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Monday, March 23, 2015

Can the Blockchain provide governance?

Author's Note: This is a brief explanation of how blockchain technology could provide services previously allocated to governments, originally written for the BitNation whitepaper in September 2014 but later excised and completed with some review by Chris DeRose and David Duccini. It explains in brief how the blockchain may have the ability to provide consensus that only governments had previously been capable of, thereby enabling the technology the ability to serve as a general verifier and issuer of identification and transactional information that is permanent, trusted and universally recognized.

This is written from the perspective of a political scientist, rather than a technologist, and describes what a transition in information verification between old state institutions and blockchain technologies might look like.

Why Do Governments Provide Services?

Governments are problem-solving institutions: having a monopoly on violence afforded governments the ability to coerce consensus out of a population in order to solve problems and answer questions in a society, such as establishing identity and land ownership, providing a system for dispute resolution, and much more.

Historically, everyone recognized that a certain framework of rules that were decided upon by majority vote would be followed. This created predictability, because people who followed the rules needed to know that other people would follow those rules as well. Governments created rules and established guidelines and penalties to ensure those rules were followed. All of this work came with costs, so governments also raised taxes in order to diffuse the cost of services among the population that benefited from them.

So traditionally, someone offering what we call “governance services” needed to meet certain conditions within the polity before their service can be considered reliable and legitimate:

1.            They must be able to ensure that services can be proportionally distributed
2.            They must be able to ensure that services will be universally recognized
3.            They must be able to ensure that services will be worth the price
4.            They must ensure that there is a process for changing the rules and services as needed

At a glance, there doesn’t seem to be an inherent property that would keep a private sector organization from being able to offer governance services, and many services in the U.S. have been increasingly outsourced to private contractors since the 1980’s. Perhaps the biggest challenge is universality. Governments can ensure through coercion that their services are universally recognized. The dollar’s value, for example, is enforced  by American guns, as is its legal system, identification system, etc. Without universal recognition of your marriage or birth certificate, so the convention goes, you have a mess when it comes to leveraging those documents to procure other resources.

But is universality really critical? We know from historical experience that different forms of money, for example, can function in a competitive market without a government mandate. We also know that universality isn’t really global: when you travel abroad, a foreign country doesn’t usually ask to see your birth certificate and social security card. They use your passport, a method of identification from an entirely different identity verification system they are not intimately familiar with. They trust it because they trust that the institution that has certified your identity has a rigorous identification process and a system by which your reputation can be discerned.

Governments have historically been the trusted verifier and issuer of identification and transaction information simply because they were the best positioned to offer those services to the public. Private companies have their own verification systems, but companies come and go. When companies do offer some identification or reputation service, such as a credit bureau, it is usually to a specific market for a specific reason. They don’t offer the broad range of services the government are able to with redistributed tax dollars. If a competitor is to offer such services, they must be permanently reliable: i.e., they can’t just go bankrupt and lose your birth certificate or marriage record. They have to be able to maintain accessibility to the records regardless of market volatility. They also must have a universally recognized and widely trusted process for determining your identity and they must be around as long as the document is guaranteed to be valid (in the case of licenses) or forever (in the case of birth records) to vouch for you.

The blockchain protocol may be the first technology that checks all of the boxes required of a governance system. Once the information is online, it exists forever on the network. It has a rigorous verification process that is virtually impossible to crack once the network reaches a certain critical mass. It can record births, marriages, deaths, property ownership, business contracts and a variety of other records traditionally created and held by governments. The identities of individuals on the network can be established definitively through their unique “signatures”, and in turn, those individuals can sign and verify transactions (say, the attending physician at your birth, or the priest officiating your wedding). Instead of a government official acting as notary or other trusted third party verifier, the consensus of a blockchain’s “miners” or other verifiers takes on that role.

Governance Services

Using the blockchain technology as a platform, companies, non-profits and other non-state actors can offer their own competitive governance services. Theoretically, there is no limit to the services that can be offered, and the distribution and availability of services will be governed by market forces. This concept has already been proven in part with “colored coins,” multi-signature transactions and smart contracts that currently exist on the Bitcoin blockchain.

In a sense, the world is already a web of competing legal and governance systems, just tied to geographic territories. The question then is this: is there a value in creating a virtual governance system that is not tied to coincidental geographical boundaries? Is it even possible to offer such a thing without coercion?

According to attorney Pamela Morgan of,  one way to prove provenance while circumventing coercion may lie in the presence of the “timestamp” in the blockchain protocol. One of the reasons government has been expected to provide identification and property ownership services is it considered sufficiently impartial that it would not lie or cheat to favor one citizen’s interests over another with respect to provenance for land rights, for example. The timestamp removes the need for this level of trust in a person or organization. The transaction’s date and time cannot be tampered with, and thus can serve as the final arbiter in the event of a duplicated or fraudulent transaction, even across different blockchains. On a technical level, there is still the possibility that a bidding war could erupt between filers wishing to process a transaction faster and thus claim provenance, but it seems unlikely this would be a problem for most transactions.

The blockchain protocol also has some advantages over traditional government services, including very high transparency, low overhead/transaction costs, and a high degree of accessibility. The system is also highly stable with just enough flexibility to ensure systemic changes can be made if they are very necessary. Unlike a nation state government, it doesn’t require an army of bureaucrats to maintain. It cannot be bribed or blackmailed and it will never make you wait hours in line or slap you with arbitrary fees and fines in order to boost revenue. This makes it a great alternative to traditional services.

What if many blockchains exist simultaneously? Couldn’t there be conflicting information for the same identity? Yes. However, it won’t likely matter much. First of all, without a barrier to entry, any user can join any blockchain just by downloading freeware so he or she can check identities wherever they exist. Second, if there is conflicting reputational or transactional information, users will eventually even out the differences through regular activity across networks, with larger, more utilized networks, having higher value, predominating.

Think of blockchains as competing information marketplaces. Like with prices in exchanges in a competitive marketplace, the information that is freely available to all will tend to even out over time, making arbitrage more difficult. So the reputational arbitrage that scammers may attempt on various blockchains will get increasingly difficult as the system matures. Furthermore, layers of meta-systems will eventually be constructed on bitcoin and other blockchains that will enable users to more easily navigate information between them.

The net result is a competing set of reputational systems, with some overlap and redundancy that exists permanently in cyberspace, with identities verified by the users themselves. Universality through force will become superseded by universality through competition, and consensus is something that will be achieved by the “votes” of miners or other system custodians, rather than by political votes.

Reputation Systems

The effectiveness of a simple user-driven reputation system was proven long ago by eBay, Amazon and Yelp and taken a step further by Pirate Bay and the Silk Road. Divorced entirely from any sort of legal system, the Silk Road’s various iterations has managed to thrive as a totally anarchic marketplace with entirely user-designated reputations until being taken down by authorities. Despite conflicts with existing law, the system itself remained internally sound, and “dark web” marketplaces succeeded despite lacking access to a formal legal accountability system. Blockchain 3.0 is the next level, creating an autonomous “economic layer” for the internet without authorities, and the ability to experiment almost without limit.

In the words of Melanie Swan of the Institute for Ethics & Emerging Technologies:

“Decentralized models have the potential to reorganize all manner of human activity, and quickly, because they are trustless, the friction of the search and trust-establishment process in previous models of human interaction is eliminated. This could mean greatly accelerated rates and levels of activity on a much greater humanity-level scale. The blockchain (decentralized network coordination technology) could emerge as a fundamental infrastructure element in the model to scale humanity to its next levels of orders-of-magnitude-larger progress.”

Potential applications

Key to establishing a reliable form of alternative governance services is the ability to establish identity, rights and reputation.

Establishing identity: Birth, marriage, death certification, next-of-kin, power-of-attorney, parent/legal guardian, account holder, contractor, property owner, creditor, proof of insurance, student, proof of profession, proof of native American tribe membership, club membership, press pass, proof of payment, and school identification, among possible others. Early applications would probably be geared more toward experimentation than essential legal services, and may include moving some existing identification systems to a blockchain-type system. “We probably need to see this used online extensively, before we start to see these applications,” noted Bitcoin expert Chris DeRose. “So, possible examples of online identity would include facebook-esque logins, comment attribution, and credit mechanisms (think airbnb tenant-evaluations, uber rider evaluations, darknet identity services, etc).”

Establishing rights: Blockchain transactions can help with property disputes by showing (even among different blockchains) that a transaction happened at a certain time, indicating reliably whether a “double spend” problem has occurred. The establishment of provenance over property is crucial to the system’s integrity and usefulness, and how this will work remains to be seen.

Establishing reputation:  David Duccini of ID Coin believes that blockchain reputation systems can be far more dynamic than the simplistic, static systems employed by retailers like eBay and Amazon. Signaling not only a positive/negative transaction but indicating the strength of the relationship via signaling mechanisms, as well as the ability to challenge a reputational event and influence one’s own reputation are potential characteristics of blockchain tech, according to Duccini. For further elaboration, check out this interview.

Proofs of identity could replace flawed methods of password retrieval such as mother’s maiden name, having to produce multiple documents or answer questions, provide fingerprints, etc.

The blockchain can replace a single human authority anywhere such is required simply to recognize that an event has taken place. So for example, a doctor can verify your birth on the blockchain rather than signing a piece of paper which is then sent to a governing authority for record keeping. His public key verifies his own identity, and other doctors (or the AMA) and his patients can verify both his identity and reputation as satisfied or dissatisfied patients.

For the time being, governments are likely to reject blockchain transactions that attempt to supplant privileges that they have claimed the right to deny others (such as registering your car on a blockchain instead of the DMV). However, for transactions that do not result in possible revocation of certain rights or privileges granted broadly to citizens in good standing (such as signing a contract or establishing ownership of property), a blockchain transaction can be counted as “digital evidence” in court and is likely to be increasingly accepted as understanding of the technology increases in the legal community. Adoption may also be stronger in markets where reliable governance services are usually scarce. As Chris DeRose noted: “I think decentralized identity is wonderful, but it will need to gain traction in underserved markets for a long time, before it gains traction in well-served markets.”

As time marches on and the technology gains wider acceptance by the legal system, business community and the public at large, usage is likely to increase. The blockchain technology offers an extremely unique approach to transaction and identity verification that has never before existed in human history. If these projects are successful in proving the concept and converge in a way that its convenient and reliable for the average user,  the changes wrought to the way people interact could be explosive.

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