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Business News/ Opinion / Online-views/  Blockchain governance

Blockchain governance

Blockchain, the technology behind Bitcoin offers far more interesting applications in the field of governance

Photo: BloombergPremium
Photo: Bloomberg

One of the challenges of doing business on the Internet is that it is so hard to know who you are transacting with.

Pure Internet trades take place between parties who don’t know and cannot, therefore, trust each other. Which means that every time you buy a product online, you have no guarantee that the person you are paying hasn’t already sold the product to someone else.

To avoid getting on the wrong side of this sort of double-spending, we end up using intermediaries such as e-commerce marketplaces—organizations we can rely on to maintain a ledger of all the products sold by a given seller so that you know that your product hasn’t already been sold.

We trust the intermediary to record each sale in the ledger, noting that the product we bought is off the market and cannot be sold again. An intermediation such as this comes at a price—which is why, beyond a point, e-commerce is infeasible for small-value transactions.

Bitcoin offers an elegant solution to this problem.

Rather than have a master ledger that needs to be maintained by a single trusted individual, it creates a distributed ledger freely accessible to everyone who uses the system.

If you want to verify whether the seller has already sold your product, all you need to do is check a copy of the ledger to see whether there is already a record of such a transaction.

All new transactions that need to be recorded in the ledger are aggregated into “blocks" and the bitcoin nodes attempt to add these blocks to the end of the ledger. The node that succeeds in adding your block gets paid for its effort and the ledger is automatically updated across all the nodes in the system. As more and more additional blocks get added to the chain after yours, the provenance of your transaction improves till it is effectively incontrovertible.

What bitcoin offers is a mechanism whereby the fact that the transaction was concluded can be automatically recorded in a reliable publicly accessible ledger without having to rely on a trusted intermediary.

In the context of commercial transactions, this is a powerful concept but, with a little imagination, the same principles could be applied outside the currency context to offer interesting solutions to a number of legal and regulatory challenges.

One obvious application is to contracts.

Our existing legal system currently offers a number of mechanisms to improve the enforceability of our contracts. All these mechanisms usually involve the invocation of various state-appointed intermediaries. Some contracts need to be notarized to prove that the parties really did sign the contract in the present of a statutory officer, while others have to be registered in order that the transaction enters the public record.

If, instead, all contracts were put onto a blockchain, we can build a technological solution that does away with the need for human intermediation while at the same time guaranteeing title and establishing provenance.

In time, this will change the way in which we transact business. Lawyers will no longer draft lengthy paper contracts but will instead prepare self-executing “smart contracts" that trigger payments via crypto-currency on the occurrence of objective parameters. Artists will be able to demonstrate ownership over the intellectual property rights in their creations by referencing their time-stamped locations on the blockchain. Disputes around title and claims of ownership will be things of the past.

If we abstract this to a higher level, there are many government functions that can be replaced by blockchain equivalents. A blockchain registry of public records will ensure that birth certificates, land records, tax receipts, passports, certificates of incorporation, minutes of official meetings and a whole host of other records are automatically recorded in a format that is tamper-resistant and publicly verifiable. If applied creatively, it will reduce our investment in governance and offer greater accountability in the provision of public services.

Work is already being done to apply the concept of distributed ledgers beyond the currency context. Ethereum, a blockchain-based platform, already offers applications that can be used to pay utility bills, place bets and even operate Ponzi schemes. The tools exist and there is little doubt that blockchain governance will be truly revolutionary. It will take a government of remarkable foresight and self-certitude to step forward, agree to give up the old ways of governance and embrace automation.

The government of Rajasthan recently enacted a law that offers state-guaranteed land titles. While this is already a revolutionary step that will improve investor confidence and significantly boost the ease of doing business in the state, it is also a framework tailor-made for blockchain governance. Will Rajasthan step up, or is that a bridge too far?

Rahul Matthan is a partner at Trilegal. Ex Machina is a column on the intersection of technology and law.

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Published: 13 Jul 2016, 12:31 AM IST
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