The “Death of Paper” and Blockchain

Translator's note: The original author Steve Waterhouse is a partner at Pantera Capital, an investment firm focused on blockchain technology and applications. Steve holds a Ph.D. in Engineering from the University of Cambridge and is an experienced entrepreneur and investor.

I recently spent a few days in Moscow. At the airport, something tragic happened. I found that Aeroflot (Russian Airlines) had misplaced my bag. I was waiting in line and got the wrong baggage voucher. Since I didn't know any Russian, the Aeroflot friends had to talk to me in broken English. Fortunately, I finally got my bag back.

I was shocked at how something so simple could hold the key to all my belongings. Afterwards, I returned to San Francisco, handed my car keys to a valet, and was given a small piece of paper with a number on it. "Wait a minute," I thought. I just got my car back on a purple piece of paper! I was shocked again that we would willingly hand over our precious possessions to people we had no reason to trust, only to get a disposable piece of paper in return.

I personally have a problem (as do many people, I’m sure) that if you give me a piece of paper, it’s going to be lost in a matter of minutes. You might begin to understand why I take very seriously an idea I call “The Death of Paper.”

I imagine a completely different world, coming soon, in which all representations of ownership of physical objects evolve from paper to digital. Instead of receiving a paper ticket from a valet, your phone will receive a digital proxy for your car, assigning temporary driving rights to a valet who will park your car for you within a specified time.

I believe that in the near future, all of these pieces of paper that represent ownership of objects will be replaced by digital certificates that we can easily access through our smartphones. This certificate will bind the identity of the object, your identity, and the identity of the person you need to trust, whether it is Aeroflot or a car valet company. I also believe that we can complete this evolution through blockchain.

Blockchain is a new type of database. It is "只写" (you cannot change its entries, only add new ones). Cryptography and massive computing power protect blockchain databases, unlike risky third parties, promises, and thin paper. For these reasons, blockchain is an ideal solution for storing permanent records, such as authenticity verification, land ownership, equity transactions, and many more applications.

Bitcoin and blockchain

Bitcoin became famous largely in 2013-2014. Its sudden rise in price and the Mt. Gox incident shocked the world. This rough application was accompanied by a dream of libertarians - to change reserve currencies and governments.

Since working in this space, I have witnessed a dramatic shift in the applications and opinions surrounding this technology. From what I have seen, most VCs investing in industry companies and large financial institutions adopting the technology behind Bitcoin now have headlines like “…Blockchain”.

What happened? We were laughed at by the public in the past, but what about now? Financial institutions including Goldman Sachs, the New York Stock Exchange, and Nasdaq have invested in blockchain companies, while Citibank, BBVA, and others have also announced blockchain experimental plans.

Blockchain Technology

The blockchain is solving what we call the Byzantine Generals' Computer Science Problem. Simply put, all nodes in the network (network participants) can publish something with a true value, but how do you know which nodes are trustworthy and who should you trust? Some nodes may be faulty, and some may be malicious.

For the first time in history, blockchain enables two entities to exchange value securely without the need for a third party. The network itself eliminates counterparty risk.

The most straightforward application of blockchain to date has been the simple transfer of value, namely Bitcoin. However, Bitcoin is only the first application of this powerful solution.

Blockchain will eat paper

In a digital framework, blockchain has the following advantages in terms of securing ownership records:

1. Independence:

Blockchain is a distributed peer-to-peer network with no central control point, which is different from many modern network architectures. This design improves the scalability of the system and protects the network from the failure of a single node.

2. Security:

Nodes in the blockchain network obtain the right to record accounts by calculating a difficult computational problem. Over the past seven years, as the Bitcoin network has grown, the difficulty of solving these problems has continued to increase. Currently, expensive "ASIC" chips are needed to solve these problems. The total computing power of the entire Bitcoin network has far exceeded the combined computing power of the world's top 500 supercomputers (although the Bitcoin network computing power only solves a very specific mathematical problem).

Because of this design, the blockchain ledger is highly secure and immune to tampering or adjustment. This means that the Bitcoin blockchain network is unquestionably trustworthy. Contrast this with a centralized design (a ledger database run by a single entity) that can adjust the database to its own advantage and is vulnerable to hacking (hackers infiltrate the network system and adjust the ledger for their own benefit or other malicious intent).

3. Transparency

In the basic blockchain architecture, any node on the blockchain network can observe the entire ledger (all transaction records that have ever occurred on the chain). Although some new designs, such as ZCoin, point to more deeply encrypted transactions, this default architecture makes the transparency of blockchain a qualitative improvement compared to traditional databases.

Example

Today, almost everything we trade involves paper:

1. Home Ownership

2. Collectibles (Rolex Authenticity Document)

3. Stock Trading

These paper-based transaction records will become completely digital, and blockchain will be the digital platform for tracking them. Selling a watch or a house will be as simple as clicking a button on your smartphone, which has higher efficiency and certainty than traditional methods.

Providing proof of transaction

The term “papering a deal” refers to the process of converting a business agreement into the legal framework that completes the transaction.

The back office of financial institutions is the most outdated from a technology perspective. While high-frequency trading engines are equipped with hardcore cutting-edge technology, back-office staff must use faxes to clear trillions of dollars in daily transactions.

Since the beginning of 2015, after Goldman Sachs invested in Circle, a series of large financial institutions have announced their investment in blockchain technology. Chain was recently exposed to have received investments from many mainstream financial institutions, including VISA, Nasdaq, Citibank, etc.

So what are these mainstream financial institutions doing with blockchain? The answer lies in the complexity of the logistics departments of these institutions. Every transaction is inked, whether it is a company's stock issuance or a syndicated loan transaction, it needs to be supported by a series of contracts, and a team of lawyers and administrative staff is needed to ensure the correctness of the contract transactions. Every year, the number of faxes sent by syndicated loans reaches an astonishing 25 million.

Blockchain offers a huge opportunity to streamline and automate these manual financial services processes.

From the picture below:

Simplified to the following figure:

Perhaps the most widespread and disruptive change that blockchain technology can bring will be the digitization of written contracts. The terms of the contract will be encoded as a statement, stored in a scalable distributed database, and maintained by the computing power of the blockchain mining network. APIs and the upcoming Internet of Things will automatically execute these contracts, checking environmental data to see if the contract conditions are met.

(Photo from: from gendal.me)

Art, Collections and Provenance

In many business transactions, verifying the authenticity and provenance of an item is very important. For example, in the art world, authenticating artworks requires great care. Street artist Banksy has his own art sales agent called "Pest Control" to ensure that he receives every transaction on the secondary market. If the transaction party buys or sells any Banksy work outside of "Pest Control", they will be blocked from the door of authentic Banksy works forever.

The art world has been embroiled in debate over artists not accepting compensation from the secondary market. While Banksy has implemented his own walled garden approach, and lawmakers in California and the European Union have enacted legislation (the California Resale Royalties Act and Directive 2001/84/EC, respectively), there is currently no way to track the movement of artworks between private parties, and no central registry of artwork ownership exists, so there is no reliable basis for enforcing these laws.

But blockchain can change that by recording digital provenance in a distributed registry. Many companies, including Verisart, founded by Robert Norton, are working on this problem. And our portfolio company Chronicled is working on solutions along the lines of consumer goods such as luxury sneakers. Another incredible example is a London-based company called Everledger, which has recorded 830,000 diamonds on the blockchain, and you know, in the diamond industry, billions of dollars are lost every year due to fraud.

We are seeing blockchain solutions being used to replace paper solutions to record and transfer property ownership. We expect the entire world of business transactions to move to a world of "digital commerce" where all ownership records and transfer records will move to the blockchain, bringing greater security and certainty to the countless transactions and rights every day.

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Original article: https://medium.com/@stevewaterhouse/the-death-of-paper-7a61c752fed0#.c1a9i6m8a
By Steve Waterhouse
Compiled by: Satuoxi
Editor: Satuoxi
Source (translation): Babbitt Information