How Blockchains and Offline Assets Could Work Together
A heated debate is raging… well, a debate is happening… about what will actually end up “onchain.” What assets, items, and ideas will we manage with blockchains instead of private databases?
This is a tributary to the all-important question–How important are Blockchains, what will they impact, and what are they worth?
Specifically, will offline, non-digital assets move on-chain? How?
It’s easy enough to assume all-digital assets (like money, data, and digital art) will be managed by blockchains. We’re seeing experiments with those already.
What about Real Estate, Wine Bottles, or Cars?
After writing my post, The Cost of Trust, I ended up in a very interesting email exchange with Colin H, founder of Float, who asked about this – “How do the blockchain and the real world interact? How do we know that the blockchain knows which wine is genuine?” (I’m paraphrasing.)
(The post used fraud in the rare wine market to show the value of trust in a market, the cost of creating trust, and the value unlocked if blockchains make creating trust cheaper.)
Our conversation became an interesting set of possible answers, and I wanted to share them with you.
Short version:
Verified Chain of ownership to a trusted source
Verified Chain of ownership through trusted owners/brokers
Verifiable Identifiers (RFID, NFCs)
Digitally verifiable Atoms (Fingerprints of physical items)
New digital records of physical ownership (like mortgages)
All value is becoming digital anyway
History of Ownership OnChain
My first, zero-research reaction was “huh, I’m not sure it can reliably know that a bottle of wine isn’t a fraud (I was wrong about this, more later) but it should know the history of ownership.
If we know the previous owner or owners as reliable, honest, knowledgable participants in the market, we can lower our estimate of the likelihood of fraud. The problem in this case, is that the fraudster WAS a well-recognized, trusted participant in the market.
The real value comes from a trusted chain of ownership back to the source. If the bottling vintner had recorded the bottle to the chain when it was initially created/sold, and the whole history of ownership had been visible, fraud becomes nearly impossible.
Since the blockchain is so new, there isn’t much of a history today. Unreliable sources are able to bring new information to the “market.” Over time, I expect this to change. In 50 years, people will be buying well-aged 2023 Cabernets whose whole history of ownership is on-chain.
In the intervening years, there is still value to seeing the time an asset has been on-chain, and the number of trusted transactions/inspections (sales through an auction house, for example) it has been through. More high-reputation owners and more trusted brokers = less fraud risk.
We still used Wine here – but you can imagine the exact same process for a new car. The VIN is recorded by the manufacturer, and the first sale is recorded. Maintenance, accidents, resales–all recorded to a public database by sources whose authenticity we trust. A perfect CarFax for every vehicle, automatically.
Blockchain to Offline Technologies
There are some technologies to track and identify physical items. We use them millions of times every day. We have Barcodes, RFID tags, Bluetooth, Tiles, LoRaWAN, etc etc etc.
True, not all of them are tamperproof, but some tamperproof technologies do exist. That’s why “but someone could switch the stickers and break the blockchain forever nooooo” feels like a weak rebuttal to me on this topic.
Colin H did some research and found Tamperproof NFC chips:
"The NFC chip will be physically attached to a specific product. Force will need to be applied in order to remove the chip. Removing the chip implies a significant damage of the product."
Is that going to be perfect? Of course not, but it’s an indication. Even if it was difficult/impossible to remove without damaging the CHIP that would be something valuable. VIN #s, RFIDs, NFCs, and more tamperproof tech will help us provide digitally verifiable identifiers. It’s not flawless, but it’s another technology that puts a strong link in a chain of lower cost trust and lower risk of fraud.
Another technology Colin found is even a step cheaper and more secure–inherent to the item itself: Craquelure-based Tracking.
“A Craquelure is a random pattern of microcracks (hairline cracks) developing in a layer of paint or varnish. The drying process results in cracks and patterns that are unique. Their origin is chaotic and not predictable. The crack patterns are produced on different granularities in terms of crack size, depending on the varnish used. The resulting pattern can be read like a fingerprint for physical products. This means that each product can be uniquely identified. Some paints lead to fine cracks that can only be seen under a microscope. Other lacquers result in a rough crack pattern, which is already clearly visible on pictures taken with conventional mobile phone cameras. These are particularly suitable for use in the supply chain, as these mobile devices are accessible to the mass market.”
Rather than relying on something that could be removed/destroyed/changed, this uses the “fingerprint” in the item itself to verify it. Digitally verifiable Atoms. Very interesting potential technology.
New Separations of Physical/Digital
If we find we do want all the things on the Blockchain, there are also ways to create new “bundles” that enable digital management better.
For this example, real estate is not easy to digitize. It’s just metes and bounds data–but ownership is carefully tracked by title offices, disputes are adjudicated, taxes are paid, etc. (And because of all this, fraud in real estate is very low–this didn’t use to be the case.)
So real estate may not be easy to digitize… but mortgages are. Here’s an excerpt from the launch announcement of Theopetra’s Self-Repaying Mortgages:
“We’ve meticulously built a legal castle to allow the homeowner to have all of the rights while Theopetra controls the debt of the home.
Theopetra marks the birth of synthetic homeownership, granting 100% of the rights to the homeowner while maximizing the home’s debt — flexibility and upside. Synthetic ownership in real estate will drive use-cases never seen before.”
Put me down as deeply skeptical of this. Outsourcing the direct ownership of my home to a new startup protocol is not an experiment I’m going to volunteer for. But it is one interesting idea for new types of ownership bundles bridging physical and digital.
All Value is Becoming Digital
I’m hard at work on The Almanack of Balaji Srinivasan right now, my second book. He is often years or decades ahead in forecasting technology trends and adoption. There’s an interesting proclamation he makes:
We’ve seen a LOT of things become digital over the past 30 years. More than any of us would have predicted. This hasn’t slown down.
Balaji’s expanded prediction has to do with robots doing an increasing amount of the creation and production. If robots are doing the cooking and delivery, the value of a meal isn’t in the craft but the recipe–the digital instructions. If robots are doing the building of a home, the labor is a commodity, the value is in the blueprint.
If… IF… that becomes true, or even more true than it is today – the digital data (recipes, blueprints, songs, programs, books) will be captured in the blockchain, ownership known, source verified, and those creators will capture what they earn much more easily.
So wait… if I invent the perfect sandwich… I can earn royalties on my sandwich recipes… forever? THIS IS THE WAY!!!!!!
Blockchain to Offline Conclusion
I am—in a word–Optimistic. It’s not obvious at first how much value there is to blockchain databases, but it will become more obvious over time. Implementations will become faster/cheaper, and we’ll apply the tech to more and more markets.
These technologies are a start, and I’m sure we’ll see more new innovations as the need becomes more obvious to manufacturers. It’s a big opportunity to provide a “pick-and-shovel” for a digital gold rush.
The clear trend of increasing digitization is a huge tailwind to all of this.
I think trust is extremely valuable, the cost of trust is high, and using technologies that make trust cheaper, faster, and easier are better for ev👏🏼er👏🏼y👏🏼one. Except for fraudsters, but screw them.