Blockchain 2019: How crypto will convert cash, property into digital assets
Business Management

Blockchain 2019: How crypto will convert cash, property into digital assets

In 2019, the most innovative work involving distributed ledger technology (DLT) – blockchain – will focus on the tokenization of assets, or the ability to represent digital or physical assets and fiat currencies as tokens that can be sold or traded on a network.

DLT has the ability to take anything, from a piece of artwork to gems and real estate, and represent them as cryptographically hashed assets on a peer-to-peer, open electronic network that has no central authority, such as a bank, governing their trade or sale.

Representing digital or physical assets as tokens on a DLT-based network enables  participants to reinvent processes and develop new business models – uncharted territory from both a business and technology perspective, according to a new report from Forrester Research.

Forrester's 2019 predictions for CIOs placed blockchain among other emerging technologies, such as artificial intelligence (AI) and augmented reality (AR), that will only be embraced by enterprises if they solve real-world problems. Otherwise, vendor hype could spark a backlash that hurts overall adoption.

While best known as the foundational technology behind bitcoin and other cryptocurrencies, blockchain is essentially a database built on a distributed, peer-to-peer topology where data can be stored globally on thousands of servers – and anyone on the network can see everyone else's entries in real-time. Therefore, it's virtually impossible for one entity to gain control of or game the network because other users would become immediately aware of the attempt.

Despite continued claims to the contrary, DLT hasn't yet had a revolutionary impact on any industry or process, according to Forrester, which argues the blockchain industry should take a realistic approach to marketing its capabilities and be upfront about the challenges in deploying it.

For example, blockchain is a team sport; if you don't have players other than yourself, it doesn't work, according to Martha Bennett, a Forrester principal analyst and lead author of the report. (Forrester prefers the term DLT over blockchain because it believes it's a more "neutral and accurate," description.)

Bennett, who takes a conservative view of DLT, sees blockchain today as analogous to the internet in the early 1990s when people recognized its potential but could not  predict the businesses it would spawn, such as Facebook, Instagram or WattsApp. Tech pundits might have envisioned an Amazon in the early days of the internet, but they had no idea how it would dominate the online sales marketplace, she said.

"The technology is still emerging and early stage, but there's a tremendous amount of innovation in the ecosystem," Bennett said.

Digitizing cars, real estate – and even artwork?

Already gaining momentum are new ownership and service models being created by tokenization – the digitizing of assets that can be sold or traded on DLT.

For example, blockchains that tokenize real estate are fast emerging; they allow  traditional investors and consumers to buy shares of a property and receive a return on rents or mortgages. The money paid for the shares allows property owners to make additional investments.

Polymath, Securitize and Harbor are among the industry's leading blockchain networks that enable assets – such as commercial buildings – to be tokenized and turned into tradable securities.

One start-up, Jointer.io is focused exclusively on real estate tokenization, but unlike other services, it doesn't offer one property as shares that can be purchased. It offers a number of buildings in an index, and participants can buy tokens from that index. The result is less risk and more profit, according to Jude Regev, founder and CEO of Jointer.

property owner blockchain jointer Jointer.io

Jointer's webpage enabling property owners to digitize their real estate holdings.

The problem with buying shares of a single property, Regev argued, is you have to trust the owner's word that he or she has the equity they claim. For example, if a building owner owes a mortgage lender 80% of the value of the property, the actual equity an investor owns is far smaller than the total value of the building. Investors might also not know whether a property has a lien on it or some other financial obligation.

"And, how are you going to force an owner to pay a dividend every time they take a distribution for themselves? The [digital token] is not really linked to the bank account collecting the rent," Regev said. "You need to trust the owner to transfer the money from the bank account into some reserve controlled by smart contracts."

Jointer real estate blockchain Jointer.io

Jointer.io's property index

"People scam other people," he continued. "It's just a matter of time before somebody is going to scam someone using security tokens. Someone is going to sell a property that doesn't exist or maybe is vacant..., or sell the same equity in a property twice. At some point, the [Securities and Exchange Commission] will jump in."

So instead of offering a single building, Jointer is creating indices from groups of properties – apartment building collectives or commercial real estate holdings. Investors can then choose indices based on regions, such as New York or San Francisco or Houston.

"The idea is you're no longer tied to a specific property, so you don't care if the property is above the market [value] or below it, if the owner is selling all the equity or doesn't have any equity.... You go by the index of the similar properties," Regev said. "All the properties – the income strength of them – which is managed by institutional interests, will be moved to a main reserve controlled by smart contracts."

The shares of those properties – represented by coins – can then be used by participants as securities for attaining loans or simply as a financial asset on which they receive a return. Large investors, for example, get a return on 90% of the asset, with the other 10% going to Jointer, Regev said. Smaller investors receive returns based on smaller portions of the asset.

Property owners – the ones placing their real estate equity in the pool – get the service for free. For the public, Jointer offers to lend funds to real estate blockchain projects while the return is based on multi-family building indexes.

Turning cold cash into digital tokens

Another example of an emerging market is the tokenization of fiat currencies, or traditional forms of money represented by digital tokens such as bitcoin, Litecoin or Ethereum's Ether.

Coinbase, CEX.IOChallengy and CoinMama are among the leaders in the digital currency exchange marketplace.

Digital wallets, or accounts that allow participants to purchase tokens with real money, are fast emerging as a new market that removes the middleman – a central bank or other governing authority – from the transfer of funds between participants and beyond geographic borders.

Four years ago, Overstock.com created Medici Ventures, a venture capital arm for DLT investments. The Salt Lake City-based subsidiary focuses its investments on six key emerging areas of blockchain technology adoption: capital markets; identity management; property; voting; underlying technologies, and money and banking.

One of the companies in which Medici owns a 35% share is Bitsy.com, which just launched a full-fledged beta of an app aimed at making digital currency exchange easier for consumers – and therefor easier to use to buy with bitcoin on Overstock.com. The app allows consumers to use the new crypto-wallet service.

"We felt like none of the other [digital exchanges] were good," said Jonathan Johnson, president of Medici Ventures. "When Bitsy came to us with their business plan, we said, 'Wait a second, this is the answer to that question.' This is the easiest on-ramp and off-ramp to crypto."

bitsy blockchain Bitsy

Bitsy's smartphone user interface.

The main advantage of Bitsy's exchange is users own both the public and private hash keys that enable the sale of digital tokens.

"With conventional bitcoin wallets, users do not have actual possession or control of the bitcoins they buy: their wallet-provider owns the Bitcoin and provides a contractual claim to the consumer, who must then trust that corporation. This defeats the whole purpose of crypto," said Patrick Byrne, Overstock.com founder and CEO. "Bitsy wallets, on the other hand, allow users to possess and have complete control of their cryptocurrency without the risk of lost keys. This sets a new standard for digital wallets."

Over the past year, purchases made on Overstock.com using bitcoin have doubled to about 0.2%, Johnson said. While that's still a small percentage of overall sales, it is steadily growing.

"We're high on blockchain technology, which allows the transfer of digital assets, whether it's bitcoin or other cryptocurrencies, votes or land titling or securities," Johnson said. "We think like the internet allowed for information to flow freely and frictionlessly, blockchain is going to allow assets to flow freely and frictionlessly."

With the public beta now live, Johnson believes the Bitsy cryto-exchange app will be generally available sometime in the first quarter of 2019.

bitsy blockchain Bitsy

The screen that appears after a bitcoin purchase on Bitsy.

Tokenization could usher in new ownership models

Tokenizing assets paves the way for entirely new ownership and service models, but work on those models is nowhere near complete. Nevertheless, they are some of the most innovative ideas put forth using DLT, Bennett said.

For example, automobiles could be tracked through blockchains by creating a unique hash tied to the vehicle identification number or VIN. Even parts that make up the vehicle could be linked via QR codes that cannot be replicated and thus, ensure the authenticity of the maker.

"So, if you also wanted to make sure when the brake discs are being replaced, only original parts are used, that's one way of ensuring it," Bennett said.

Cars could also someday be owned by multiple entities, each holding a certain number of tokens representing a portion of the vehicle's overall worth. The vehicle would then become a service, to be used when needed but not entirely owned by one person or company.

"You would have a tokenized car, where the car itself is owned by different entities. The car overall could be owned by the manufacturer, but in an electric vehicle the battery could be owned and serviced by a different company," Bennett said. "What's delivered to the consumer is a service whereby they can get transportation when they need it."

Digital rights could also be linked to blockchains, where a hash representing an object – a painting or precious gem, for instance – could be maintained in the immutable record, ensuring not only authenticity among sellers and buyers, but tracking the provenance of the item.

Big hurdles remain

Some things, however, cannot be accomplished purely with DLT and cryptocurrencies, Bennett said. For example, you cannot have a high transactional throughput rate with bitcoin and a resistance to malicious attacks.

"It's one or the other," she said. "There is a point beyond which you cannot address latency unless you control some big pipes.... If you have a large network with lots of nodes and all those nodes need to be fully replicated, then no, you cannot have a high throughput rate."

The creator of the open-source blockchain platform Ethereum has been exploring ways to fix the technology's innate performance issue – the inability for processing capacity to effectively scale.

So far, Ethereum is experimenting with two possible fixes. The first, "sharding," would require a small percentage of nodes to see and process every transaction, allowing many more transactions to be processed in parallel at the same time. Sharding is also expected to maintain most of the desired decentralization and security properties of  blockchain.

The second solution involves creating data-link layers or "layer 2" protocols that send most transactions off-chain and only interact with the underlying blockchain in order to enter and exit from the layer-2 system, as well as in the case of attacks. Layer 2 protocols transfer data between nodes within a LAN or an adjacent WAN. Data sent "off chain" can be stored in conventional SQL, Oracle or other databases.

While the industry isn't expecting major breakthroughs in 2019, the pace of innovation is such that it won't be the root cause of project failures if the system is properly architected, implemented and run. Agreeing on data definitions, what data to share and with whom, what the process looks like end-to-end, what governance principles apply to the network, will continue to be bigger challenges, Forrester's report said.

Another conundrum facing DLT: data is only as accurate as the person entering it and it's up to a consensus mechanism – a majority of users – to decide what transaction does and doesn't get added to the immutable electronic ledger. That boils down to the need for rules.

"In anything, that involves not just sharing data but using data that has been entered by someone else. What do you do if there's an error? Who's responsible?" Bennett said. "If I cannot rely on data entered by someone else, what's a shared ledger worth?

"I've even seen pilot projects fail, and even ones that had good use cases; they failed because the entities failed to agree on the legal terms of the pilot projects," Bennett added.

Running afoul of regulators

Business and regulatory issues also represent stumbling blocks.

For example, the EU's General Data Protection Regulation (GDPR) targets citizens' personally identifiable information (PII), providing transparency around its use and giving people the right to restrict it or request it be deleted all together. While public blockchains can anonymize participants and even the data entries by representing the information with hash keys, it is possible to infer who a blockchain participant is through metadata, Bennett pointed out.

"It's fair to say public blockchains like bitcoin and Ethereum are completely incompatible with GDPR," Bennett said. "Blockchain is ... not anonymous."

Recent reports have pointed to the ability to glean user location data on Ethereum. For example, the blockchain search engine Etherscan, which is used to look up, confirm and validate transactions on an Ethereum blockchain, can be used to find links between an a user's IP address and their Ethereum address.

Another way DLT technology can be incompatible with regulations such as GDPR is that you cannot exercise your right to be forgotten on a public blockchain. Blockchain, by nature, is not erasable or changeable; it is write-once, append many technology. While there are efforts to make DLT data unobtainable, through cryptographic erase schemes, they are still controversial, according to Bennett.

Accenture, for example, floated an "editable" blockchain prototype that hasn't seen adoption. The prototype was aimed at permissioned, not public, blockchains.

"My advice to companies is PII – personally identifiable information – should never be directly recorded on a blockchain, period," Bennett said.

Even with those issues, DLT platform proliferation will continue and the tools and services will continue to improve, Forrester's report stated.

In 2018, Ethereum/Quorum, Hyperledger Fabric, R3's Corda, Digital Asset Holdings' software and Multichain have been the most prominent live systems or major developments. While the list of players won't change significantly in 2019, more contenders are likely to emerge, as there are a number of well-funded projects under way that promise to address some of the key shortfalls in existing architectures.

Some of the well-funded projects include Hedera Hashgraph, a blockchain governance prototype; RChain and EOS, both of which purport to solve blockchain performance issues; and Cardano, a smart contract platform aimed at protecting user privacy.

"This really is the futuristic stuff," Bennett said. "And, anything around tokenization is long-term strategic work."

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