Trade this: real-world assets trading on the blockchain

Commerce is arguably the oldest game in humanity’s playbook.

Exchanging stuff for other stuff was pretty much the kind of early communication that enabled an unprecedented level of collaboration between disparate groups of hairless apes, and which took our societies from roaming savannah tribes to a global space-faring civilisation.

Like any game, commerce has rules. Back to the earliest trades, these rules were likely set ad-hoc, either cemented by trust from an existing relationship, or imposed by the sharpest spear. Here’s ten apples for your chicken - nice doing business with you.

But boy did we come a long way from chicken trading.

As communities outgrew their relatedness and trade between strangers became the new black, this rulemaking-on-the-spot has proven to be unsurprisingly inadequate, even more so because commerce grew exponentially more complex. Trusting strangers to follow through on agreements became a nasty and costly problem.

To manage trust issues, humanity started adding institutions to the mix - governments, legal systems, and trade organisations were established to codify, maintain and enforce the rules that dictated how trade should work.

That’s pretty much where we have stood for the past few thousand years, with few if any changes to the structure itself. These stewards and authorities have been of great help at a time when commerce was bound by geography. However, as trading expanded into the global stage and the internet became a thing, it became increasingly clear that this system has not aged that gracefully.

And that is when bitcoin came up and for the first time in history we had a system where trust could be achieved without authority over the internet.

Unsurprisingly, the first use cases for this brand new trust layer was to trade stuff, with bitcoin being the first application and BTC (the token) playing the role of a digital bearer bond - digital cash. A decentralised, borderless and permissionless money.

Ever since bitcoin opened these trustless floodgates, the crypto community has been increasingly engaged in a polarised (and sometimes quite heated) debate between decentralising purists and institutional pragmatists over how to scale it into the world at large. Which - grossly oversimplifying - can be summarised by the question: how decentralised should we - or can we - get?

And that’s pretty much where we’re at right now.

Enter CommerceBlock

Like with many other people working in the banking industry during the 2008 financial bust, Nicholas Gregory had a pretty rough surprise when his then-employers got bailed out of bankruptcy for tens (and later, hundreds) of billions of dollars of public money - only to emerge unscathed, unchanged, and with big, fat bonuses a couple of years later. That didn’t sit really well with Gregory:

Nicholas Gregory, CEO of CommerceBlock
On a Friday I was working for Merrill Lynch, on a Monday I was working for Bank of America, To have found out that your bank had been bailed out for 20 billion… it just really doesn’t make sense anymore.

Eventually, he started hearing about this magic internet money that was all the rage on the geekish parts of the web. Based in New York at that time, he started going to early bitcoin meet-ups, and even though he didn’t really believe in it at first, he got caught up by one of crypto’s foremost features: its community: “A lot of those people that were on these meet-ups were a lot like me. Had the same interests. Crypto has the same kind of crowd.”

As happens with the best of us, it was a slow burn for Gregory. It was only around 2012 that he actually started taking it seriously, and even longer to actually decide to go full throttle.

Because of the bottleneck created by the Bitlicense, a piece of legislation introduced by the state of New York that soon became a hurdle for both local users and companies that wanted to buy or sell bitcoin, a new market emerged in the city: the OTC (over-the-counter) market.

And it was by hanging out with other developers that he started knocking up ideas and building OTC software, looking into ways of making bitcoin more usable in finance. Finally, around 2015, he decided to focus full-time on it.

“I saw it as the future. I didn’t really want to be building Blockbusters when I could see Netflix.”

After contributing with a few projects in the space he decided to leverage his expertise in dealing with financial instruments to build CommerceBlock, as a way of bridging the gap between blockchains and real-world assets trading.

Real-world assets

Bitcoin has this strange magnetism that draws great minds from all walks of life, each for their own particular reason and with very little in common on the surface. (Curiously enough, there’s a disproportionate amount of black belt-martial artists amongst its ranks, as is the case of Nicholas Gregory, Roger "Bitcoin Jesus" Ver, and Eric Voskuil, just to name a few - but that’s besides the point here).

A while later, Gregory brought in Tom Trevethan as CTO. Unlike people Gregory hung with at NYC meet-ups, Trevethan came from a completely different background. A PhD in Theoretical Physics, he had worked inside Academia doing computational physics before being bitten by the bitcoin bug. Before joining CommerceBlock, he had been doing research at nChain, one of the most recognisable names in the blockchain space.

Tom Trevethan

Along with Trevethan’s expertise, Gregory and CommerceBlock set off building “open-source blockchain solutions for real-world assets & applications.” The company currently works closely with CoinShares, one of the biggest crypto investment companies in the world and responsible for XBT, the first bitcoin ETP product in Europe.

But how does CommerceBlock work, and how is it different from similar ideas?

CommerceBlock has not launched (nor does it intend to launch) its own blockchain. And unlike many of the start-ups that sprung up during the 2017 boom, they have funding from established clients that date back to Gregory’s OTC times. “One reason they invested in us is they wanted to get commodities on the blockchain”, he explains. And that’s exactly what he is aiming for.

The idea behind CommerceBlock is deceivingly simple. On the one hand, they build bespoke blockchain networks to clients that are hoping to take real-world assets into the blockchain - public, permissioned and customisable sidechains tailored to each client’s requirements.

That wouldn’t be new in and of itself. On the other hand, however, the real innovation is the integration of said sidechains with MainStay, a clever protocol that cryptographically pegs their clients’ chains to an established, robust, open network. Bitcoin is the obvious choice for the foreseeable future, but the system can be implemented over any blockchain, really.

By doing so, instead of the massive overhead and risk of building and managing their own chain, they are able to take advantage of bitcoin’s unmatched computational power and security. This system also avoids the pitfalls of both the “one chain to rule them all” approach (which is super hard to scale), and “blockchain intranets”, where each company creates their own closed system for fear of exposure to the public internet (we all know how that ended).

Even though they customise their networks according to clients’ needs, security and immutability are achieved by cryptographically committing the sidechain’s state periodically to the main chain. The networks are connected, but separate. This means that if any malicious actor ever plans on attacking or reversing transactions on a sidechain, they would have to back that by changing bitcoin’s history as well. Which by all measures is no mean feat.

Decentraland vs Authoritopolis?

But wait - permissioned chains? Doesn’t that go against the whole ethos of decentralising stuff?

As we mentioned earlier, we’re at a crossroads when it comes to what the next step should be for crypto. On the one side, purists reject each and every attempt at regulation. On the other, ultra-pragmatists believe KYC, AML and other acronyms should be pursued aggressively as the only way to get a crypto economy going. Keeping up with the zeitgeist of the 21st century, both sides seem pretty adamant that there can only be one right way.

One of the cool features behind CommerceBlock is that it offers the best of both worlds in a simple (and flexible) manner. It addresses not only the gap between real-world assets and the digital realm, but by taking into account our current financial and institutional reality, it also offers a bespoke stepping stone towards the crypto economy.

And thus, by not disregarding our existing reality nor trying to shove a full-fledged revolution down everyone’s throats, it may well succeed in accelerating adoption. In particular amongst big, established businesses, notoriously known for not hovering too far from the most conservative side of innovation.

How does it work?

Let’s illustrate how CommerceBlock works by using Gregory’s and Trevethan’s favourite example: platinum.

CommerceBlock Logo

Say a platinum producer wants to trade platinum over the blockchain - let’s call it Plathereum, just because. Commerceblock would then create a bespoke chain for the client. The client would have full control over Plathereum, customising its openness, requirements, transparency, privacy, and even security (by establishing the number of independent nodes that will be responsible for validating all transactions, thus sharing the transaction fees).

These rules can include KYC, AML and other requirements for trading to take place in even the more regulated environments. So in order to join the Plathereum, traders may be required to go through KYC. If Plathereum needs to report on the sales of their platinum tokens, they need only provide regulators with a special key. The regulator can join the network by running a node and by using that key, they can have access to the required information - all of which is included in the sidechain’s code. And as Gregory explains,

The sidechain is the contract. But who owns the sidechain? Well, it actually is owned by a legal entity, there’s a company behind it. If they want to change the rules of the contract in the sidechain, they update the sidechain. But it’s a public permissioned blockchain. Anyone can download the source code, see a change in the rules, recompile it. You can verify it. [...] If it’s public, then the code is the law.

The best of both worlds

Transactions in the sidechain still happen directly between peers and don’t require an intermediary - people can buy their platinum straight from other people (or from the company itself) and trade freely. The main difference between Plathereum and bitcoin is that, since there’s a real-world asset involved, there is also legal accountability. And much like when buying a product, you have recourse in case one of the parties misbehaves.

What if the chain owner gets greedy and decides to change transactions, or make rules on the spot? Well, simple. You just sue them, like you would with any other breach of contract. It’s not the only solution around for dealing with legal ownership of digital assets (Mattereum also takes an interesting approach), but it’s one that has been working for ages in real life, as Gregory explains:

The responsibility is with the owner of the sidechain. If the sidechain would allow you to send money to someone on the FBI list, either the owner of the sidechain is going to get in trouble, or the KYC vendor. But there’s traceability to say who’s at fault, and that’s what the world needs. You need to sue people - that’s how the world works.

And building a case is a lot easier than in closed systems, as Trevethan points out,

Going back to trust, a lot of it is about having evidence when it comes to dispute resolution. Imagine you have your platinum just stored on a database and basically the company just says to you “your entry isn’t there.” Then it’s between your word and his. If you’re in a sidechain, you have independent truth and you can take it to the authorities to demonstrate.

Since the state of the sidechain is periodically committed to the bitcoin network, the wannabe manipulator better be ready to dispense copious amounts of processing power, as they would have to change bitcoin’s history too. The same goes for attacks to the sidechain. So Plathereum users can be sure that the transaction history won’t be “accidentally lost” or tampered with.

Nicholas Gregory gives interview at a blockchain conference
Nicholas Gregory gives interview at a blockchain conference

Sure, the sidechain isn’t fully decentralised. But then again, does it have to? By incorporating the peer-to-peer structure and doing away with the swarm of intermediaries, a lot of the friction - and cost - is removed from the system. As Gregory points out, "if you look at the real world, there’s many people you could trust. If you go straight from the source to a sidechain, there’s only one person to trust. Blockchains are removing all those intermediate levels."

If you look at the real world, there’s many people you could trust. If you go straight from the source to a sidechain, there’s only one people to trust. Blockchains are removing all those intermediate levels.

Plus, by not disregarding existing rules and regulations, it allows for a more seamless integration with our current economic reality, which may be more attractive to crypto outsiders. When the first message was relayed via telegraph, people didn’t go crazy and burn all post offices - hell, letters are still a thing to this day - but change did happen in time. For commerce in the blockchain, this certainly seems like a step in the right direction.

The takeaway

There is a lot more under the hood, of course, like the entire incentivisation system complete with a token economy, and many more details. We really recommend you check out CommerceBlock’s website for a full view of their vision. Also, if that’s your cup of tea, have a read of the MainStay whitepaper - it’s a nice read and an ingenious mechanism for leveraging trust from established networks.

The gist of it is, CommerceBlock doesn’t try to sell a distant (and perhaps utopian) future. They are removing intermediaries and offering greater transparency, efficiency, and perhaps as important, flexibility. They are building new toys for playing the age-old game of commerce, all the while offering a smooth onramp into a crypto economy; not a vertical cliff, but a gentle slope. And that’s arguably the sweet spot for adoption to take place.

Many great ideas die out because they were ahead of their time. The fully decentralised future, if it even arrives, may take many years, or decades. Putting the cart before the horses is a surefire way to fail - Facebook would never have worked on the yellow pages. The process may be slower than we might have hoped for, but successful ideas need to work in the real world for real people - and that’s something that Gregory, Trevethan, and Co. are fully aware of.


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Posted on 2019-01-31

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