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Tuesday, June 20, 2017

To Whom Does This Thing Belong? And How Do We Know?

As economic structures become ever more sophisticated, so too must the tools we use to establish and enforce property rights need to advance.

What’s the single greatest invention in human history? I would argue that the answer is private property. If you understand why, then you should also have a profound appreciation for another great invention in human history: the blockchain. They are mutually reinforcing. In fact, humanity has never had a better tool for keeping up with property claims under complex, globalized, digital economic structures.

We need people to agree on what belongs to whom.Let’s go back in time, say 150,000 years ago, when there were plenty of berries and slow-moving animals around to feed the few people around who needed to eat. But then the food runs out. They were face-to-face with the terrible reality of scarcity.

What’s the solution? Faced with starvation, people figured out how to domesticate animals and grow food. To achieve the full production schedule, you need to claim ownership of land and the results of your labors, so you can trade with others. Thus was the idea of private property invented. It required some measure of social consensus and some means of enforcement. We need people to agree on what belongs to whom.

One Tool Begets Another

That’s why the technology of private property requires another technology: some tool to keep track of who owns what. Under very primitive economic conditions, the means of knowing what belongs to whom can also be primitive. There is word of mouth and community consensus. There are fences and walls to signal property rights. Branding animals and food came later. The common law emerged to protect property rights. Much later in history came the idea of title companies.

There is always and everywhere the problem of stealing, lying, deception, fraud, and falsification of records. The point of these tools is to compel assent, provide public standards that smooth the operation of commerce, and encourage peaceful rather than violent interactions. As economic structures become ever more sophisticated, so too must the tools we use to establish and enforce property rights need to advance.

There is always and everywhere the problem of stealing, lying, deception, fraud, falsification of records, and so on. Ideally, the tools get ever better at detecting and preventing these from disrupting peaceful commerce.

The problem of establishing ownership rights cries out for more sophisticated solutions once wealth becomes financial, global, and mobile. In the 19th century, stock certificates and physical bond notes were subject to fraud. When it went unchecked, it would crash whole companies, while creating fake fortunes and destroying real ones. Recall that the plot of The Great Gatsby revolved around a phony fortune generated through fraudulent financial records.

The Database

In the old days, property claims were assigned and recorded by hand. Here is where the invention of the database made an amazing contribution. Rights could be more easily exchanged, reassigned, and moved much more quickly. Databases took over the world because of their flexibility. But they made an immense contribution to create more accurate records of all kinds. 

Databases were too centralized and not subject to verification by disinterested third parties.But they have been far from perfect. In a highly leveraged environment, ownership rights can again become murky and ambiguous, and people can game the system. Consider the 2008 financial crisis. With mortgage-backed securities bundling millions of ownership titles worth trillions, property rights became muddled. To some extent, the boom in housing depended on this. Money managers, lenders, and investors, didn’t want to know. But when the housing sector came crashing down, thanks to savvy and curious truth seekers, markets worked hard for years to sort out who owned what.

We now know a major reason for this problem. Among a sea of moral hazards and errant monetary policy, databases were too centralized and not subject to verification by disinterested third parties. The debt ratings agencies were in charge of determining the quality of debt and the risk of default. When they got it wrong, there was no one who could provide an ongoing check. You had to trust these third parties. When their judgment failed, the failure nearly brought down the world financial system.

The Blockchain

Bitcoin was only the most conspicuous fruit of a new and powerful infrastructure.

Congress responded with regulation and pledges for more oversight. Absurd. What we needed was a better technology. Only the market could provide. 

That same year, as it happened, something amazing was invented. The White Paper of the pseudonymous Satoshi Nakamoto proposed a new solution. The ledger that records ownership rights should be part of a distribution network that can be downloaded and hosted by any node. Changes in the ledger can only be made through strict rules, proof of work or stake, and community consensus. The result of this new cloud-based, decentralized ledger is an immutable record that requires no systems of third-party trust to operate.

The headline invention was, of course, Bitcoin. Actually, it wasn’t a headline. Hardly anyone paid attention until the dollar/Bitcoin exchange ratio started rising higher and higher. Only then did this remarkable new money started getting attention. Even then, most people missed the point. 

What many people missed during the great bull market of Bitcoin is that this new monetary tool was only the most conspicuous fruit of a new and powerful infrastructure with applications to financial markets, contracts, and ownership titles all over the world.

As it turns out, it wasn’t just about Bitcoin, which is indeed truly amazing. Just as spectacular was the value of the ledger service of blockchain technology itself.

The Economist explains:

The blockchain is an even more potent technology. In essence it is a shared, trusted, public ledger that everyone can inspect, but which no single user controls. The participants in a blockchain system collectively keep the ledger up to date: it can be amended only according to strict rules and by general agreement…. Blockchains are also the latest example of the unexpected fruits of cryptography. Mathematical scrambling is used to boil down an original piece of information into a code, known as a hash. Any attempt to tamper with any part of the blockchain is apparent immediately—because the new hash will not match the old ones. In this way a science that keeps information secret (vital for encrypting messages and online shopping and banking) is, paradoxically, also a tool for open dealing.

Truth in Ownership and Digital Assets 

At FEEcon this year (among many remarkable learning experiences), I had a public conversation with a major player in a new blockchain company, a leader in an industry that is completely reshaping economic structures around the world. The person is Caitlin Long, president of Symbiont, one of thousands of new companies deploying blockchain technology to provide accuracy, clarity, and truth in ownership rights.

Symbiont is a pure blockchain company that registers titles on a distributed network. It is not a “tokenized” blockchain so there is no currency or asset to buy. But within the blockchain sector, there are thousands of companies that use tokens such as Bitcoin, Ether, Factoid, and thousands of others. They are usually divided between currencies and digital assets. (My favorite source to keep up on them all is

It is extremely obvious that there is a blockchain gold rush on right now. It’s true that when people hear the word “blockchain,” they get alarmed because the discussion quickly becomes highly technical. It doesn’t seem to matter much because this doesn’t pertain to you and me.

The best revelation to come out of the conversation I had with Long is that the blockchain is absolutely essential for all of us. It doesn’t mean you have to code, learn cryptography, manage complex wallets on your digital devices, and so on. Neither do you have to understand electricity in order to turn on the lights.

However, blockchain technology will profoundly affect the security of your ownership rights in the future. Banks are adapting. Title companies, state agencies, registrants of all sorts are jumping all over this new way of doing things. The desire to know the immutable truth is what’s driving this. 

Don’t Steal Things

An example of the added value is provided, again, by The Economist:

When the Honduran police came to evict her in 2009 Mariana Catalina Izaguirre had lived in her lowly house for three decades. Unlike many of her neighbours in Tegucigalpa, the country’s capital, she even had an official title to the land on which it stood. But the records at the country’s Property Institute showed another person registered as its owner, too—and that person convinced a judge to sign an eviction order. By the time the legal confusion was finally sorted out, Ms Izaguirre’s house had been demolished.  

It is the sort of thing that happens every day in places where land registries are badly kept, mismanaged and/or corrupt—which is to say across much of the world. This lack of secure property rights is an endemic source of insecurity and injustice. It also makes it harder to use a house or a piece of land as collateral, stymying investment and job creation… That is why politicians seeking to clean up the Property Institute in Honduras have asked Factom, an American startup, to provide a prototype of a blockchain-based land registry. Interest in the idea has also been expressed in Greece, which has no proper land registry and where only 7% of the territory is adequately mapped.

When I first heard about this company Factom, I was thrilled and agreed to become an advisor precisely due to the service it could provide everyone in the world who deals with a serious problem of ambiguity in property rights. This is problem all over the world, and perhaps even in your neighborhood. There are now thousands of such companies working with this technology.

Have you ever been part of a title dispute over a house? They can be hugely expensive to sort out. Sometimes they cannot be sorted out. And what happens then? I’ve seen whole properties fall into disrepair, lovely structures decay and fall down, and high-value assets unable to serve any purpose. It’s a disaster. 

And that is just one the most apparent example. In financial markets, the problems grow infinitely more complex. Sorting out what is promised vs. what is actually owned can become mind boggling. The blockchain tolerates no such ambiguity. 

Think about other forms of record keeping: births, deaths, marriages, baptisms, copyrights, inheritances, and so on. Under the current system, there is too much jurisdictional conflict, confusion, loss, and outright fraud. The blockchain offers the possibility for an immutable, universal record. 

The Gold Rush

Looking at the valuations of many blockchain companies, it is extremely obvious that there is a gold rush on right now. In the future, some will rocket to the moon and some will crash. Which will go which way is something for the market to decide. As for the value of the underlying technology, there can be no doubt.

Truth in ownership has saved humanity many times in the past.

Returning to the example of primitive economic conditions, that first person to put a fence up around his plot of land was onto something. The point was to keep uninvited people out, but also to provide better information, facilitate investment and trade, incentivize production, and keep violence at bay. The fence made the world a better place and helped a starving world learn how to feed itself.

Today we are also starving for lack of clarity in ownership rights. The sophistication of our economic structures has outstripped our ability to keep track of claims. That’s where beautiful, scaleable, truth-telling blockchain can make all the difference.

I asked Long if the 2008 financial crisis would have happened if all titles had been recorded on a blockchain. Her answer: absolutely not. That’s an amazing thing to contemplate.

Truth in ownership has saved humanity many times in the past. It will again.

Snapshot of non-BTC cryptocurrency prices on this date:


Snapshot of blockchain asset prices on this date: