This is this third part of our ‘Making Sense of Blockchain’ blog post series, here we look back at a post originally authored by Dominic Perini on how our attitudes to ownership are changing and how this relates to the value we attach to digital assets in the blockchain space. You can read part 1 of this series on ‘6 Blockchain Principles’ here.
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Digital Assets: Ownership in the Era of Blockchain
Ownership, provenance and handling
While physical goods contain an abstract element: the design, the capacity to model it, package it and make it appealing to the owners or consumers. Digital assets have a far stronger element of abstraction which defines their value while their physical element is often negligible and replaceable (e.g. software can be stored on disk, transferred or printed). These types of assets typically stimulate our intellect and imagination.
The peculiarity of digital goods is that they can be copied exactly at a very low cost: for example, they can be easily reproduced in multiple representations on heterogeneous physical platforms or substrates thanks to the discrete nature in which we store them (using a simplified binary format). The perceivable form can be reconstructed and derived from these equal representations an infinite number of times. This is a feature that dramatically influences how we value digital assets. The opportunity to create replicas implies that it is not the copy nor the rendering that should be valued, but rather the original digital work. In fact, this is one of the primary achievements that blockchain has introduced via the hash lock inherent to its data structure.
If used correctly the capacity to clone a digital item can increase confidence that it will exist indefinitely and therefore maintain its value. However, the immutability and perpetual existence of digital goods are not immune from facing destruction, as at present there is a dependence on a physical medium (e.g. hard disk storage) that is potentially subject to alteration, degradation or obsolescence.
A blockchain, such as that of the Bitcoin network, represents a model for vast replication and reinforcement of digital information via Distributed Ledger Technology (DLT). Here, repair mechanisms can intervene in order to restore integrity in the event that data gets corrupted by a degrading physical support (i.e. a hard disk failure) or a malicious actor.
However, as genetic evolution suggests, clones with equal characteristics can all face extinction by the introduction of an actor that makes the environment unfit for survival. Thus, it might be sensible to introduce heterogeneous types of ledgers to ensure their continued preservation on a variety of physical platforms and therefore enhance the likelihood of survival of information.
The evolution of services and their automation
Now let’s consider how we have started to attach value to services and how we are becoming increasingly demanding about their performance and quality.
Services are a form of abstract valuable commonly traded on the market. They represent the actions bound to the contractual terms under which a transformation takes place. This transformation can apply to physical goods, digital assets, other services themselves or to individuals. What we trade is the potential to exercise a transformation, which in some circumstances might have been applied already. For instance, a transformed commodity, such as refined oil, has already undergone a transformation from its original raw form.
As transformations are being automated more and more, and the human element is progressively being removed, even services are gradually taking the shape of automated algorithms that are yet another form of digital asset, as is the case with smart contracts. Note, however, that in order to apply the transformation, an algorithm is not enough, we need an executor such as a physical or virtual machine.
Sustainability and access to resources
Stimulation of the intellect and/or imagination isn’t the only motivator that explains the increasing interest in digital goods and consequently their rising market value. Physical goods are known to be quite costly to handle. In order to create, trade, own and preserve them there is a significant expenditure required for storage, transport, insurance, maintenance, extraction of raw materials etc.
There is a competitive and environmental cost involved, which makes access to physical resources inherently non-scalable and occasionally prohibitive, especially in concentrated urban areas. As a result, people are incentivised to own and trade digital goods and services.
The high power consumption required by the Bitcoin network’s method of consensus would potentially negate these environmental benefits. However, Keith Bear from the Cambridge Centre for Alternative Finance (CCFA) recently discussed their publication of the Bitcoin Power Index with us. He told us that although power consumption is a concern it should be remembered that blockchain technology can act as a force for good, being used for environmentally beneficial projects.
Services traditionally require resources to be delivered (e.g. raw material processing). However, a subset of these (such as those requiring non-physical effort, for instance, stock market trading, legal or accounting services) are ideally suited to being carried out at a significantly lower cost via the application of algorithmic automation (assuming that the high carbon footprint required to drive the ‘Proof of Work’ consensus mechanism used in many DLT ecosystems can be avoided).
Barriers to acceptance of digital assets
Whereas it is sensible to forecast a significant expansion of the digital assets market in the coming years, it is also true that, at present, there are still several psychological barriers to overcome in order to get broader traction in the market.
The primary challenge relates to trust. A purchaser wants some guarantees that traded assets are genuine and that the seller owns them or acts on behalf of the owner. DLT provides a solid way to work out the history of a registered item without interrogating a centralised trusted entity. Provenance and ownership are inferable and verifiable from a number of replicated ledgers while block sequences can help ensure there is no double spending or double sale taking place within a certain time frame.
The second challenge is linked to the meaning of ownership outside of the context of a specific market. A good example of this is provided by the closure of Microsoft’s ebook store. Microsoft’s decision to pull out of the ebook market, presumably motivated by a lack of profit, could have an impact on all ebook purchases that were made on that platform. The perception of the customer was obviously that owning an ebook was the same as owning a physical book. What Microsoft might have contractually agreed through its End-User License Agreement (EULA), however, is that this is true only within the contextual existence of its platform.
There is a push, in this sense, towards forms of ownership that can break out from the restrictions of a specific market and be maintained in a broader context. Blockchain’s DLT in conjunction with smart contracts, that exist potentially indefinitely, can be used to serve this purpose allowing people to effectively retain their digital items’ use across multiple applications.
The transition to these new notions of ownership is particularly demanding when it comes to digital non-fungible assets. Meanwhile, embracing fungible assets, such as a cryptocurrency, has been somewhat easier for customers who are already used to relating to financial instruments. This is probably because fungible assets serve the unique function of paying for something, while in the case of non-fungible assets there is a range of functions that define their meaning in the digital or physical space.
What this will mean for blockchain adopters
In discussing the major emerging innovation that blockchain technology has influenced dramatically over the last two years, the ownership of digital assets, it is clear that what we are witnessing is a new era that is likely to revolutionise the perception of ownership and reliance on trusted and trustless forms of automation. This is driven by the need to increase interoperability, cost compression, sustainability, performance and customisation.
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Stay tuned for the final part of this deep dive blockchain series where we make the case for Erlang and Elixir programming languages to innovate with blockchain.