May 30, 2024

Blockchain Phantoms and Poltergeists: Establishing the Connections Between Digital and Real Worlds

Blockchain Phantoms and Poltergeists: Establishing the Connections Between Digital and Real Worlds

In the mythology of the paranormal, the spirit world exists in parallel to the material world but rarely interacts with it. It takes a special kind of ghost, the poltergeist, to have an actual effect in the physical universe. In some ways, the relationship between the blockchain world and the real world takes a similar pattern. Blockchain represents a parallel universe, complete of itself and with its own rules of logic, but strangely detached from what goes on elsewhere. Addressing this detachment is the missing link to fulfilling the true promise of blockchain, and has underpinned the development of Artclear.

Blockchains are record keeping systems characterised by cryptography. They avoid the possibility that a single entity -whether legitimate or malicious- can gain control of the records and manipulate them to its advantage. In fact, blockchains can dispense with any kind of governing authority and operate on a purely peer to peer basis.

This is a powerful idea that has captured the imagination of a lot of people, including me. However, it is only part of the picture and another equally important part has not received enough attention: records are only representations of something that exists in the real world. This means that no matter secure a record keeping system is, it is useless unless you can have absolute confidence that the records reflect underlying reality.

This point may appear obvious, but it often seems to be overlooked in blockchain discussions, perhaps because of the origins of blockchain in Bitcoin. Bitcoin introduced two distinct concepts to the world: blockchain and crypto-currency, with the blockchain acting as the record keeping system for ownership of the currency. This duality has persisted as people have sought to expand the record keeping function of the blockchain to a wider set of contexts through the concept of “tokenisation”, where the “token” is assigned some kind of right in the real world.

Cryptocurrency and USD

The thing about Bitcoin currency is that it exists only in the blockchain: it is not a representation of anything else in the world. This means that the blockchain can contain all the information needed to value, hold and transact in Bitcoins. It resembles the spirit world, moving to its own rhythms and detached from the rest of the universe.

However, the minute that you recast the “token” as the representation of something else, this detachment is no longer tenable. New structures and information are needed to define the rights attached to the tokens and to enable token holders to exercise these rights, both legally and operationally, outside of the blockchain. Establishing these structures and gathering and verifying the required information can be at least as expensive as the maintenance of ownership records taken care of by the blockchain and often relies on remarkably old school methods.

Take the costs of issuing a financial instrument. They are driven by lawyers’ fees to structure the instrument; accountants’ and auditors’ fees to ensure it can be accurately evaluated by investors and brokers’ commissions to discover demand so that it can be priced and distributed.

But the challenge of linking a record to the real world is even more acute where the real-world thing is a tangible, physical object such as a work of art. In that case, the blockchain must have a mechanism to deal with the fact that the object can exist entirely independently of the record that is supposed to represent it.

This is the reason why, although Artclear is a blockchain company, all our efforts until now have been on solving the problem of indelibly and uncontestably tethering an individual work of art to its digital record. With the solution to that problem under our belts, we are now developing the infrastructure that will equip the global art world to thrive in the second quarter of the twenty-first century.

It is also the reason that I predict that Artclear will not be alone in forging ever more sophisticated links between digital and physical. The next wave of digital innovation, the wave that will really deliver on the promise, will need to engage with the deep, real-world mechanics of the way companies and assets are structured and operate, to develop new techniques for creating, evaluating, and administering truly digital instruments.

The digital world has been phantasmagorical for too long. Time to send for the poltergeists.