The Economics of Trustless Systems and Blockchain Governance

Contracts can be an expensive cost for businesses and individuals in today’s economy, with many long-term or recurring business transactions requiring documents and lawyers.  Especially in real estate transactions, forms need to be filed verifying ownership of an asset.  Similarly, vehicles and heavy equipment must be registered with a central authority to verify ownership as well.  What if this could be done automatically, using blockchain technology?

Blockchain Explained

Since the emergence of cryptocurrency in 2009, people have heard a lot about the blockchain, which keeps crypto ownership safe from hacking.  Basically, the blockchain is a decentralized “chain” of blocks of data that are uneditable and are seen by all viewers.  When a transaction is made, a new block that cannot be edited is added to the chain.  This prevents anyone from removing or changing a block of data, creating an immutable record of a digital transaction.  Once added to the blockchain, a record of ownership cannot, theoretically, be erased.

Economics of Blockchain Ledgers

Low Variable and Marginal Costs of Production

Use of blockchains to record data is almost cost-free after the system has been created.  Transparency and its automated nature keeps the system secure: data cannot be removed or edited once entered, and can be viewed by everyone.  For real estate and vehicle records, use of blockchain could save local and state governments many thousands of dollars in record-keeping costs.  It could also, in theory, save users lots of time and resources needed to update records, such as trading in their existing vehicle and purchasing a new one.  Typically, this requires a visit to the local department of motor vehicles and filing of several forms.  The use of blockchain technology could mean the entire process is completed in seconds at the dealership.

Reduced Asymmetric Information

Fraud exists in current information-recording systems because the information exists in multiple places and can be edited or forged in at least one location.  For example, a title to a vehicle or deed to a property can be forged on paper or in a digital document and submitted as proof of ownership.  The recipient may not have the time or inclination to check the received document with the ones kept by the city, county, or state to verify.  Thus, the fraud goes undetected and the fraudster gets access to what he or she wants (additional property, a loan, etc.).  With a blockchain, there is only one source of data that can be checked instantly.

Risks of Switching to Blockchain Data Governance

User Incompatibility and High Fixed Costs

While blockchain technology is more efficient than existing record-keeping systems, not all necessary users may be equipped to use it.  This would lead to high initial fixed costs as government agencies had to retrain both employees and customers (i.e., the public) to understand and utilize the blockchain.  Additional costs would be imposed on transferring existing information in various formats, some paper and some digital, to the new blockchains.  Time and resources would be expended on deciding what to do with pre-blockchain files: destroy, store forever, phase out?  Each option would incur costs of its own.

Privacy Concerns

We frequently tout transparency, especially in governance, but can quickly find exceptions where privacy should be protected.  Therefore, would there need to be a “private” system of records kept off the blockchain, such as information regarding minors, victims of crimes, or public officials whose records might be used for doxxing?  The layers of bureaucracy needed to obtain records about properties and physical assets can therefore be seen as some security against fraud and abuse.  If bad actors could see everyone’s property records on the blockchain, would they have ample time to plan elaborate cons?

Who Enters the Data?

While the blocks of data in the blockchain may be immutable, who enters it?  Citizens may resist the asset registration process being too swift and efficient due to fears of errors, mismanagement, or potential fraud.  Would asset registration still go through government agencies, or would sellers be allowed to enter transactions into the blockchain?  As with a degree of privacy, many citizens may appreciate the bureaucracy as a degree of redundancy on checking for accuracy.  For example, going through two county clerks may reveal inaccuracies in a form, while an instant upload to a blockchain may not catch any errors.

Legal Reforms May be Needed

When disputes over assets get taken to court, how will blockchain data records be handled?  Will courts readily accept the new system, or insist that traditional records also be maintained?  Some time may be required for courts to accept new data systems as verifiable evidence.  This period of legal struggle could lead early adopters to hesitate, delaying widespread adoption.  For example, no county may want to be the first to switch to blockchain registration out of fears of legal hassles.  Once someone else gets the precedent of blockchain acceptance through the courts, then more counties will agreeably make the switch.

Likely Evolution:  Blockchain as a Complement Before Becoming a Substitute

As with most new technology, look for implementation to take time, beginning with younger, tech-savvy users.  Counties and states will likely begin blockchain asset registration for new assets as a system that exists alongside traditional methods.  Eventually, all new assets will only be entered into the blockchain by government employees.  Finally, older records will be added to the blockchain as asset owners become comfortable with how to access and verify them.  At some point, the old methods (paper files, PDFs) will be erased, similar to how tech companies end support for old operating systems.

Due to fiscal pressure to cut costs, local and state governments will likely look at blockchain technology in the near future as a way to reduce costs of record-keeping.  However, implementation of blockchain record-keeping will likely be slow due to strong citizen desires to protect privacy and avoid having to learn new systems.  Government agencies may have to actively promote the benefits of blockchain immutability and transparency to convince a critical mass of taxpayers to accept the shift.  After all, those asset records are currently [mostly] public…they just take some legwork to access!