Why your application probably does not need Blockchain (but Factorium does)
I want to start this piece by taking a high level of overview of what a Blockchain actually does and where it is a good fit and where it is not.
Blockchain is only a good fit in scenarios where there is no central, single party (or small group of parties which determine what the facts are.
If such central party (or small group of parties) exists, then using Blockchain not only does not make sense, it actually makes things worse off.
This not only includes scenarios where the records are either maintained in a central manner but also those where they are regulated by an centralized entity.
Let us dig deeper.
Consider a small village of 100 people. It maintains records of property with the headman. The headman maintains a small militia of 5 people and can know heads together if necessary. He is generally considered fair.
When any one sells their property to the other person, the headman updates his record. Everyone trusts him and he resolves disputes if they arise in a fair manner.
The centralized system of records works beautifully when there is a fair and neutral central party. It is fast and efficient and simple.
Eventually the headman gets old and passes away. He is replaced by his son who tries to siphon off property by updating the records to benefit himself and his cronies.
The villagers get wind of it and decide to do away with the new headman. They decide that going forward everyone would maintain a copy of the record with themselves. When there would be a need for an update, the update would be announced in the village square and everyone would update the records with them.
This is what is called a distributed decentralized ledger. Note that while the villagers could have just one record and agreed to update it only through a public vote that presents a risk.
If this record was stolen or tampered with, for eg: the deposed headman has one of his henchman break into the safe where the public records are kept and modifies them or simply burns them, then that becomes a fatal flaw in the design.
By replicating the records with each party, blockchains introduce resilience to the system.
Someone looking to tamper the records would have to modify each record and with the checks in the form of mining that go into a blockchain update, this becomes an almost impossible task.
Blockchains create a set of truth that cannot be tampered with (easily).
However there is still a flaw here. The deposed headman rings up the provincial officials higher up who get annoyed with this little act of rebellion. They send in forces and along with the local village militia they have everyone erase their records under the threat of physical force.
Moral of the story: If your decentralized system cannot withstand the ability of one party to exercise a monopoly of force it cannot work in the long run.
A corollary is applicable here. Even if the regulator agreed to allow you to maintain a decentralized registry and has the monopoly of force, if and when a situation arises which threatens the role of the centralized regulator they will exercise their prerogative to shut down the whole system.
Decentralization is an either or thing. A drop of poison can still poison you.
The reason I bring this up is there are new decentralized exchanges that deal in regulated assets such as securities. There are distributed ledgers recording property title etc. ASX in Australia is proposing to replace its system of share records with a DLT system. However in each case the final say still resides with one party.
These systems are pointless. And blockchain is actually a bad fit for them for reasons beyond what we have already discussed.
Let's go back to our village.
The provincial officials are cunning and they want to maintain the pretence that they are allowing the villagers to do their own thing. They want to maintain a potemkin charade, where they want others to think that they are democratic. They allow each villager to maintain the record but only they will have the right to update it.
The villagers have to update their record every time something changes but do not have the final say on what changes go into the record.
The villagers soon see through this. They get tired of updating their own records when it serves no purpose. They have no real say.
The provincial officials also soon realize their own folly. They are unnecessarily having everyone to update 100 records when all that needs to happen is update one record.
If anyone wanted to see what the current status is they can easily visit the local village office and check the records.
Having to update 100s of records when it is not required creates an expensive, slow and cumbersome process without any upsides.
That is permissioned chains for you.
That is also the case for anyone who claims to record assets that are currently regulated by a centralized regulator such as property titles, shares, car titles etc.
When centralized parties that also enjoy a monopoly of force exist, a blockchain is pointless.
Blockchain is only a use case for scenarios which require consensus to be formed when such a trusted (or force monopolizer) central party does not exist.
The reason I bring this point up as this goes to the heart of some of the arguments being made around how securities/property title etc can be recorded on the blockchain. In cases of both securities and property, legal requirements for custodial centralized records exist. But even if that did end up changing where the regulator removes the need for a centralized record, it does not address the fact that the regulator has the ability to exercise control.
And if the regulator is able to control and change data on demand, then the replicated ledgers are pointless. If the regulator is benign then you do not need to maintain your own data and if the regulator is corrupt but has a monopoly of force, keeping a copy of the data with you is not going to serve any purpose.
The only scenarios where blockchain can provide value is when there is an absence of a centralized trust arbiter.
These are scenarios where are yet to be covered under the net of state regulation. God lies in the gaps. Or transactions that are recorded in a pure peer to peer basis, one to one contracts that are not recorded elsewhere apart from with the parties to the contract.
The lowly fern is a wonderful plant. Its leaves have a mind blowing fractal geometry where each section is made up of a number of smaller section that resemble the large section. It has latched onto a very peculiar Darwinian space and thrives in it. It grows in shade, under the tall canopy of other trees in the forest. Where the light is unable to reach it.
Assets that can be tokenized onto the blockchain thrive in similar niches, where the searing rays of state regulation are yet to penetrate.
All assets are contracts, they are in essence “A right to …” or a “claim to” . Your ownership of property is your right to do what you please with it. This may mean living in it or allowing someone else to live in it, or let it sit there and do nothing.
Only those assets can be tokenized which do not have requirements or regulations via a centralized regulator with a monopoly of force. But pure bearer items such as gold cannot be really tokenized as a claim to a gold token does not mean anything if someone steals the gold from the vault where it was supposed to be in safe keeping for you.
Which means the “right to” or “claim to” should be ideally be able to recorded in a blockchain native fashion. If you are recording ownership of offchain assets such as gold, or silver or precious art you have to wear the risk of confiscation of the physical asset.
But if your asset is a loan you made to another person and it was recorded on the blockchain then it is a blockchain native asset.
P2P loans, invoices, leases on property, IP rights, escrow contracts, book royalties are all examples of Assets which can be blockchain native and are suitable for tokenization.
We are starting off with B2C invoices with the reasoning being elaborated here
An ideal play is to integrate with a market place such as ebay or Amazon. Even better however is to integrate with a market place which accepts crypto ERC 20 as payments as its native payments processing mechanism.
We are happy to report that we have made substantial progress on that front and are about to announce a major partnership with one of the biggest marketplaces that are crypto native. The partnership is synergetic where the merchants on the marketplace are able to achieve greater sales using the Buy Now pay later approach and we are able to gain greater adoption as well.
The ERC 20 tokens representing the invoices can then be floater on any exchange that supports ERC20 tokens and traded globally without restrictions.
These invoices resemble short term bonds, where there is a predictable payout at every interval along with one at maturity. Yet being factored receivables do not get caught up in securities regulations. This leads to greater and faster capital formation which should in turn grease the wheels of commerce. Businesses facing cash flow issues will find this solution a god send.
The marketplaces using us in the back end can also be a source of investors/financiers for us where we can create a webshop on the portal to also attract investors.
We will be providing regular updates on our progress on this front. Stay tuned.
