A Brief History of Blockchain: An Investor’s Perspective

 

Caveat: Before diving in, please understand that Bitcoin and blockchain though often used interchangeably are not the same thing. We’ll discuss this in more detail.

Bitcoin:

In 2008, Satoshi Nakamoto (the pseudonym for an as-of-yet unidentified individual) published a white-paper called Bitcoin: A Peer to Peer Electronic Cash System. In this paper, he argued that he had solved the issue of double-spend for digital currency via a distributed database that combined cryptography, game theory, and computer science. Double spend is simply the idea that digital currency can be spent in two places. Satoshi’s creation was a huge innovation because it enabled one entity to confidently transact value directly with another entity without relying on a trusted third party to stand between them.

Continue reading “A Brief History of Blockchain: An Investor’s Perspective”

A gentle introduction to blockchain technology

A gentle introduction to blockchain technology

This article is a gentle introduction to blockchain technology and assumes minimal technical knowledge.  It attempts to describe what it is rather than why should I care, which is something for a future post.Shorter companion pieces to this are:


PART 1 – EXECUTIVE SUMMARY


People use the term ‘blockchain technology’ to mean different things, and it can be confusing.  Sometimes they are talking about The Bitcoin Blockchain, sometimes it’s The Ethereum Blockchain, sometimes it’s other virtual currencies or digital tokens, sometimes it’s smart contracts.  Most of the time though, they are talking about distributed ledgers, i.e. a list of transactions that is replicated across a number of computers, rather than being stored on a central server.

The common themes seem to be a data store which:

  • usually contains financial transactions
  • is replicated across a number of systems in almost real-time
  • usually exists over a peer-to-peer network
  • uses cryptography and digital signatures to prove identity, authenticity and enforce read/write access rights
  • can be written by certain participants
  • can be read by certain participants, maybe a wider audience, and
  • has mechanisms to make it hard to change historical records, or at least make it easy to detect when someone is trying to do so

I see “blockchain technology” as a collection of technologies, a bit like a bag of Lego.  From the bag, you can take out different bricks and put them together in different ways to create different results.

blockchain_bag2

I see blockchain technology as a bag of Lego or bricks

What’s the difference between a blockchain a a normal database? Very loosely, a blockchain system is a package which contains a normal database plus some software that adds new rows, validates that new rows conform to pre-agreed rules, and listens and broadcasts new rows to its peers across a network, ensuring that all peers have the same data in their databases.


PART 2 – INTRODUCING BITCOIN’S BLOCKCHAIN


The Bitcoin Blockchain ecosystem

As a primer on bitcoin, it may help to review A gentle introduction to bitcoin.

The Bitcoin Blockchain ecosystem is actually quite a complex system due to its dual aims: that anyone should be able to write to The Bitcoin Blockchain; and that there shouldn’t be any centralised power or control.  Relax these, and you don’t need many of the convoluted mechanisms of Bitcoin.

That said, let’s start with The Bitcoin Blockchain ecosystem, and then try to tease out the blockchain bit from the bitcoin bit.

Replicated databases.  The Bitcoin Blockchain ecosystem acts like a network of replicated databases, each containing the same list of past bitcoin transactions.  Important members of the network are called validators or nodes which pass around transaction data (payments) and block data (additions to the ledger).  Each validator independently checks the payment and block data being passed around.  There are rules in place to make the network operate as intended.

Bitcoin’s complexity comes from its ideology. The aim of bitcoin was to be decentralised, i.e. not have a point of control, and to be relatively anonymous.  This has influenced how bitcoin has developed.  Not all blockchain ecosystems need to have the same mechanisms, especially if participants can be identified and trusted to behave.

Here’s how bitcoin approaches some of the decisions:

bitcoin_approach


Public vs private blockchains

There is a big difference in what technologies you need, depending on whether you allow anyone to write to your blockchain, or known, vetted participants.   Bitcoin in theory allows anyone to write to its ledger (but in practice, only about 20 people/groups actually do).

Public blockchains.  Ledgers can be ‘public’ in two senses:

  1. Anyone, without permission granted by another authority, can write data
  2. Anyone, without permission granted by another authority, can read data

Usually, when people talk about public blockchains, they mean anyone-can-write.

Because bitcoin is designed as a ‘anyone-can-write’ blockchain, where participants aren’t vetted and can add to the ledger without needing approval, it needs ways of arbitrating discrepancies (there is no ‘boss’ to decide), and defence mechanisms against attacks (anyone can misbehave with relative impunity, if there is a financial incentive to do so).  These create cost and complexity to running this blockchain.

Private blockchains.  Conversely, a ‘private’ blockchain network is where the participants are known and trusted: for example, an industry group, or a group of companies owned by an umbrella company.  Many of the mechanisms aren’t needed – or rather they are replaced with legal contracts – “You’ll behave because you’ve signed this piece of paper.”.  This changes the technical decisions as to which bricks are used to build the solution.

Another way of describing public/private might be permissionless vs permissioned or pseudonymous vs identified participants.

See the pros and cons of internal blockchains or the difference between a distributed ledger and a blockchain for more on this topic.


PART 3 – MORE DEPTH, PLEASE


Warning: this section isn’t so gentle, as it goes into detail into each of the elements above.  I recommend getting a cup of tea.

DATA STORAGE: What is a blockchain?

A blockchain is just a file.  A blockchain by itself is just a data structure.  That is, how data is logically put together and stored. Other data structures are databases (rows, columns, tables), text files, comma separated values (csv), images, lists, and so on.  You can think of a blockchain competing most closely with a database.

Blocks in a chain = pages in a book
For analogy, a book is a chain of pages. Each page in a book contains:

  • the text: for example the story
  • information about itself: at the top of the page there is usually the title of the book and sometimes the chapter number or title; at the bottom is usually the page number which tells you where you are in the book. This ‘data about data’ is called meta-data.

Similarly in a blockchain block, each block has:

  • the contents of the block, for example in bitcoin is it the bitcoin transactions, and the miner incentive reward (currently 25 BTC).
  • a ‘header’ which contains the data about the block.  In bitcoin, the header includes some technical information about the block, a reference to the previous block, and a fingerprint (hash) of the data contained in this block, among other things. This hash is important for ordering.
books_and_blocks

Blocks in a chain refer to previous blocks, like page numbers in a book.

See this infographic for a visualisation of the data in Bitcoin’s blockchain.

Block ordering in a blockchain

Page by page.  With books, predictable page numbers make it easy to know the order of the pages.  If you ripped out all the pages and shuffled them, it would be easy to put them back into the correct order where the story makes sense.

Block by block.  With blockchains, each block references the previous block, not by ‘block number’, but by the block’s fingerprint, which is cleverer than a page number because the fingerprint itself is determined by the contents of the block.

ordering

The reference to previous blocks creates a chain of blocks – a blockchain!

Internal consistency.  By using a fingerprint instead of a timestamp or a numerical sequence, you also get a nice way of validating the data.  In any blockchain, you can generate the block fingerprints yourself by using some algorithms.  If the fingerprints are consistent with the data, and the fingerprints join up in a chain, then you can be sure that the blockchain is internally consistent.  If anyone wants to meddle with any of the data, they have to regenerate all the fingerprints from that point forwards and the blockchain will look different.

one_block

A peek inside a blockchain block: the fingerprints are unique to the block’s contents.

This means that if it is difficult or slow to create this fingerprint (see the “making it hard for baddies to be bad” section), then it can also be difficult or slow to re-write a blockchain.

The logic in bitcoin is:

  • Make it hard to generate a fingerprint that satisfies the rules of The Bitcoin Blockchain
  • Therefore, if someone wants to re-write parts of The Bitcoin Blockchain, it will take them a long time, and they have to catchup with and overtake the rest of the honest network

This is why people say The Bitcoin Blockchain is immutable (can not be changed)*.

Here’s a piece on immutability in blockchains.


DATA DISTRIBUTION: How is new data communicated?

Peer to peer is one way of distributing data in a network.  Another way is client-server.  You may have heard of peer-to-peer file sharing on the BitTorrent network where files are shared between users, without a central server controlling the data.  This is why BitTorrent has remained resilient as a network: there is no central server to shut down.

Client-server
In the office environment, often data is held on servers, and wherever you log in, you can access the data.  The server holds 100% of the data, and the clients trust that the data is definitive.  Most of the internet is client-server where the website is held on the server, and you are the client when you access it.  This is very efficient, and a traditional model in computing.

Peer-to-peer
In peer-to-peer models, it’s more like a gossip network where each peer has 100% of the data (or as close to it as possible), and updates are shared around.  Peer-to-peer is in some ways less efficient than client-server, as data is replicated many times; once per machine, and each change or addition to the data creates a lot of noisy gossip.  However each peer is more independent, and can continue operating to some extent if it loses connectivity to the rest of the network.  Also peer-to-peer networks are more robust, as there is no central server that can be controlled, so closing down peer-to-peer networks is harder.

4
The problems with peer-to-peer
With peer-to-peer models, even if all peers are ‘trusted’, there can be a problem of agreement or consensus – if each peer is updating at different speeds and have slightly different states, how do you determine the “real” or “true” state of the data?

Worse, in an ‘untrusted’ peer-to-peer network where you can’t necessarily trust any of the peers, how do you ensure that the system can’t easily be corrupted by bad peers?


CONSENSUS: How do you resolve conflicts?

A common conflict is when multiple miners create blocks at roughly the same time.  Because blocks take time to be shared across the network, which one should count as the legit block?

Example. Let’s say all the nodes on the network have synchronised their blockchains, and they are all on block number 80.
If three miners across the world create ‘Block 81’ at roughly the same time, which ‘Block 81’ should be considered valid?  Remember that each ‘Block 81’ will look slightly different: They will certainly contain a different payment address for the 25 BTC block reward; and they may contain a different set transactions.  Let’s call them 81a, 81b, 81c.

three_blocks

Which block should count as the legit one?

How do you resolve this?

Longest chain rule.  In bitcoin, the conflict is resolved by a rule called the “longest chain rule”.

In the example above, you would assume that the first ‘Block 81’ you see is valid. Let’s say you see 81a first. You can start building the next block on that, trying to create 82a:

mine_on_first

Treat the first block you see as legitimate.

However in a few seconds you may see 81b. If you see this, you keep an eye on it. If later you see 82b, the “longest chain rule” says that you should regard the longer ‘b’ chain as the valid one (…80, 81b, 82b) and ignore the shorter chain (…80, 81a). So you stop trying to make 82a and instead start trying to make 83b:

mine_on_longest

Longest chain rule: If you see multiple blocks, treat the longest chain as legitimate.

The “longest chain rule” is the rule that the bitcoin blockchain ecosystem uses to resolve these conflicts which are common in distributed networks.

However, with a more centralised or trusted blockchain network, you can make decisions by using a trusted, or senior validator to arbitrate in these cases.

See a gentle introduction to bitcoin mining for more detail.


UPGRADES: How do you change the rules?

As a network as a whole, you must agree up front what kind of data is valid to be passed around, and what is not.  With bitcoin, there are technical rules for transactions (Have you filled in all the required data fields?  Is it in the right format?  etc), and there are business rules (Are you trying to spend more bitcoins than you have?  Are you trying to spend the same bitcoins twice?).

Rules change.  As these rules evolve over time, how will the network participants agree on the changes?  Will there be a situation where half the network thinks one transaction is valid, and the other half doesn’t think so because of differences in logic?

In a private, controlled network where someone has control over upgrades, this is an easy problem to solve: “Everyone must upgrade to the new logic by 31 July”.

However in a public, uncontrolled network, it’s a more challenging problem.

With bitcoin, there are two parts to upgrades.

  1. Suggest the change (BIPs). First, there is the proposal stage where improvements are proposed, discussed, and written up. A proposal is referred to as a “BIP” – a “Bitcoin Improvement Proposal”.
    If it gets written into the Bitcoin core software on Github, it can then form part of an upgrade – the next version of “Bitcoin core” which is the most common “reference implementation” of the protocol.
  2. Adopt the change (miners). The upgrade can be downloaded by nodes and block makers (miners) and run, but only if they want to (you could imagine a change which reduces the mining reward from 25 BTC per block to 0 BTC. We’ll see just how many miners choose to run that!).

If the majority of the network (in bitcoin, the majority is determined by computational power) choose to run a new version of the software, then new-style blocks will be created faster than the minority, and the minority will be forced to switch or become irrelevant in a “blockchain fork”.  So miners with lots of computational power have a good deal of “say” as to what gets implemented.


WRITE ACCESS: How do you control who can write data?

In the bitcoin network, theoretically anyone can download or write some software and start validating transactions and creating blocks.  Simply go to https://bitcoin.org/en/download and run the “Bitcoin core” software.

Your computer will act as a full node which means:

  • Connecting to the bitcoin network
  • Downloading the blockchain
  • Storing the blockchain
  • Listening for transactions
  • Validating transactions
  • Passing on valid transactions
  • Listening for blocks
  • Validating blocks
  • Passing on valid blocks
  • Creating blocks
  • ‘Mining’ the blocks

The source code to this “Bitcoin core” software is published on Github: https://github.com/bitcoin/bitcoin.  If you are so inclined, you can check the code and compile and run it yourself instead of downloading the prepackaged software on bitcoin.org.  Or you can even write your own code, so long as it conforms to protocol.

Ethereum works in a similar way in this respect – see a gentle introduction to Ethereum.

Permissionless
Note that you don’t need to sign up, log in, or apply to join the network.  You can just go ahead and join in.  Compare this with the SWIFT network, where you can’t just download some software and start listening to SWIFT messages.  In this way, some call bitcoin ‘permissionless’ vs SWIFT which would be ‘permissioned’.

Permissionless is not the only way
You may want to use blockchain technology in a trusted, private network.  You may not want to publish all the rules of what a valid transaction or block looks like.  You may want to control how the network rules are changed.  It is easier to control a trusted private network than an untrusted, public free-for-all like bitcoin.


DEFENCE: How do you make it hard for baddies?

A problem with a permissionless, or open networks is that they can be attacked by anyone. So there needs to be a way of making the network-as-a-whole trustworthy, even if specific actors aren’t.

What can and can’t miscreants do?

A dishonest miner can:

  1. Refuse to relay valid transactions to other nodes
  2. Attempt to create blocks that include or exclude specific transactions of his choosing
  3. Attempt to create a ‘longer chain’ of blocks that make previously accepted blocks become ‘orphans’ and not part of the main chain

He can’t:

  1. Create bitcoins out of thin air*
  2. Steal bitcoins from your account
  3. Make payments on your behalf or pretend to be you

That’s a relief.

*Well, he can, but only his version of the ledger will have this transactions. Other nodes will reject this, which is why it is important to confirm a transaction across a number of nodes.

With transactions, the effect a dishonest miner can have is very limited.  If the rest of the network is honest, they will reject any invalid transactions coming from him, and they will hear about valid transactions from other honest nodes, even if he is refusing to pass them on.

With blocks, if the miscreant has sufficient block creation power (and this is what it all hinges on), he can delay your transaction by refusing to include it in his blocks.  However, your transaction will still be known by other honest nodes as an ‘unconfirmed transaction’, and they will include it in their blocks.

Worse though, is if the miscreant can create a longer chain of blocks than the rest of the network, and invoking the “longest chain rule” to kick out the shorter chains.  This lets him unwind a transaction.

Here’s how you can do it:

  1. Create two payments with the same bitcoins: one to an online retailer, the other to yourself (another address you control)
  2. Only broadcast the payment that pays the retailer
  3. When the payment gets added in an honest block, the retailer sends you goods
  4. Secretly create a longer chain of blocks which excludes the payment to the retailer, and includes the payment to yourself
  5. Publish the longer chain. If the other nodes are playing by the “longest chain rule” rule, then they will ignore the honest block with the retailer payment, and continue to build on your longer chain. The honest block is said to be ‘orphaned’ and does not exist to all intents and purposes.
  6. The original payment to the retailer will be deemed invalid by the honest nodes because those bitcoins have already been spent (in your longer chain)
double_spend

The “double spend” attack.

This is called a “double spend” because the same bitcoins were spent twice – but the second one was the one that became part of the eventual blockchain, and the first one eventually gets rejected.
How do you make it hard for dishonest miners to create blocks?

Remember, this is only a problem for ledgers where block-makers aren’t trusted.

Essentially you want to make it hard, or expensive for baddies to add blocks.  In bitcoin, this is done by making it computationally expensive to add blocks.  Computationally expensive means “takes a lot of computer processing power” and translates to financially expensive (as computers need to be bought then run and maintained).

The computation itself is a guessing game where block-makers need to guess a number, which when crunched with the rest of the block data contents, results in a hash / fingerprint that is smaller than a certain number.  That number is related to the ‘difficulty’ of mining which is related to the total network processing power.  The more computers joining in to process blocks, the harder it gets, in a self-regulating cycle.

difficulty_calibration

Every 2,016 blocks (roughly every 2 weeks), the bitcoin network adjusts the difficulty of the guessing game based on the speed that the blocks have been created.

This guessing game is called “Proof of work”. By publishing the block with the fingerprint that is smaller than the target number, you are proving that you did enough guess work to satisfy the network at that point in time.


INCENTIVES: How do you pay validators?

Transaction and block validation is cheap and fast, unless you choose to make it slow and expensive (a la bitcoin).

If you control the validators in your own network, or they are trusted, then

  • you don’t need to make it expensive to add blocks, and
  • therefore you can reduce the need to incentivise them

You can use other methods such as “We’ll pay people to run validators” or “People sign a contract to run validators and behave”.

Because of bitcoin’s ‘public’ structure, it needs a defence against miscreants and so uses “proof of work” to make it computationally difficult to add a block (see Defence section).  This has created a cost (equipment and running costs) of mining and therefore a need for incentivisation.

Just as the price of gold determines how much equipment you can spend on a gold mine, bitcoin’s price determines how much mining power is used to secure the network. The higher the price, the more mining there is, and the more a miscreant has to spend to bully the network.

So, miners do lots of mining, increasing the difficulty and raising the walls against network attacks. They are rewarded in bitcoin according to a schedule, and in time, as the block rewards reduce, transaction fees become the incentive that miners collect.

tx_fees_replace_block_rewards

The idealised situation in Bitcoin where block rewards are replaced by transaction fees.

This is all very well in theory, but the more you look into this, the more interesting it gets, and with the bitcoin solution, the incentives may not quite have worked as expected. This is something for another article…


CONCLUSION


It is useful to understand blockchains in the context of bitcoin, but you should not assume that all blockchain ecosystems need bitcoin mechanisms such as tokens, proof of work mining, longest chain rule, etc.  Bitcoin is the first attempt at maintaining a decentralised, public ledger with no formal control or governance. Ethereum is the next iteration of a blockchain with smart contracts. There are significant challenges involved.

On the other hand, private or internal distributed ledgers and blockchains can be deployed to solve other sets of problems.  As ever, there are tradeoffs and pros and cons to each solution, and you need to consider these individually for each individual use case.

If you have a specific business problem which you think may be solvable with a blockchain, I would love to hear about this: please contact me.


Acknowledgments

With thanks to David Moskowitz, Tim Swanson, Roberto Capodieci. Errors, omissions, and simplifications are mine.

Blockchain Lingo – IEEE Spectrum

spectrum.ieee.org

Posted 2 Oct 2017 | 12:00 GMT By Morgen E. Peck

special report icon

Like any new technology, the development of the blockchain required the invention of new words to describe its parts and their uses. Perhaps because it was invented by an anonymous hacker or because its subsequent application spread so widely, the lingo of blockchain can seem a bit odd. The list below will help you understand the basics of blockchain. Put your suggestions for other unusual blockchain tech terms in the comments, and maybe we’ll add them.

Blockchain

A shared database that grows only by appending new data, authenticates users with strong cryptography, and leverages economic incentives to encourage mistrustful strangers to manage and secure updates.

Block signers

The actors in a proof-of-stake blockchain that are responsible for validating transactions and adding them to the blockchain.

Ethereum

A public blockchain designed to store and execute smart contracts and other complex software apps. It features its own cryptocurrency, ethers. The first version of the software was released in 2014.

Hash function

An algorithm that digests a chunk of data of arbitrary size and turns it into a string of numbers and letters of fixed length, called a hash. The function is a one-way operation used in blockchains to choose which participants update the chain.

ICO

Initial coin offering. A way of funding new app development on blockchains, it involves the sale of cryptocurrency before the software is released to the public. The cryptocurrency typically gives users access to the app under development.

Miners

The individuals that add new blocks to public blockchains that use proof of work, such as Bitcoin. Their actions both secure the entries on a public blockchain, and provide a mechanism for the distribution of new coins. They gain the right to add new blocks by spending computational resources, and the network rewards miners by allocating new coins to them.

Oracle

An entity that records data about real-world events—such as the ambient temperature or the outcome of a presidential election—on a blockchain. It serves as a reference for smart contracts.

Permissioned ledger

A database, inspired by blockchain technology, that restricts access to reading, writing, or both to a set of known actors. It’s also called a private blockchain.

Proof of stake

A mechanism for allocating the right to add new blocks of data to a public blockchain. Participants gain the right to add new blocks by proving they own cryptocurrency.

Proof of work

A mechanism for allocating the right to add new blocks of data to a public blockchain. Participants (miners) gain the right to add new blocks by repeatedly running a hash function.

Public blockchain

A blockchain that is open for anyone to look at and to add new blocks to. Certain resources (computing power, possession of the native cryptocurrency) may be required to add new blocks, but anyone has the right to do so.

Smart contracts

Software-based agreements deployed in systems capable of automatically executing and enforcing the terms of the contracts.

Do You Need a Blockchain?

spectrum.ieee.org

Posted 29 Sep 2017 | 15:00 GMT By Morgen E. Peck

special report icon

According to a study released this July by Juniper Research, more than half the world’s largest companies are now researching blockchain technologies with the goal of integrating them into their products. Projects are already under way that will disrupt the management of health care records, property titles, supply chains, and even our online identities. But before we remount the entire digital ecosystem on blockchain technology, it would be wise to take stock of what makes the approach unique and what costs are associated with it.

Blockchain technology is, in essence, a novel way to manage data. As such, it competes with the data-management systems we already have. Relational databases, which orient information in updatable tables of columns and rows, are the technical foundation of many services we use today. Decades of market exposure and well-funded research by companies like Oracle Corp. have expanded the functionality and hardened the security of relational databases. However, they suffer from one major constraint: They put the task of storing and updating entries in the hands of one or a few entities, whom you have to trust won’t mess with the data or get hacked.

Blockchains, as an alternative, improve upon this architecture in one specific way—by removing the need for a trusted authority. With public blockchains like Bitcoin and Ethereum, a group of anonymous strangers (and their computers) can work together to store, curate, and secure a perpetually growing set of data without anyone having to trust anyone else. Because blockchains are replicated across a peer-to-peer network, the information they contain is very difficult to corrupt or extinguish.

This feature alone is enough to justify using a blockchain if the intended service is the kind that attracts censors. A version of Facebook built on a public blockchain, for example, would be incapable of censoring posts before they appeared in users’ feeds, a feature that Facebook reportedly had under development while the company was courting the Chinese government in 2016.

However, removing the need for trust comes with limitations. Public blockchains are slower and less private than traditional databases, precisely because they have to coordinate the resources of multiple unaffiliated participants. To import data onto them, users often pay transaction fees in amounts that are constantly changing and therefore difficult to predict. And the long-term status of the software is unpredictable as well. Just as no one person or company manages the data on a public blockchain, no one entity updates the software. Rather, a whole community of developers contributes to the open-source code in a process that, in Bitcoin at least, lacks formal governance.

Given the costs and uncertainties of public blockchains, they’re not the answer to every problem. “If you don’t mind putting someone in charge of a database…then there’s no point using a blockchain, because [the blockchain] is just a more inefficient version of what you would otherwise do,” says Gideon Greenspan, the CEO of Coin Sciences, a company that builds technologies on top of both public and permissioned blockchains.

With this one rule, you can mow down quite a few blockchain fantasies. Online voting, for example, has inspired many well-intentioned blockchain developers, but it probably does not stand to gain much from the technology.

“I find myself debunking a blockchain voting effort about every few weeks,” says Josh Benaloh, the senior cryptographer at Microsoft Research. “It feels like a very good fit for voting, until you dig a couple millimeters below the surface.”

Benaloh points out that tallying votes on a blockchain doesn’t obviate the need for a central authority. Election officials will still take the role of creating ballots and authenticating voters. And if you trust them to do that, there’s no reason why they shouldn’t also record votes.

The headaches caused by open blockchains—the price volatility, low throughput, poor privacy, and lack of governance—can be alleviated, in part, by tweaking the structure of the technology, specifically by opting for a variation called a permissioned ledger.

In a permissioned ledger, you avoid having to worry about trusting people, and you still get to keep some of the benefits of blockchain technology. The software restricts who can amend the database to a set of known entities. This one alteration removes the economic component from a blockchain. In a public blockchain, miners (the parties adding new data to the blockchain) neither know nor trust one another. But they behave well because they are paid for their work.

By contrast, in a permissioned blockchain, the people adding data follow the rules not because they are getting paid but because other people in the network, who know their identities, hold them accountable.

Removing miners also improves the speed and data-storage capacity of a blockchain. In a public network, a new version of the blockchain is not considered final until it has spread and received the approval of multiple peers. That limits how big new blocks can be, because bigger blocks would take longer to get around. As of July, Bitcoin can handle a maximum of 7 transactions per second. Ethereum tops out at around 20 transactions per second.

When blocks are added by fewer, known entities, they can hold more data without slowing things down or threatening the security of the blockchain. Greenspan of Coin Sciences claims that MultiChain, one of his company’s permissioned blockchain products, is capable of processing 1,000 transactions per second. But even this pales in comparison with the peak throughput of credit card transactions handled by Visa—an amount The Washington Post reports as being 10 times that number.

As the name perhaps suggests, permissioned ledgers also enable more privacy than public blockchains. The software restricts who can access a permissioned blockchain, and therefore who can see it. It’s not a perfect solution; you’re still revealing your data to those within the network. You wouldn’t, for example, want to run a permissioned blockchain with your competitors and use it to track information that gives away trade secrets. But permissioned blockchains may enable applications where data needs to be shielded only from the public at large.

“If you are willing for the activity on the ledger to be visible to the participants but not to the outside world, then your privacy problem is solved,” says Greenspan.

Finally, using a permissioned blockchain solves the problem of governance. Bitcoin is a perfect demonstration of the risks that come with building on top of an open-source blockchain project. For two years, the developers and miners in Bitcoin have waged a political battle over how to scale up the system. This summer, the sparring went so far that one faction split off to form its own version of Bitcoin. The fight demonstrated that it’s impossible to say with any certainty what Bitcoin will look like in the next month, year, or decade—or even who will decide that. And the same goes for every public blockchain.

With permissioned ledgers, you know who’s in charge. The people who update the blockchain are the same people who update the code. How those updates are made depends on what governance structure the participants in the blockchain collectively agree to.

Public blockchains are a tremendous improvement on traditional databases if the things you worry most about are censorship and universal access. Under those circumstances, it might just be worth it to build on a technology that sacrifices cost, speed, privacy, and predictability. And if that sacrifice isn’t worth it, a more limited version of Satoshi Nakamoto’s original blockchain may balance out your needs. But you should also consider the possibility that you don’t need a blockchain at all.

Introduction to Blockchains & What It Means to Big Data

kdnuggets.com

 By Abhinav Venkat, Noah Data.

“Arguably the most significant development in information technology over the past few years, blockchain has the potential to change the way that the world approaches big data, with enhanced security and data quality just two of the benefits afforded to businesses using Satoshi Nakamoto’s landmark technology.”

What is a Blockchain?

Blockchain is a distributed database system that acts as an “open ledger” to store and manage transactions. Each record in the database is called a block and contains details such as the transaction timestamp as well as a link to the previous block. This makes it impossible for anyone to alter information about the records retrospectively. Also, due to the fact that the same transaction is recorded over multiple, distributed database systems, the technology is secure by design.

With the above in mind, blockchain is immutable – information remains in the same state for as long as the network exists.

Blockchain and Big Data

When you talk about blockchain in the context of Bitcoin, the connection to Big Data seems a little tenuous. What if, instead of Bitcoin, the blockchain was a ledger for other financial transactions? Or business contracts? Or stock trades?

The financial services industry is starting to take a serious look at block chain technology. Oliver Bussmann, CIO of UBS says that blockchain technology could “pare transaction processing time from days to minutes.”

The business imperative in financial services for blockchain is powerful. Imagine blockchains of that magnitude. Huge data lakes of blocks that contain the full history of every financial transaction, all available for analysis. Blockchain provides for the integrity of the ledger, but not for the analysis. That’s where Big Data and accompanying analysis tools will come into play.

Opportunities for Big Data Analytics

Recently, a consortium of 47 Japanese banks signed up with a blockchain startup called Ripple to facilitate money transfers between bank accounts using blockchain. The main reason behind the move is to perform real-time transfers at a significantly low cost. One of the reasons traditional real-time transfers were expensive was because of the potential risk factors. Double-spending (which is a form of transaction failure where the same security token gets used twice) is a real problem with real-time transfers. With blockchains, that risk is largely avoided. Big data analytics makes it possible to identify patterns in consumer spending and identify risky transactions a lot quicker than they can be done currently. This reduces the cost with real-time transactions.

In Industries outside of banking too, the main drive for adoption of Blockchain technologies has been security. Across healthcare, retail and public administration, establishments have started experimenting with blockchain to handle data to prevent hacking and data leaks. In healthcare, a technology such as blockchain can make sure that multiple “signatures” are sought at every level of data access. This can help prevent a repeat of events such as the 2015 attack that led to the theft of over 100 million patient records.

Possibilities in Real-Time Analytics

Up until now, real-time fraud detection has only been a pipe dream and banking institutions have always relied on using technologies to identify fraudulent transactions retrospectively. Since the blockchain has a database record for every single transaction, it provides a way for institutions to mine for patterns in real-time, if need be.

But all of these possibilities also raise questions about privacy and this is in direct contradiction to the reason why blockchain and bitcoins became popular in the first place. Several industry experts have expressed concerns that a technology that can provide a record of every transaction can be exploited for everything “from customer profiling to other less benign reasons”.

From another perspective however, blockchains greatly improve transparency in data analytics. Unlike previous algorithms, the blockchain design rejects any input that it can’t verify and is deemed suspicious. As a result, analysts in industries such as Retail only deal with data that is completely transparent. In other words, the customer behavior patterns that blockchain systems identify are likely to be a whole lot more accurate than it is today.

Uncovering Transactional Data

The data within the blockchain is predicted to be worth trillions of dollars as it continues to make its way into banking, micropayments, remittances, and other financial services. In fact, the blockchain ledger could be worth up to 20% of the total big data market by 2030, producing up to $100 billion in annual revenue. To put this into perspective, this potential revenue surpasses that of what Visa, Mastercard, and PayPal currently generate combined.Big data analytics will be crucial in tracking these activities and helping organizations using the blockchain make more informed decisions.

Data intelligence services are emerging to help financial institutions, governments, and all kinds of organizations delve into who they might be interacting with on the blockchain and uncover “hidden” patterns.

Uncovering Social Data

As the popularity of bitcoin advanced in 2014 and 2015, the virtual currency began to fluctuate heavily as a result of real-world events and the general public’s sentiment about the technology. These fluctuations are proof that the virtual currency has several characteristics that make it ideal for social data predictions.

According to Rick Burgess of Freshminds: “Using social data to predict consumer behavior is nothing new, and many traders have been looking to include social metrics into their trading algorithms. However, because there are so many factors involved in pricing most financial instruments, it can be extremely difficult to predict how markets will change.”

Fortunately, bitcoin users and social media users tend to align quite well, and it may be beneficial to use them both for data analysis, as he further explains:

  • Bitcoin users tend to be in the same demographic as social media users, and so their attitudes, opinions, and sentiment towards bitcoin are well documented.
  • The value of bitcoins and other cryptocurrencies are determined almost solely by market demand because the number of coins on the market is predictable and are not tied to any physical goods.
  • Bitcoins are predominantly traded by individuals rather than large institutions.
  • Events that affect Bitcoin’s value are disseminated first and foremost on social media.

Data analysts are now mining social data for insights into key cryptocurrency trends. This, in turn, helps organizations uncover powerful demographic information and link bitcoin’s performance to world events.

Uncovering New Forms of Data Monetization

According to Bill Schmarzo, CTO of Dell EMC Services, blockchain technology also “has the potential to democratize the sharing and monetization of data and analytics by removing the middleman from facilitating transactions.” In the business world, this gives consumers stronger negotiating powers over companies. It allows consumers to control who has access to their data through the blockchain. They could then demand pricing discounts in exchange for revealing data on their personal consumptions of a company’s product or service.

Schmarzo also explains how the blockchain may lead to new forms of data monetization because it has the following big data ramifications:

  • All parties involved in a transaction have access to the same data. This accelerates data acquisition, sharing, the quality of data and data analytics.
  • A detailed register of all transactions is kept in a single “file” or blockchain. This provides a complete overview of a transaction from start to finish, eliminating the needs for multiple systems.
  • Individuals can manage and control their personal data without the need for a third-party intermediary or centralized repository.

Ultimately, the blockchain could become a key enabler of data monetization by creating new marketplaces where companies and individuals can share, sell, and offer their data and analytical insights directly with each other.

Spearheaded by the large scale adoption of bitcoin, blockchain technologies are gaining ground throughout the business and financial worlds. The fast and secure transactions it facilitates could potentially revolutionize traditional data systems. According to a survey by KPMG and Forrester Consulting, one-third of decision makers trust their company’s data. But with blockchain technologies, this trust can be considerably strengthened, and real applications will become much more commonplace.

Original. Reposted with permission.

Bio: Abhinav Venkat is associate VP – consulting at Noah Data.

Related:

Blockchain and Distributed Ledger Technology

Blockchain explained from an enterprise perspective
Blockchain has the potential to revolutionize how businesses operate.What is blockchain technology?

The simplest blockchain definition? A reliable, difficult-to-hack record of transactions – and of who owns what. Blockchain is based on distributed ledger technology, which securely records information across a peer-to-peer network. Although it was originally created for trading Bitcoin, blockchain’s potential reaches far beyond cryptocurrency. Blockchain ledgers can include land titles, loans, identities, logistics manifests – almost anything of value. The technology is still new, but the potential impact it can have on business is exciting, and immense.

What is distributed ledger technology?

A distributed ledger is a database of transactions that is shared and synchronized across multiple computers and locations – without centralized control. Each party owns an identical copy of the record, which is automatically updated as soon as any additions are made.

How does blockchain work?

A blockchain records data across a peer-to-peer network. Every participant can see the data and verify or reject it using consensus algorithms. Approved data is entered into the ledger as a collection of “blocks” and stored in a chronological “chain” that cannot be altered.

What are smart contracts?

Smart contracts – self-executing agreements based on blockchain technology – automatically trigger actions or payments once conditions are met. In the near future, they will use real-time information, such as asset GPS data, to trigger an event, such as a transfer of ownership and funds.

4 types of blockchain networks

Of the four ways to establish a blockchain network – currently, consortium is the most accepted model for business.

Consortium blockchains

In a consortium blockchain, the consensus process is controlled by a pre-selected group – a group of corporations, for example. The right to read the blockchain and submit transactions to it may be public or restricted to participants. Consortium blockchains are considered to be “permissioned blockchains” and are best suited for use in business.

Semi-private Blockchains

Semi-private Blockchains are run by a single company that grants access to any user who satisfies pre-established criteria. Although not truly decentralized, this type of permissioned blockchain is appealing for business-to-business use cases and government applications.

Private Blockchains

Private Blockchains are controlled by a single organization that determines who can read it, submit transactions to it, and participate in the consensus process. Since they are 100% centralized, private blockchains are useful as sandbox environments, but not for actual production.

Public blockchains

Anyone can read a public blockchain, send transactions to it, or participate in the consensus process. They are considered to be “permissionless.” Every transaction is public, and users can remain anonymous. Bitcoin and Ethereum are prominent examples of public blockchains.

The age of blockchain transactions

Fewer Intermediaries

Blockchain is a true peer-to-peer network that will reduce reliance on some types of third-party intermediaries – like banks, lawyers, and brokers.

Faster Processes

Blockchain can speed up process execution in multi-party scenarios – and allow for faster transactions that aren’t limited by office hours.

Transparency

Information in blockchains is viewable by all participants and cannot be altered. This will reduce risk and fraud, and create trust.

ROI

Distributed ledgers will provide quick ROI by helping businesses create leaner, more efficient, and more profitable processes.

Security

The distributed and encrypted nature of blockchain mean it will be difficult to hack. This shows promise for business and IoT security.

Automation

Blockchain is programmable – which will make it possible to automatically trigger actions, events, and payments once conditions are met.

Blockchain shows promise in many different industries and lines of business. Here are three key use cases:

Supply Chain

Blockchain technology has the potential to improve transparency and accountability across the supply chain. Applications are already being used to track and trace materials back to the source, prove authenticity and origin, get ahead of recalls, and accelerate the flow of goods.

Public Sector

The public sector is looking at the potential of blockchain to serve as the official registry for government and citizen-owned assets like buildings, houses, vehicles, and patents. Blockchains could also facilitate voting, reduce fraud, and improve back-office functions like purchasing.

Utilities

Blockchain software solutions are being tested for a wide range of applications in the utilities industry: peer-to-peer solar energy sales between neighbors, energy trading among utility conglomerates, automated billing for autonomous electric vehicle charging stations, and more.

How SAP is bringing blockchain to the enterprise

At SAP, we see blockchain as a promising way to simplify complex multi-party processes and create trust among participants. We’re using our expertise in 25 industries and across all lines of business to actively explore blockchain technology, and help you capitalize on its potential. SAP Leonardo, our digital innovation system, includes some early-stage blockchain capabilities, and integrates them with other breakthrough technologies – such as the IoT and machine learning.

Embedded in the SAP Cloud Platform, our blockchain-as-a-service (BaaS) pilot is giving registered customers an easy way to experiment with the technology. By eliminating the need for a large upfront capital investment, BaaS is perhaps the lowest-risk gateway to enterprise blockchain adoption.

  • Experiment with blockchain to see how it could benefit your business
  • Use open standards to create consortium and private blockchain networks
  • Prototype, test, and build customized blockchain applications and smart contracts

Blockchain and IoT co-innovation for the digital supply chain

SAP is co-innovating with our customers and partners to explore high-value blockchain functionality for some of our existing products. We’re currently investigating new capabilities for multiple solutions across our IoT and supply chain portfolio, including: SAP Asset Intelligence Network, SAP Distributed Manufacturing, SAP Transportation Management, and SAP Global Track and Trace.

Get the facts

10%
of global GDP will be stored in blockchain by 2027.
~ World Economic Forum
of major banks in NA and Europe are exploring blockchain Technology.
~ Accenture
90%

83%

of life science leaders expect blockchain will be adopted within five years.

~ The Pistoia Alliance

Getting started with blockchain technology

Certain sectors will be heavily impacted by blockchain in the near future – and forward-looking companies are already getting ahead of the curve.

Blockchain in Real Estate: You Can Now Buy Fraction of House

https://cointelegraph.com/news/blockchain-in-real-estate-you-can-now-buy-fraction-of-house

The power of the Ethereum Blockchain continues to permeate traditional models of business and investment with Real Estate the latest target. Through crowdfunding and smart contracts, REAL believes that the inefficacy and illiquidity of this traditional institution of investment potential can be opened up.

The idea of investing in real estate used to involve forking out huge sums of money to buy property, in a person’s locality, with the hopes that it earns a profit over running costs. However, crowdfunding, and even more recently, Blockchain technology, is disrupting this model.

Buy a fraction of a house

There is a lot of promise that comes with investing in property. Rent, as well as the appreciation of property, are consistent and reliable streams of revenue and return, however, breaking into the property market is not a game for all.

Recent ideas, such as crowdfunding have simplified many aspects of traditional investments and business, but they still have their problems. Crowdfunding involves the coming together of multiple parties, in an agreement of trust, to effect an outcome that usually has to be regulated by a third-party.

In the case of real estate crowdfunding, middlemen have to be employed to sustain an agreement between multiple parties so that the proper dividends are received and the benefits are equally and fairly distributed. Cross border investments also come with their own issues.

Breaking down the walls, with Ether

REAL’s belief is that their use of Blockchain, Ethereum smart contracts, and digital currencies, or their own tokens, can alleviate these problems.  REAL tokens will be used to invest in properties on their crowdfunding platform.

While some of the traditional real estate investment issues are being solved through crowdfunding, a new world of cross border and trustless investment, can be opened with Blockchain technology.

Through REAL’s platform, tangible real estate can be invested in fractionally and with digital currencies. By using the Ethereum network, smart contracts do the work.

In an Ethereum environment, the need for regulatory bodies and middlemen would seem to fall away, and with them the fees and problems surrounding potential global investment. By investing on an Ethereum Blockchain REAL propose that rental dividends, agreements between investors, and other intricate aspects of property investment – on a crowdfunded level – will be executed fairly and transparently.

Full of liquid

Disrupting traditional markets also comes with ease of accessibility and REAL claim that because of the self-contained Blockchain system, and the lack of external parties governing the flow of assets and control of parties in the crowdfunded investment, there will be high liquidity in an usually illiquid game.

As with any cryptocurrency token the growth or decline of the value of REAL’s token can be profited off, as well as the dividends returned from the true investment. Their platform aims to allow digital, crowdfunding investors the chance to turn their tokens into Ethereum, or other digital currencies, with ease.

Disclaimer. Cointelegraph does not endorse any content or product on this page. While we aim at providing you all important information that we could obtain, readers should do their own research before taking any actions related to the company and carry full responsibility for their decisions, nor this article can be considered as an investment advice.

Real estate Title transfers in Blockchain

Permissionless Real Estate Title Transfers on the Bitcoin Blockchain in the USA! – Cook County Blockchain Pilot Program Report

  • Published on Published on June 28, 2017

Ragnar Lifthrasir, MSRED

  1. Can you legally transfer ownership of real estate on the bitcoin blockchain?
  2. Can a blockchain real estate title transfer be recorded in the government public records?
  3. Can you do both without needing special permission or partnership with the county government?

The answers are yes, yes, and yes.

We know this because my startup velox.RE, recently completed an eight month pilot program with Chicago’s Cook County Recorder of Deeds to test transferring ownership of real estate on THE blockchain and subsequent recording of that conveyance into the public record.

If you prefer to watch rather than read, I briefly summarize the pilot program in this video.

Consensus

The pilot program was a collaborative, volunteer effort, with talented individuals and organizations who represented public and private stakeholders. Besides velox.RE, these participants included:

  • Lewis Cohen, a partner at international law firm Hogan Lovells
  • Chuck Thompson, Founder of Blockchain Consulting and legal advisor to velox.RE
  • Leaders from The International Blockchain Real Estate Association (IBREA)
  • Cook County Recorder of Deeds (CCRD)
  • Two Chicago-based pro bono counsel from law firm Goldberg Kohn represented CCRD
  • Others from title insurance, notaries public, and technology lent their expertise for specific issues

Accomplishments

After months of research, discussion, and software versions, the pilot program produced the following accomplishments:

A) velox.RE successfully completed several tests of a Bitcoin blockchain real estate conveyance with a Chicago property owner. This met the all the legal, procedural, and software requirements agreed upon by the pilot program participants.

While a company reported that it created a token to stand for real estate and sent it to another in 2016, the velox.RE pilot program will allow velox.RE to perform the first known legal and paperless conveyance, where the actual exchange of a token was done in a manner that the grantor and grantee expect to qualify as a legal conveyance. Furthermore, velox.RE, and others who follow can perform blockchain conveyances in all 50 US states.

B) Cook County Recorder of Deeds approved the legal instrument that velox.RE and its user — property owner could use to publicly record a blockchain conveyance.

Conclusions

The pilot program produced the following conclusions:

  1. Property owners can transfer title to their real estate with Bitcoin colored coins right now. (Permission or participation from a Recorder’s Office is not needed since they aren’t involved in property conveyances). For the blockchain conveyance to be legally valid, it must follow existing legal requirements and certain technological specifications.
  2. Property owners can record their blockchain conveyance into the public record right now. Indeed, as long as the document is properly formatted, the Recorder’s Office must, by law, record it.

How is this different from other blockchain pilot programs?

There are two other notable blockchain real estate pilot programs, one in the Republic of Georgia and one in Sweden. Both have respected teams and have accomplished their goals to date. Georgia and Sweden use a title registry system, where a property changes ownership by a government official updating the land ledger to reflect the new owner. The government performs the conveyance between the parties.

In contrast, (most of) the US uses the deed registration system where the seller transfers ownership of the property directly to the buyer using a deed. In a separate, optional step, the buyer may choose to publish this deed in a county clerk / recorder’s office.

How do the Swedish and Republic of Georgia pilot programs differ from ours?

Technology. Both European programs used a private blockchain. We used the Bitcoin blockchain.

Function. The Republic of Georgia’s program was a land registry. Property did not change ownership on a blockchain. But rather, existing records were “backed up” on a blockchain. The Swedish program focused on using a smart contract to make a more seamless transactional process. In both cases the government ran some sort of blockchain technology.

The function of our pilot program was to transfer ownership of a property peer to peer, (between buyer and seller). We tested using a blockchain deed to replace a paper deed. We also tested how a blockchain conveyance could then be recorded into the public government record. In both cases, the government did not run any blockchain software, but rather helped craft the legal and procedural steps.

Why did we use Bitcoin (blockchain) specifically?

Bitcoin is the most secure and robust decentralized value transfer network. It has been running for eight years with no downtime, has more processing power dedicated to it than the largest supercomputer in the world and has a simple scripting language with the smallest attack vector. Other blockchains like Ethereum are interesting experiments, but they do not match Bitcoin in terms of reliability, security and decentralization. Financial institutions that value reliability, security and decentralization for digital assets are likely going to want solutions on top of Bitcoin.

— Adam Back, Inventor of Hashcash & CEO of Blockstream. Source

Why Use Blockchain For This?

What problem were we trying to solve with using the blockchain? Primarily fraud, asset liquidity, and transactional costs and friction.

The real estate industry faces multiple pain points caused by fragmentation and centralization. Technology is fragmented across different protocols. People are fragmented across different roles. Technology is centralized in proprietary and non-interoperable software applications. Data is centralized by third parties. In the upcoming velox.RE white paper I go into exhaustive detail on our technology and why it solves the major problems in real estate.

This fragmentation and centralization produces the following ten pain points:

  1. Illiquid assets / cumbersome title transfer
  2. Slow price discovery
  3. Expensive Due diligence
  4. Incomplete and insecure property data
  5. High transaction costs
  6. Unnecessary third parties
  7. Non-interoperable and proprietary software
  8. Legal inconsistencies
  9. Fraud
  10. Haphazard mortgage tracking

The Cook County Recorder of Deeds (CCRD) faces a lot of fraud. In explaining their “Deed Check” service, the CCRD website says,

Even though the deed was conveyed to you when you purchased the home, and was likely warranted to be free and clear of outstanding liens or claims at that time, there is nothing to prevent a scammer from filing a false claim on top of your legitimate deed after closing and finalization of the conveyance.

This is because County Recorders are not authorized by law to verify the legal claims made in documents.

The FBI has called mortgage fraud one of the fastest growing white collar crimes. In the US, deeds are filed in county recorders offices, who cannot police fraudulent documents.

County recorders are required to record any document that meets legal standards. We are not authorized by law to verify the legal claims made in documents. Unlike a credit report, property owners cannot “Freeze” their chain of title to prevent someone from recording a lien or document against a property. Most fraudulent recordings happen as an abuse of our open recording system.

— Karen Yarbrough, Cook County Recorder of Deeds – Source

Fraud isn’t limited to submitting false documents to the recorder’s office. Even in the US, government fraud still occurs. For example, on January 20, 2016 a clerk in Chicago’s Cook County plead guilty to accepting a cash bribe in exchange for preparing a back-dated deed on an Oak Park home and agreeing to record it with her office.

The Blockchain Deed 

velox.RE digitizes real estate assets by creating a Bitcoin token (colored coin) to represent the asset. To transfer the asset you transfer the colored coin on the Bitcoin network. The Bitcoin blockchain is a public ledger of the transfer. The colored coin functions as a digital deed.

In property law, a title is a bundle of rights in a piece of property in which a party may own either a legal interest or equitable interest. The rights in the bundle may be separated and held by different parties. It may also refer to a formal document, such as a deed, that serves as evidence of ownership.” –Wikipedia

To illustrate how colored coins function as a deed in the US, I will summarize the conveyance process. It’s crucial to remember that transferring title involves two separate steps in this system.

Step 1: Conveyance

In the United States, a deed conveys (Transfers) the title to real estate. The government does not participate in the transfer, it is performed directly between the seller and buyer. And no third party is required to create the deed. The property is transferred when the seller signs the deed and hands it or sends it to the buyer.

 

In the example below, Glenn Tuan sold a property in San Jose, California to Shahmirzad Properties, LLC.

Paper deeds are easy to counterfeit using Photoshop. By creating a deed to a property they don’t own, fraudsters can:

  1. Take out a loan
  2. Sell, transfer, or rent the property

Paper currency is difficult, though not impossible, to counterfeit, so printing a deed on a dollar instead of a regular paper could reduce fraud. Hypothetically, the most effective way for governments to reduce fraud right now is to print deeds on their currency.

But it’s illegal to deface fiat currency. One can, however, put a deed onto cryptocurrency, in our case, bitcoin. This is basically what Colored Coin does. But instead of a paper dollar bill, title information is put onto a fraction of a bitcoin.

Making a digital currency uncounterfeitable was one of Satoshi Nakamoto’s biggest breakthroughs in creating bitcoin. Thus using bitcoin as the conveyancing medium instead of paper vastly reduces the ability to create fraudulent paper deeds.

The colored coin is the deed. It is a Bitcoin token that digitally represents the title to the property. To transfer ownership of the property, the seller sends the colored coin from her bitcoin wallet to the property buyer’s bitcoin wallet via a bitcoin transaction.

Step 2: Public Record

Going back to our example, once Shahmirzad LLC has the deed, it owns whatever title to the property was conveyed in that deed.

To protect the grantee’s interest in the property, it is common practice (but not required by law in most states) to put the deed into the government public record. This is performed at the county recorder’s office and is known as “recording” the deed. In some counties, the deed can be submitted electronically for recordation.

Shahmirzad LLC will record the deed to protect his interest in the property by, for example, preventing Tuan from claiming that he still owns the property and selling the property twice. If Shahmirzad LLC delayed a week in recording the deed, and during that period Tuan made another transfer of the same property to someone else (call them “BFP”) who did not have knowledge that Shahmirzad LLC had previously purchased the property, and BFP recorded the deed before Shahmirzad LLC, BFP would have superior rights to Shahmirzad LLC, even though it is the actual title holder.

Before buying a property, a purchaser checks the public record to verify that the person selling the property is the last recorded owner and that there are no gaps (“breaks”) in the history. The history of all transfers of a property from one owner to the next is known as the “chain of title”.

In this real estate system, the conveyance and recording are two separate steps, performed at different times, with different entities, and different technologies. With Bitcoin however, the two steps are combined into one step, occur at the same time, with the same entities, and same technology. The ownership change is automatically, immutably recorded on a public record — the Bitcoin blockchain.

The advantage given by using the blockchain as the backbone for such asset manipulation is that one can rely on the blockchain’s transparency, immutability, ease of transfer and non-counterfeitability to transfer and trade such digital tokens with unprecedented security and ease.

Colored Coins GitHub

While originally designed to be a currency, Bitcoin supports a limited scripting language that can be used to store metadata on the blockchain. Colored Coins is a concept that allows attaching metadata to Bitcoin transactions and leveraging the Bitcoin infrastructure for issuing and trading immutable digital assets that can represent real world value. The value of such digital assets is tied to a real-world promise by the asset issuers that they are willing to redeem those digital tokens for something of value in the real world.

Colored Coins GitHub

The full text and data about the asset (such as address and name of owner) are not contained in the bitcoin transaction. There isn’t enough storage space. Instead, all of the information is kept off chain, in the data storage system of Colored Coin. This data is hashed and the resulting hash value is stored as metadata in the OP_RETURN field of the bitcoin transaction.

Let’s return to the pilot program and how we adopted our technology to fit the legal requirements for a property conveyance.

Making Paper Deeds Digital

We had five attorneys from four different law firms, several government officials, two title insurance company presidents plus other real estate professionals, research, discuss, and test how to make a blockchain deed conform to existing laws. After more than half a year of work, we all agreed on the following document that summarizes the basic principles.

In the spirit of open source software and the collaborative nature of the International Blockchain Real Estate Association, velox.RE has decided to share our “Blockchain Deed Protocol” with everyone. We hope other startups, property owners, government officials, and the wider industry uses it as template.

Once the pilot program participants reached consensus on the existing requirements and principles of a legal deed transfer, velox.RE designed and built the software to implement it on the bitcoin blockchain.

The pilot program participants unanimously agreed on this protocol. So we then moved forward with implementing and testing it on the velox.RE software.

We had a Chicago commercial real estate professional who wanted to transfer a property. We successfully tested the velox.RE software with him in person, on two different occasions, and with Trezor hardware wallet integration.

We concluded the pilot program with velox.RE’s successful software tests.

What’s Next

At velox.RE we are continuing to develop our comprehensive real estate platform and build our team. Title is just one of our applications. Our focus isn’t on governments, but on property owners and operators.

Some of the pilot program participants will be presenting at the International Blockchain Real Estate Association’s annual conference on October 10th, in conjunction with NYC RE Tech Week. I hope you’ll join us.