TIL of a constructive use-case for the blockchain

Great Debates
1

Today I learned of an actual helpful use of the blockchain. I’ve been waiting for this for well over a decade and now it has arrived.

From wiki, the blockchain, “Is a distributed ledger with growing lists of records that are securely linked together via cryptographic hashes.” Anyone can access it. It’s the foundation of cryptocurrencies like bitcoin. Banks are interested: it’s a very elegant solution searching for a problem.

Polymarket, which bills itself as the world’s largest prediction market, apparently records all its transactions on the blockchain. That offers a very rich source of data for researchers of financial markets. In addition to knowing the prices and quantities of asset trades (something we have in abundance from the stock market) you also have the entire set of trades made by a specific trader. So you can figure out not only what individuals did, but why they did it based upon the other trades that they conducted. And you can sum that up across the entire market.

You can separate out buyers and sellers and empirically tease out their reasoning. Over time that could lead to better decisions.

In theory you could do that if you had access to brokerage records. And in fact, that has been done in one paper. But there are real privacy concerns: and the research has to be done carefully so as not to identify individual participants. Here, there is no such concern: traders are anonymized by their blockchain wallets. And if they don’t like being studied, tough luck: that’s exactly what they signed up for in the first place.

The academic paper is entitled, “Under Pressure? Central Bank Independence Meets Blockchain Prediction Markets”: a walk-through is here. I heard about it from an interview conducted by Paul Krugman with the esteemed economic historian Barry Eichengreen over at Krugman’s substack.

There are a number of debates here, including the virtues and lack of virtues of existing blockchain technologies, the utility of what we’re discussion, unforeseen consequences, the privacy of the set of numbers constituting a blockchain wallet, etc.

I can imagine that this sort of thing could create new opportunities for scammers: use 2 accounts to take the opposite sides of high profile trades, then point to the winning account as evidence of your financial acumen. Or better yet, look up the best wallet on the blockchain and claim that you own it. Who’s going to contradict you?

2

Yes, a blockchain basically functions as a ongoing receipt of purchase, with past transactions immutable.

Another constructive use-case is tracking purchases of virtual possessions. Say you buy an online game for $60. Then over the next couple years you spend $120 purchasing in-game items. What happens to the additional $120 you spent if the company closes or bans your account? Did the extra items you bought ever actually belong to you? Right now, the answers are “gone” and “not really” because it’s only the software company tracking who “owns” what on its platform.

But if a blockchain was used to track virtual purchases you could prove ownership of the purchased items, and potentially resell those items to others, even after you lost access to the account. Your potential buyers would have proof the item was legit (blockchain shows proof of purchase from company to you) and would even be able to sell the same items to someone else at a later date (blockchain shows company → you → buyer1). In other words, virtual items could have resell value similar to physical items.

Maintaining a system to track these blockchains would come at a cost, even without the loss of additional sales caused by ‘used’ item sales. So as you can imagine it’s a tough sell to software companies. Perhaps you could do it by creating a new cryptocurrency where miners process the blockchain purchases of virtual items as well as calculating hashes. If buyers got upset and demanded blockchain tracking you might eventually see some buy-in from software companies. Of course they’d then charge even more.

3

So basically the blockchain can track trade in intangibles, when there’s no central authority to do so. One twist in Dark_Sponge’s story, is that even with a blockchain, the software company could still disallow any purchases made outside of their platform - they control the platform after all. But if the blockchain is part of the TOS and the software company resides in a jurisdiction with enforceable laws, then it might be useful.

A central clearing house, aka a database, run by Google, Microsoft, Ubuntu, LibreOffice, the Electronic Frontier Foundation, whomever could play the same role if they were interested, but for small or mid-sized game developers, they probably would not be. So a blockchain could help.

Another potential use case is land-rights in countries with poorly enforced property rights. Weirdly, that has intangible aspects, insofar as title to land typically consists of records kept by the local governing body. The land is tangible, the records less so. Even then, you need a central authority to enforce these rights.

Generally speaking, if there’s sufficient distrust where you’re considering a blockchain, then you need to think seriously about whether this technological fix is adequate or appropriate to address what is typically a legal enforcement problem. The strongest use cases are those where law enforcement explicitly bows out, such as trade in illegal items or services.

The OP’s example involved privacy, which was a different type of application.

4

The insurance industry has made some attempts to set up a Blockchain to keep track of reinsurance contracts. I’m not sure what came of that, it whether it was ever launched.

5

This is just NFTs. We already saw how well that worked out.

In general, the reason digital data is an improvement over paper and pen is precisely because copying and transferring that data is essentially free. If we’re just going to recreate 1900s analog meatspace business models online, why even waste time with computers at all? Pen and paper (and canvas, and vinyl, and film, and tape, etc) worked great for centuries, and all the relevant logistics, laws and enforcement mechanisms already exist in a mature state.

6

There is one benefit, and one benefit only, of blockchains, and that is decentralization.

Is this data decentralized? Or is there a single source (polymarket)? If it’s not decentralized, then there’s a 100% chance the same thing can be accomplished without a buzzword. I mean buzzchain. I mean… well you get it.