Blockchains and Digital Property Rights

Property Rights in the Physical World

In the physical world, let’s say I want to sell you my car. We create a contract that verifies I own this car, and I am transferring ownership to you once you pay me $10,000. We have a notary review the signing of this agreement and certify that each party signed this agreement. Once I receive the $10,000 and you receive the car, the transaction is settled.

If I suddenly claim that you stole the car from me, and I never signed the agreement we have the notary's record and a complex courts and legal system to ensure that contracts are enforced. If I bribe the notary to agree that I never signed the contract, the legal system provides an opportunity to evaluate the case and hopefully make the correct judgement.

While we have spent centuries perfecting this set of property rights for the physical world, it is poorly suited to an instant-settlement digital world.

‍

Today's Feudal Digital Society

In the absence of digital-specific property rights, users have not been able to truly own digital property or assets. Centralized companies have created walled gardens with their own rules to govern digital property in their ecosystems. Apple charges a 30% fee on digital items purchased on its app store. Facebook shares your data with third-party advertisers. Twitter can deactivate your account if you say something they don’t agree with.

This has led us to live in a feudal digital world, with almost all digital assets and property owned by a small group of centralized entities. Just like medieval kings, these centralized entities unilaterally determine the rules around ownership and transfer of digital assets.

‍

How Blockchains Allow us to Break the Feudal Digital System

Now instead of a physical car, let’s say I want to send you 1 digital token worth $20mm.

How can this transaction be done in a way where we do not need to trust our counterparty, or a single, potentially corruptible “notary”? The blockchain solves this problem:

• In a blockchain, instead of using a single notary, we first send the transaction to a vast network of “notaries” (called miners in the Bitcoin network and validators in Proof-of-Stake networks)
• The network of notaries certifies that this transaction is valid – that I own the asset and have submitted and signed a transaction to transfer it to your account
• Our validated transaction is included in a “block” of other transactions proposed at the same time
• Once the “block” is full of transactions, it is added to the previous block of transactions, called a “chain”
• As the sender, I pay a small fee to the network for validating the transaction, and my digital file is transferred from my wallet to your wallet

A blockchain is just a chain (unchangeable record) of blocks (transactions that have been validated by a decentralized network of computers)

The key features of a blockchain are:

• Decentralized: They are operated by a network of participants, with a single entity unable to make unilateral changes to the network
• Immutable: Transactions that are published to the blockchain cannot be changed. This creates a permanent record of all transactions that have been included in the blockchain

The Importance of Digital Property Rights

In any economy, there is a direct correlation between the strength of property rights and economic investment and activity. If I fear that the government is going to come at any moment and seize my company, I have little incentive to invest the time and capital to innovate and build an amazing company.

‍

The end of feudalism and introduction of clear and resilient property rights ushered in the industrial revolution and a period of sustained innovation.

Blockchains and smart contract platforms lay the foundation to bring the digital economy out of feudalism. Having a trusted way to own and transfer digital assets opens an entire new set of opportunities for the digital economy to grow.

We are in the very early innings of understanding what innovation this new technology will unlock. Networks of decentralized applications (dApps) are leveraging the power of blockchains to create innovative applications and entire new consumer categories. We've already seen $250bn+ of value locked in DeFi protocols, $70bn of total sales of digital collectibles, and hundreds of blockchain-enabled games being developed. We expect new categories and innovative use cases to continue to emerge as talented entrepreneurs and developers leverage this new technology platform.

‍

Disclosures

Oath Digital, Inc. All content is original and has been researched and produced by Oath Digital, Inc (“Oath Digital”) unless otherwise stated herein.  This report is for informational purposes only and does not constitute an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. There is not enough information contained in this report to make an investment decision and any information contained herein should not be used as a basis for this purpose. This report does not constitute a recommendation or take into account the particular investment objectives, financial situations, or needs of investors. Investors are not to construe the contents of this report as legal, tax or investment advice, and should consult their own advisors concerning an investment in digital assets. The price and value of assets referred to in this research and the income from them may fluctuate. Past performance is not indicative of the future performance of any assets referred to herein. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments.

Certain of the statements contained herein may be statements of future expectations and other forward-looking statements that are based on Oath’s views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. In addition to statements that are forward-looking by reason of context, the words “may, will, should, could, can, expects, plans, intends, anticipates, believes, estimates, predicts, potential, projected, or continue” and similar expressions identify forward-looking statements. Oath assumes no obligation to update any forward-looking statements contained herein and you should not place undue reliance on such statements, which speak only as of the date hereof. Although Oath has taken reasonable care to ensure that the information contained herein is accurate, no representation or warranty (including liability towards third parties), expressed or implied, is made by Oath as to its accuracy, reliability or completeness. You should not make any investment decisions based on these estimates and forward-looking statements.