Monday, March 2, 2015

Non-bitcoin assets on the block chain are not interesting

I frequently hear people in the Bitcoin community say that money is just the first application of the Bitcoin block chain, and that they want to use it for tracking other assets like land and securities. That thinking is misguided and I would like to explain why.

First of all, let's talk about the data in the block chain. The payload data for the block chain is mainly just a bunch of blobs of structured binary data called transactions. Each transaction has a list of inputs and a list of outputs, and it specifies how much value is stored inside each output. The value inside each output is just a positive integer which represents how many bitcoins are in that output. Each transaction output also has a script which determines who can unlock the output, and the typical script will contain something called a Bitcoin address. The rest of the data in the block chain, and all the software that runs on the nodes in the Bitcoin network, is designed to fulfill one purpose: it establishes a decentralized consensus on the set of unspent transaction outputs. It does this in a way that anyone can use the network, but nearly no one can modify its data maliciously.

The block chain, and the servers that maintain it, know nothing about real estate or stocks. So when someone tells you they have developed a way to represent non-bitcoin assets on the block chain, what they are saying is that they have invented a set of rules for how to interpret the data in the block chain in order to add extra information to it about asset ownership.

These rules that they invented are not enforced in the block chain. Therefore, if you are an owner of a non-bitcoin block chain asset, then you have to trust some third party to actually give value to your asset. That third party could arbitrarily change the rules of the game some day and declare that your assets are not valid, in a very similar manner to how PayPal or Coinbase can arbitrarily freeze your account. The block chain doesn't care, so the only recourse you would have is to complain loudly in public and/or file a lawsuit. There is nothing you can actually do by yourself in order to maintain control of that asset. Therefore, that kind of asset is inferior to an actual, real bitcoin, and it is not a particularly interesting thing to talk about.

The only benefit I can see to these kind of schemes is that there would be more transparency in the ownership and transfer of these assets. But you don't need the block chain to achieve that. Imagine this alternative system instead: the central authority that everyone is trusting could simply maintain a centralized ledger themselves. They could publish a new version of the ledger on their website every hour, signed with their company's PGP key. The asset holders could use ECDSA cryptography, or any kind of authentication mechanism that the company implements, in order to authenticate themselves and issue orders for transferring the asset. This kind of system is totally possible with today's technology, and it would be cheaper to implement than a block chain-based system because you wouldn't have to download tens of gigabytes of data or pay fees to Bitcoin miners.

So why does everyone keep talking about non-bitcoin assets on the block chain and writing software and protocols for it? There are people who have spent a lot more time thinking about this than I have, so maybe I am missing something. Please enlighten me in the comments.

TLDR: The bitcoin network establishes a decentralized consensus on the set of unspent transaction outputs. It doesn't know anything about non-bitcoin assets, so you'd have to trust a third party in order to actually hold such an asset. If you are trusting a third party, there is no real reason to use the block chain.

9 comments:

  1. Could the advantage be that a ledger of account maintained via bitcoin is not subject to hacking or fraud? You outline measures a company could take to securely maintain its ledger itself, but are they just as secure?

    Of course, that still leaves breach of contract as a worry, but eliminating some, but not all, hazards might be worthwhile.

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    1. I don't see how a centralized ledger is necessarily less secure than the block chain, but maybe you could make that argument.

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  2. Say the third party published a signed list of assets. I guess an advantage would be that with that list, and the blockchain, the owners could prove that they were the owners at that point in time - even without the third party to confirm it? It would protect against the third party trying to rewrite the history.

    (I.e. same reason proofofexistence.com has merits (in some cases) even if it doesn't embed in the blockchain the file that you're proving exists.)

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    1. Hello, Martin. Yeah, I can see how that kind of scheme would make it harder for the third party to cheat you out of your assets. It is better than a scheme where the timestamp is embedded in the signed document itself for two reasons: you can make sure the third praty does not fake their timestamp, and you could pretty easily have a convention for how the proofs of existence are created that allows you to verify that the third party is only creating one series of asset lists instead of creating two conflicting series of lists.

      Of course, you'll still have to rely on a court (or a court of public opinion) if there ever is a conflict.

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    2. That's true, your point about the blockchain being unable to *enforce* property rights still stands. (Until smart devices - that only look to the blockchain in order to decide who their "master" is - start to take over the world.)

      But even if we have to fall back to ye old judicial system for resolving disputes (and enforcing the outcome), if at least the facts themselves are clearer, we're off to a better start?

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  3. Nasdaq will start using the blockchain for some non-bitcoin assets: http://money.cnn.com/2015/05/11/technology/nasdaq-bitcoin-technology/

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  4. Honduras to build land title registry using bitcoin technology:
    https://uk.news.yahoo.com/honduras-build-land-title-registry-using-bitcoin-technology-162701917.html#mqNimS8

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