PRESENTATION FOR LANDGATE3 DEC 2015

CONSIDER HOW BLOCKCHAINS MIGHT INFLUENCE TRUST RELATIONSHIPS & ASSET/TRANSACTION MANAGEMENT IN A LAND REGISTRY ENVIRONMENT

By Junran Cao

OUTLINE OF APPROACH• INTRODUCTION

• OVERVIEW OF BITCOIN

• HOW BLOCKCHAIN FACILITATES THE BITCOIN TRANSACTIONS

• INCENTIVES FOR MINERS

• SECURITY OF TRANSACTION BLOCKCHAINS

• PRELIMINARY DISCUSSION OF HOW BLOCKCHAINS MIGHT INFLUENCE LAND REGISTRY

• CHALLENGES WHEN USING BLOCKCHAINS FOR PHYSICAL ASSETS

• FINAL COMMENTS AND QUESTIONS

OVERVIEW OF BITCOIN• Bitcoin is an open-source, peer-to-peer digital currency that began in 2008.

• The world’s first completely decentralized digital-payment system.

• Prior to bitcoin’s invention, online transactions required a trusted third-party intermediary (e.g. PayPal).

• Suppose person A wishes to transfer $x to person B. PayPal keeps a ledger of both account holders’ balances. In this instance, PayPal deducts the amount from A and adds to B’s account.

• Without the presence of an intermediary, digital money suffers from what is known as the ‘double-spending’ problem. That is to say, just as sending an attachment via email does not remove the file from my computer. Person A’s account may not show a deduction of $x even after the transfer to B has been made.

• Bitcoin, without the intervention of a third-party to reconcile the accounts, has overcome the double-spending problem. It is the first digit currency to do so.

• The technology that enables bitcoin to achieve this is the blockchain.

• Even though reservation in Bitcoin remains, blockchain is seen an innovative platform that can be applied in other areas.

HOW BLOCKCHAIN WORKS - 1• Bitcoin achieves this by distributing the ledger via a peer-to-peer networks. That is to say, the ledger

which contains the transaction records of all the users is distributed among all the users of the system.

• This public, distributed ledger is called the blockchain.

• The blockchain structure ensures that users have the confidence to transact in bitcoins (in the sense of using bitcoin as a medium of exchange rather than as a unit of account or store of value) through the use of public-key cryptography.

HOW BLOCKCHAIN WORKS - 2• Each user is assigned two ‘keys’ – one private key that is kept secret like a password, one public key that

can be shared when making transactions.

• When person A transfers funds to person B, A’s computer creates a unique message that contains B’s public key and is ‘signed’ by A’s private key.

• The authenticity of the exchange can be verified by the other users’ computers by examining A’s public key.

• When this transaction – the transfer of ownership of the bitcoins – is recorded and time-stamped, it becomes a new block to the added to the existing blockchain.

• The public-key cryptography ensures that when this update is made, it is made on all the computers in the network.

• Therefore, the fact that a transaction is recorded and has to be verified by all the computers in the network prevents individual frauds.

• Anyone who see A’s public key can validate only A can create the block because only A has the private key SK_A.

signature

INCENTIVES FOR MINERS

• To recap: The actual mechanics of reconciling the ledger (or ‘mining’) involves using one’s computer to find a sequence of data – a block – that produces a particular pattern when the bitcoin hash algorithm is applied to the data (proof-of-work).

• The natural question is to ask what incentives do the miners by devoting their computing power to maintain the network?

• There are two kinds of reward the miners receive:

• 1) Until the year 2140 when currency is scheduled to reach its maximum capacity of 21M bitcoins, the miner who validates a transaction and extends the blockchain is rewarded with new bitcoins.

• 2) Even after 2140, the miners will still be rewarded with transaction fees when they carry out these tasks.

• Interestingly, the size of the transaction fee is set by the pair of users who are transacting. Too high a fee would be costly for bitcoin users, but too low a fee would dissuade miners to verify the transaction.

SECURITY OF TRANSACTION BLOCKCHAINS -1

SECURITY OF TRANSACTION BLOCKCHAINS -2• In order for one to succeed in double-spending bitcoin (as in the above example), the user would need

to beat all the other nodes in the network and solve all the proof-of-work puzzles to create the longer (i.e. most effort exerted) chain that would be realised as the universal ledger.

• This is impossible so long as the combined computing power of all the honest nodes are greater than any criminal individual/teams.

• Furthermore, the cost (in terms of electricity and time) spent in creating the fraud is likely to be much higher than the legitimate means of mining for bitcoins.

• In summary, two deterrents: 1) the magnitude of the mathematical puzzles to be solved 2) economic incentive to ‘play by the rules’.

SUMMARY THE MOST SALIENT POINTS OF BITCOIN

• Privacy: Bitcoin is pseudonymous. The public keys are not tied to anyone’s real identity, however, by looking through all the transactions under a public key, the user may still be traced.

• Lies between secret cash transactions and payment using a third-party.

• Open: Anyone with an internet connection and downloads a bitcoin client can transact in this currency.

• Decentralised: Since it operates on a pure P2P network, no one entity can seize assets, reverse transactions or directly control supply.

APPLICABILITY OF BLOCKCHAIN TECHNOLOGY TO LAND REGISTRY – PRELIMINARY DISCUSSION• Potential benefits?

• Privacy – since the identity of the owner is not easily traced (though not impossible), certain buyers of land property may prefer this change for the purpose of, eg., tax avoidance.

• Lower transaction fees - through the elimination of jobs that currently exist to administer the transfer of land titles, etc.

• Debatable aspects?

• Decentralised – smaller government involvement in the lives of the residents.

• Open – potential of reaching a greater market (i.e. skipping over country borders)? Maybe more relevant in the rental market.

APPLICABILITY OF BLOCKCHAIN TECHNOLOGY TO LAND REGISTRY – CHALLENGES - 1

• A self-evident point: Bitcoin is a purely digital entity which uses the blockchain technology to facilitate its usage. But when blockchain is applied to a land registry environment, we are dealing with physical assets.

• What does this mean? Whilst blockchain can provide security assurances for bitcoin users, the legal system (police, courts) is still required to enforce the transaction if, e.g., someone transfers the land title via the P2P network but refuses to physically move out.

APPLICABILITY OF BLOCKCHAIN TECHNOLOGY TO LAND REGISTRY – CHALLENGES - 2• Bitcoin is fractional. The smallest unit is a Satoshi (0.00000001 BTC). A unit of housing can not be so

easily divided into fractions.

• Therefore, where is the incentives going to come from in a blockchain-powered land registry network?

• Cash? Electronic payment through a banking institution? Bitcoin? A store of credit for future transactions in property purchasing?

• This leads to a further question: how will the costs of the transactions fees be determined?

• Indeed, who will be the miners? If transaction fees are the only incentives, coalitions of miners are likely to emerge.

• We see that whilst bitcoin (the currency) and blockchain work seamlessly together, when we combine blockchain with a physical asset there is no straightforward substitution.

APPLICABILITY OF BLOCKCHAIN TECHNOLOGY TO LAND REGISTRY – A RIVAL START-UP (A THOUGHT EXPERIMENT)

• What aspect of bitcoin can be discard?

• What can be adopted directly?

• What need to be refitted?