Design Principles

Trust and Confidence

When ownership is transferred, the acquirer wants absolute certainty that the seller is the rightful owner and that there are no other claimants to ownership. Owners also want to know that, once they are recorded as the owner, that record will not be lost or deleted and that any instruction they give to transfer ownership will be duly recognized. In summary, they wish to avoid the ‘Three Sins’

  • The Sin of Commission – forgery of a transaction

  • The Sin of Deletion – reversal of a transaction

  • The Sin of Omission – censorship of a transaction

The more trust and confidence that users have in such a system, the lower the cost of transacting as the users will not need to carry out extraneous checks and procedures to assure themselves of transfer finality.

Resilience

A system which records ownership of financial assets and allows their transfer will have high strategic importance to the economies in which it operates. Any failure – even temporary - of that system is likely to be costly to the participants and the economy as a whole.

Homogeneity

A plethora of different processes for recording and transacting ownership results in participants having to have multiple systems, interfaces and experts in order to complete transactions. Just as containerization reduced the cost of shipping by being agnostic to the type of good being transported, a single agnostic process for recording and changing ownership will yield the same benefits.

Cost

The cost to the direct participant will depend upon the costs borne by the operator of the system and any profit the operator adds on top. The costs borne by the whole market might also include mark-ups added by participants who act as ‘gatekeepers’ to the system or agents for people who do not have the ability to interact directly with the system.

Control and Access

How participants can make changes and how they get access to the register may have a bearing on the cost of maintaining the system. For example, a system which requires manual intervention to check details or identity will be more costly to operate than one where such checks are automated. The likelihood is the more complex the data stored, the more critical and more expensive the access controls will need to be.

In both traditional and blockchain systems, authority to change records can be deployed by using public/private key cryptography.

One of the least mentioned innovations of the blockchain systems is their sparsity of data. By not holding sensitive data such as identity information, access, security and control issues are virtually dispensed with. In considering the structure of the ideal ownership and transaction system, recording the fact of the transaction can be separated from the identity and access and control for each dealt with separately.

Privacy

Privacy is of vital importance to financial institutions. In particular, any information about market activities or investment must be kept confidential to the parties involved.

Immutability

Once a record is written to the system it is important that it cannot be expunged – as if it never existed. This is achieved in blockchain systems by deploying a system of hashing. A hash is a long number which is derived from a block of data or transactions in a way that is not able to be reverse engineered. By including the hash of one block as part of the data of the next, it is possible to establish a linked series of hashes that uniquely represent the underlying data. If that series of hashes is kept and made available independently of the underlying data, the data can always be checked against the hashes and any changes will be easily observable.

The smaller the unit of data that is hashed, the more granular the check can be.

Speed

Between the agreement of a bargain and the change in the register of ownership, each of the counterparties is at risk. Their risk is that the other side will not complete the exchange of asset or consideration. The damage suffered by the injured party in such circumstances would be that the price of the asset may have changed and another buyer or seller might only be found at a less advantageous price. This risk is reduced as the time between the bargain and the change in the register is made shorter.