Based in Singapore, I have been involved and invested in Bitcoin and Cryptocurrencies since 2011. I launched and ran a Bitcoin point-of-sale payment service in 2013 and became one of the representatives of the space in the region, having spoken with various global media and at international conferences.

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Asset Management: You (Probably) Don't Need Blockchain for It, Part V.

Asset Management: You (Probably) Don't Need Blockchain for It, Part V.

This is part five of a series of articles. While parts two onward deal with separate issues, it is recommended to read the first one in order to understand the context applied to the separate use-cases.

Another big topic, which is often brought up by “blockchain consultants” and heads of corporate innovation labs who point out the blockchain’s traceability is the management of companies’ assets. For the reason I’ve mentioned before - the natural limits of smart contracts when it comes to crossing the physical/digital world chasm, I want to distinguish here between tokenization of physical and digital assets, talk about the latter ones in later chapters and focus on the former ones here.

The case which is brought up probably most often by large corporations with huge numbers and variability of assets across their customers, partners, and vendors is tracking those assets as they change hands. This could be components of complex machinery or tools necessary in providing service to customers. The problem is, that as these assets move across all the parties, the owner can sometimes lose track of who is holding them at which point. A blockchain solution, as many claim, could help by recording and providing an indisputable information about the movement of the assets.

However, there are two parts of this problem - one is, how to record an information about a current state of the asset in question; the second is, how to store that record in an indisputable manner. Any organization, which is considering a solution for this problem needs to ask where their real challenge is - is it in maintaining trust between themselves and their partners about custody of assets, which can technically be easily accounted for or is it in a difficulty to record transactions with those assets in complex daily operations of otherwise trusted parties who in good faith lose track of those transactions.

Keep in mind, that blockchain is just a ledger technology. It can help in upholding the consistency of the transactions, not at recording information about them. The challenge in solving the recording part of the problem is in technological or process integration to a ledger. Blockchain cannot help there. To solve it, partners need to find means to minimize effort and the rate of errors in recording the assets’ changes of state. Data integration, IoT, and clear process ownership could help. Where one major player has the strongest incentive and also enjoys the trust of its partners, it can maintain the ledger much more efficiently than in a blockchain.

Blockchain can be the right solution for the second - the trust - part of the problem. An industry, a community, or any other group could agree to track its asset exchanges using a public and distributed blockchain. Private or permissioned blockchains have no value in adding trust. The same way as one can manipulate a centralized database, they can change records deep in a blockchain without a distributed consensus. The group doesn’t need to create and incentivize distribution of a new blockchain necessarily. They can piggyback on a consensus of an existing major blockchain using a sidechain framework (such as Rootstock), but they will have to use its cryptocurrency to pay its miners for that record keeping. 

Those who would like to object, that fees are not desirable need to consider an incentive for the record keeping. Either the group trusts a centralized ledger, which can keep the marginal costs for transaction recording at virtually zero, or they outsource that trust to a distributed group of miners who need to be incentivized monetarily. 

Where volatility of cryptocurrencies would pose undesired risk or accounting challenge, stablecoins could help because all parties could maintain balance for the purpose of facilitating the transactions without being exposed to volatility risk and without needing to book a separate asset class.

Real Estate

With real estate assets, the challenge of keeping track of the physical transactions is removed because real estate - by definition - doesn’t move. There is no need to inform about change of their physical state, i.e. its handover between parties. Ledger here merely informs about who has the right to use it (live in it, build on it, etc.), which makes it much more straightforward for blockchain consensus. 

Currently, the real estate ledgers are maintained by central governments who are also ultimately responsible for enforcing them. That means, that in order for blockchain to replace the centralized real estate records, a government would not only have to give up its monopoly over the record keeping but also over the enforcement of the ownership. If the government is not trusted to maintain the real estate ledger (mainly due to ineffectiveness or corruption), it wouldn’t help much to outsource the bookkeeping to a distributed consensus, because the same government would arguably not be reliable in enforcing the consensus-based records. Or to put it another way - where the government maintains a monopoly over enforcement of real estate claims, it might as well keep its own records. It will either be effective at both, or neither. One without the other makes no sense.

That, unfortunately, means that blockchain (albeit open and distributed) in itself would not - as others suggested - help with private property enforcement in failed states. If a state-backed (or state-tolerated) thug in Venezuela wants to seize a property, its rightful owner can scream “it’s on the blockchain!” all they want, they can kiss their garden bye-bye. 

Naturally, it is unrealistic to expect modern governments to give up their monopolies over real estate claims because that effectively means privatizing law enforcement. New states and territories such as Liberland or other free private cities initiatives would be the best adopters of such proposals. 

Assuming, that in all of those territories, the land in its initial state is controlled by a private sovereign (president of Liberland, or a company in charge of a particular private city initiative) who wishes to privatize it via initial offering, that sovereign could commission a creation of an open and permissionless blockchain and record all the land in tokens with the lowest reasonably possible denomination. The blockchain could piggyback on another major blockchain to use its consensus for immutability of records and cryptocurrency to pay miners' fees for bookkeeping and for the transactions (buying and selling the real estate) themselves. A token representing the claims could then be sold in a (finally useful!) ICO, and from then on traded freely between their new rightful owners. 

Third party applications could emerge, which would provide simple smart contracts for changing the ownership based upon payment in the cryptocurrency or for paying rent to the rightful owner. And of course, common law and its private enforcement and dispute resolution agencies would respect the records and enforce ownership accordingly

3 Trends That Will Take Crypto To a New Level

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Energy: You (Probably) Don't Need Blockchain for It, Part IV.

Energy: You (Probably) Don't Need Blockchain for It, Part IV.