In response to First US Real Estate Transaction in Blockchain: What's Next? I received an interesting email from William Entriken.
He is working on working on the Ethereum project.
The project involves standardizing the process of transacting real estate assets on the blockchain. In techspeak that "non-fungible tokens"
Entriken wrote a short article, starting with the basics, but it gets very interesting.
Blockchain Beyond ICOs by William Entriken
Right now cryptocurrencies (just one blockchain application) get the most press, but the next applications will be much larger and more legitimate.
What exactly is blockchain?
Blockchain is a digital system for notarizing documents. Think about documents you would notarize — recording the sale of a car or house, confirming your identity for access to government services, consummating a large business transaction. The purpose of notarizing a document is to establish that a particular person agreed to a specific thing at a certain time in some way that could be used as evidence in court, if necessary. Notaries have been a professional practice since at least the 14th century as popularized in England. But recently, a new system popularized the idea of a digital notary system, and then another created hundreds of billions of dollars out of thin air.
The first digital notaries
If you have ever emailed versions of a Word file back and forth with a large team, you know this can be a painful experience. Maybe somebody forgot to turn on "track changes" and two people sent you updates at the same time which you will need to incorporate into one cohesive document. Somebody decided to make a system that tracks every version of a file and it would track every person that made each change. It did this in a way where the history is never lost which uses blockchain. This system is called Git and it is the first popular blockchain. Many companies offer a Git product including one company, GitHub, which Microsoft bought for $7.5 billion this year. But this is small potatoes. Next is Bitcoin.
Bitcoin was put into use in 2009. This is a blockchain system where, rather than notarizing your group homework assignments, somebody notarized the document "I own 50 Bitcoin". All subsequent documents notarize a transfer of these 50 Bitcoins from somebody that has them to somebody else, or mint new coins out of thin air according to some specific rules. By the next year, these coins were worth about 0.01 USD each. Don't you wish you bought a bunch then? Many people made copycat projects.
People have been copying this idea over and over to print their own Monopoly money and go on to convince other people that it is worth something. A website called CoinMarketCap tracks these projects and you can see these fundraising practices, usually lossmaking, in real-time. Some of these projects are real and valuable, for sure, but good fundraisers might trick you into believing a terrible project is valuable.
The most popular exchange may charge you 1 million USD or more just to make your coin available for trade — plus going on a roadshow is very expensive. "Managing" the price of your coin on an exchange is very expensive, and maybe illegal. It is not unheard of to spend half of an entire project's money on fundraising in these ways. To learn how these fundraisers are being run, just read the United States' laws (15 U.S.C. § 78j(b)) and regulations (17 CFR Part 240) for securities exchanges tactics that are prohibited. Many blockchain fundraising projects use creative tricks and intend to follow the the letter of the law by classifying their projects as "utilities" rather than "securities." Don't worry, the next blockchain applications will be much more legitimate.
With these hundreds of billions of dollars created from thin air and the crazy price fluctuations of Initial Coin Offerings (ICOs) for products that mostly don't even exist, most people took their eyes off the prize. The prize is that a cheap, publicly-available digital notary is really useful for existing enterprise and government applications.
Right now in the United States it is expensive and slow to find the registered owner of real estate property and whether there are encumbrances/liens on those assets (property title search). Likewise for cars. Governments already have this information but it is difficult to request and each requestor must get the data directly from the government publisher. One stamped document from the government is insufficient, anybody that you would want to show your document should pay for their own official copy directly from government to avoid forgery. A digital notary service (blockchain) improves this process tenfold or better for government and the end users.
High-value luxury goods often come with a certificate of authenticity. When you sell your expensive purse to a second-hand buyer, they will want to confirm the certificate is valid (maybe check the hologram) before they purchase from you. You probably know a family member that could modify or reprint a certificate of authenticity using Photoshop and make it look good enough. A digital notary service makes documents that cannot be forged.
Ownership of financial assets (mortgage securities, etc.) is reported to investors quarterly for publicly traded firms/funds in the United States in a process that is opaque and can be manipulated. An audit trail of asset-backed security sales which is available to regulators (and possibly investors) would make this information available in real time. Warren Buffett calls these "financial weapons of mass destruction" and having a better accounting of them could prevent future financial crises. A digital notary service prevents records from being erased and modified when regulators show up to ask questions.
These are the new applications of blockchain that take advantage of it being a digital notary.
Blockchain "In the Future"
You might have heard about blockchain solutions that enable "machine learning" or "artificial intelligence" or maybe even "virtual reality" and "self-driving cars". Even more ambitious projects offer to trade physical assets "without middle-men", or to "eliminate spam". Or the impossible, share "symptoms, diagnosis or treatment plans" while keeping them secret, and "comply with GDPR" while also permanently notarizing sensitive documents. These technologies will be ready in a few short months out, if you believe project white papers.
None of these technologies have anything to do with blockchain. The reason why some projects incorporate these buzzwords into their presentations is because the audience might be confused and forget that blockchain is just a digital notary. People that don't understand this might think blockchain is some future sci-fi technology that works like magic.
In sci-fi movies, it is not enough to have one crazy technology, they need many to make it believable. Take the "car attack scene" in iRobot, starring Will Smith. In addition to robots, they have self-driving vehicles, artificial intelligence, and cars that spin while gliding forward, meanwhile Will Smith's character is a cyborg that survives a full-speed, head-on collision with a wall.
If you value government transparency in recordkeeping and companies working to reduce fraud and better track assets then the future of blockchain is bright. If you think the next unicorn company will come and disrupt an established industry using a plan developed by someone who's only business experience is writing white papers then take Warren Buffett's advice and hire a "second advisor to make the case against the proposed acquisition, with its fee contingent on the deal not going through."
About William Entriken
William Entriken is the lead author of the "token standard" for tracking physical assets using blockchain (ERC-721). He actively advises blockchain companies for projects he believes in and organizes Chain 76, a conference for applying blockchain to supply chain problems in the pharmaceutical industry.
Video Explanation of "Non-Fungible Blockchain"
Mike "Mish" Shedlock