Equity venture capital for companies building on Bitcoin

#3 BANANAS ON THE BLOCKCHAIN?

The promise of blockchain technology has often led to claims that all assets will eventually be tokenised atop them. This future will not come to pass.

To outline the basic premise of the argument;

A blockchain is just a database, and a slow and expensive one at that because its data is distributed across multiple nodes
A token is issued for the purposes of serving as ‘currency’ on the blockchain - think ETH on the Ethereum blockchain
Further tokens can be issued on top of these blockchains to represent ownership (fractional or whole) of external assets (e.g., a banana, a piece of artwork, or some real estate)

It’s the final point that we take contention with. Does it actually make sense to issue a token on a blockchain for the purposes of expressing ownership of fruit or fraction of real estate?

Proponents in the space would say yes, because:

Tokens open up the asset class to a wider range of investors who would not be able to afford the whole asset
These tokens would provide liquidity where it previously didn’t exist
The blockchain is supposedly immutable and so an NFT of a banana can prove origin and provide supply chain visibility

Whilst the arguments for a token seem persuasive at first glance, they fall apart on closer scrutiny. For example, were a banana to be tokenised on the blockchain, who would be trusted to check if the underlying banana was real? The point of a blockchain is to remove intermediaries, and yet here we have a third party foundational to the construct itself. This critical third party dependence is known as the oracle problem.

Let’s imagine one were to instead tokenise something more valuable, say an apartment on Miami Beach or a Monet painting. The asset exists in physical space, whilst the token is purely digital. An NFT is an example of such a token, it is a digital signature that can be used to prove ownership. But that’s all it is, a digital signature. The underlying asset cannot be reconstituted from the signature alone. Therefore, your stake on that asset relies on enforcement of the rule of law in the relevant jurisdiction. If your property is seized, an NFT claiming ownership of 1/100th may offer little recourse. You are at the mercy of external parties to decide your rights for your own investments.

Once one starts asking these questions, other issues quickly present themselves. If, for example, you lose the private keys to that 1/100th of the property, what are the other 99 token holders to do? Do you all have to collectively decide on management of the asset, like moving the artwork from one Freeport to another or changing the storage humidity conditions?

Suffice to say, if the fruit rots or the apartment burns down, a token is of little use. As a purely digital abstraction, it has no bearing on the real world and cannot guarantee access to what it claims to represent.

The push to tokenise real-world assets comes at least partly because blockchains outside of bitcoin are desperate for a use case. The native currency of each blockchain derives value from rent-seeking (its value increases as activity on the underlying blockchain increases). On-chain tokenised assets are an opportunity to drive revenue to the platform and thus to accrue returns to the stakers of the native token. The problem, as should now be clear is that yields on these are not tied to productive growth in the real economy but to speculation around future use cases that have no technical merit.

As we’ve seen it’s difficult to imagine a meaningful real-world use for 1/100th of an asset, whether a flat, an artwork or anything else. So why would anyone seek out these projects? This question leads to the heart of the problem: the skewed incentive system created by the fiat system. Individuals are pushed to speculate in ever increasing ways as they search for a durable store of value that can withstand monetary debasement and its consequent erosion of purchasing power. This is the specific problem bitcoin fixes through its immovable supply cap of 21m coins. Were our money acting the way money should (increasing in purchasing power over time as technological deflation takes place), there would be no need to speculate so excessively. When money is precious, recklessness is minimised.

So the choice becomes whether to buy a fraction of commercial real estate in Shanghai or a fraction of an emergent monetary network. One through which your purchasing power only increases over time; one where, as more people participate, the network itself strengthens and increases in value. Instead of a fraction of a Picasso, buy a fraction of a monetary network that doesn’t rot, won’t burn down and relies on 3rd parites to validate ownership. Buy a digital bearer asset with no counter-party risk that can be transferred at the speed of light and where ownership gives you independent, immediate control of the asset itself. This is the argument for bitcoin, base layer collateral for the next age of humanity and money fit for a digital age.

Bitcoin is perfected property and perfected money: it is highly divisible, transmissible at the speed of light for next to no cost, supply capped, and has no physical footprint (so it cannot be seized or taxed without consent). Examine those properties in relation to an office block in downtown Manhattan and the advantages are clear and overwhelming.

THE TIMECHAIN UPDATE

With the above in mind, we are delighted to announce we have backed Debifi – a business enabling bitcoins use case as super collateral. The market for bitcoin is global, 24/7 and highly liquid. It’s divisibility, fungibility and unique security model (multi-signature authentication) elaborates on our initial thesis of bitcoin forming the economic base layer for the global economy. A highly experienced and successful team based out of Lavia, they further strengthen the Timechain raison d’être of backing world class teams building on Bitcoin in Europe and Emerging Markets.