached through a highly-distributed verification process across many computers.
  3. Transactions are authenticated with public-key cryptography making them virtually impossible to fake.

I have explained why these characteristics are valuable for digital cash (parts 2, 3, 4). I was a Bitcoin maximalist. I thought alternative cryptocurrencies (AKA “altcoins”) would take value away from Bitcoin’s “network effect.” Yet I keep seeing the opposite happen. I am now convinced that we will see as many types of currencies as we see blogs. The digital world just doesn’t seem to have the same zero-sum characteristics as the physical world. A borderless financial system that allows people to send or receive money across the internet, even to someone they don’t know or don’t trust, is a big deal. (I would not dare to build this on a traditional web server.) When the monetary policy is written in code and decentralization, it can be more predictable than men in suits. Separating authentication from identity can increase privacy while resisting mass-surveillance and totalitarianism. Censorship resistance creates the conditions for true financial inclusion.

An obvious question that follows is what other assets are as fundamental to the modern economy as money, that could benefit from open, borderless, neutral, and censorship resistant digital exchange?

I would not have told you computing resources, but after I read the Ethereum white paper I understood the perspective on why the cloud could benefit from distributed trust. I can sketch the argument for you as follows:

When our phone or PC uses the internet, we are connecting to programs that run on computers owned by other individuals or companies. Nearly all these computers are designed to be controlled by a single “root” administrator. Even when we use a secure connection, such as the case when we bank or shop online, our encrypted data is unencrypted on that remote server. This means we are “fully-trusting” the web service. That makes us totally vulnerable to insiders and hackers that have or can gain root access. (Insider jobs in the finance industry are the most common.)

Ethereum introduced the notion of a “blockchain computer” — a virtual or cloud computer shared across many traditional computers and protected using the cryptographic and consensus methods that make Bitcoin secure. What programs could you run on a blockchain computer? The same ones you can run on your computer. Yet they would run much slower and they would be extremely expensive. To quantify this: about 10,000 times slower and on the order of 10,000,000 times more expensive. (Here’s an interesting look into the cost of running an Ethereum program or “contract” versus Amazon Web Services). For this reason, ideal applications to run on a blockchain computer are those that require fiduciary duty level interactions, represented in code.

As an aside: A number of projects aim at decentralizing storage. Personally I’m not yet convinced incorporating a blockchain necessary. Strong encryption done locally removes the ability of a platform to tamper with data. I also don’t see a “double spending” type problem. If anything that would be a desirable state.

Let me share a third asset that needs open, borderless, neutral, and censorship resistant exchange: data. I think it goes without saying that the world’s most valuable resource is no longer oil, but data. Private data is currently owned by the tech monopolies such as Facebook. They exploit the digital lives of billions in exchange for “free services.” For years, we could conveniently ignore this. Facebook seemed like a fantastic bargain, until foreign governments manipulating us exposed the Faustian bargain. (Freedom is never “free.”)

Yet Facebook, while being one of the worst exploiters of our data, is hardly alone. AI and machine learning algorithms work because they can consume private data without consent at scales never before fathomable. In the last century, monopolies had to pay off governments to extract their resources, in this century they just need to offer free cloud services.

Is it possible to change this? If data is the new oil — and whoever owns it will be rich — can everybody own their own data?

I believe the answer is yes, and that it requires something arcane — a property system — built on a blockchain. Property systems record ownership of assets by assigning and recording transfers of “title.” Ownership of title conveys “property rights,” or legal protections to use, rent, sell and gift an asset.

Property rights were invented for land (real property) and then ideas (intellectual property), but none extends to the most valuable resource in the digital world, data. An open, borderless, neutral, and censorship resistant property system could be used to reclaim ownership of our data and make our own markets and exchanges. Markets that could make individuals (not monopolies) a lot of money.

How might such a system be constructed? Here’s a sketch:

To make a digital title, we need a way to generate unique identifiers of data, include some attributes about the asset, and have the owner digitally sign the whole thing to make it unforgeable.

Previously, I described “minting” digital coins using digital signatures. Coins are fungible (interchangeable) whereas titles are unique (with provenance). To “issue” a title we need both a signature and a unique identifier. We can make the latter by mapping data of arbitrary size to a string of a fixed size using an algorithm known as a cryptographic hash function. Any change to the data (input) drastically changes the output (digest) and there is no way to “reverse” the function. In other words, knowing the digest tells you nothing about the input. The title can include this digest and be made public (as required for property) while the asset (data) can be kept private. (To understand why it’s desirable to have some information public and some private just think about your genomic data.)

The origin and history of ownership, known as “chain of title,” gives property its value. Without chain of title property becomes fungible, like money, and has far less economic or social value. Thus, ownership transfers of title must be recorded over time — exactly what a blockchain does. And that’s about it — now we have our property system, built on the blockchain.

It’s not perfect. These property titles would be self-signed. Thus anyone can issue a title for anything regardless of whether the data is legally theirs to own. This is not as bad as it first sounds: conflicting ownership claims have different issuing signatures. Therefore it’s easy for another party to inspect the claims for validly. The blockchain acts as the chain of evidence. Stolen property would be permanently recorded, acting as a deterrent.

There is also the practical problem of getting actors to respect the property rights agreed upon. This would depend on the specific type of property, methods like encryption can help. For example, transferring title to someone’s location data would not mean that the location data is transferred automatically. (Only the property right to that data would transfer in a property system.) Another system is necessary to transfer data itself. Trust in that other system could be minimized, but not easily removed entirely. It would be possible to use the blockchain property system to control access rights. I won’t take the time to explain those details here. A final point is that a property system should not be confused with “Digital Rights Management” (DRM). Digital property functions like an anti-DRM. When you own something it is yours to do what you want with it.

It’s interesting to note that many kinds of internet resources (eg: domain names) have the basic characteristic that users must agree on their control across trust boundaries. These types of problems can be solved by agreeing on and maintaining property rights. Thus, a property system is quite general and important. This is why making it decentralized is so interesting.

If you’re hungry for more I suggest buying some bitcoin and then read Mastering Bitcoin — it’s the best book on this subject. Feel free to message me on twitter (or email) if you would like to talk more.