What Is This All About? briefly touched upon the nature of Trust and Authority. We described how Bitcoin creates a trustworthy digital bank, and how Ethereum is creating a global trustworthy computer that can perform general computations. Yet, we closed the chapter by acknowledging that there are limitations to this model. In this chapter, we will learn what those limitations are.
State and Mutation
Most authorities can be abstracted as two functions: They hold value-bearing and contentious state (information), and they perform mutations upon that state.
flowchart Auth[Authority] --> State Auth --> Mutation
In the example of owning digital money, the state of the authority is the ledger of all accounts and balances, and the mutations are transfers between two accounts.
Digital and Real World
Another property of authorities is whether the state that they hold, and the mutations that are done upon it, are in the real world, or the digital world.
flowchart Auth[Authority] --> RW[Real World] Auth --> Digital[Digital World]
Banking, excluding cash, and many similar financial services, are examples of authorities that are purely digital. The state is a ledger holding everyone’s balance, which is merely a set of numbers in a computer. Updating one’s balance is as simple as updating one of these numbers.
Conversely, the land registry is a real world form of authority. Such an authority needs to be able to know if a land exists, who owns it, and crucially, enforce the ownership of it through some law enforcement mean, if need be.
Proposition - Oracle Problem in Authorities
For an authority to successfully establish trust in any matter, it needs to be able to readily read the state related to that matter, and readily (enforce or) write mutations to it, regardless of being in the digital or real world.
Link to original
Oracle Problem
The often overlooked reality is: Blockchains are obviously digital systems. For a digital system, introspection of the real world is (nearly) impossible to do independently. This difficulty, specifically when it comes to reading information from the real world, is referred to as the Oracle Problem.
flowchart DS[Digital System] --"write ❌"--> RW[Real World] --"read ❌"--> DS
As an example, a digital system, such as a Blockchain, has no practical way to independently understand if a piece of land exists, and to whom it belongs. Moreover, a digital system cannot meaningfully enforce that “Alice should from now on own this land that formerly belonged to Bob”.
Real World Asset Fallacy
A very common fallacy in the blockchain space is applications that create a blockchain, selling its Resilience, but they have a clear bottleneck in which a centralized authority need to sit in between the blockchain and the outside world, and solve the Oracle Problem. I believe a lot of companies aiming to bring real-world-assets (RWA) into blockchains are fundamentally mislead by overlooking this fact.
This is why real world authorities are backed by some form of law enforcement unit, such as the police and military, as noted in What Is This All About?. No blockchain based system yet has a real world law enforcement body behind it1.
Contrary, blockchains can effortlessly harvest their full Resilience on use-cases whose state is purely digital. This property demonstrates why Decentralized Finance (DeFi for short) is such a successful use-case for blockchains. Assuming a free and open internet2, DeFi requires no further foundation to operate upon.
Weakest Link
This is NOT to say that no blockchain based system should attempt to tackle any real-world use-case. But, we should acknowledge that there is a high chance to create a system with a single-point-of-failure here.
Very often, such systems combine a blockchain and its science-based trust with a human-based authority that conveys the existence of real-world information to and from the blockchain, and this human-based authority is exactly the single point of failure3. This design might suffer from the weakest link issue:
Proposition - Weakest Link
The strength of any chain is only as strong as its weakest link.
While a useful term in the industries that work with an actual chain, the analogy can be expanded to composite (digital) systems with interdependent constituents as well.
In our case, the overall Resilience of a composite Authority is only as good as its weakest component.
Originally appearing in “Essays on the Intellectual Powers of Man”.
Link to original
Summary
Any Authority’s role is to establish Trust. Blockchains are systems that yield Resilience science-based trust, instead of the old-school human-based trust.
An authority typically needs to hold some contentious state and perform mutations on top of it. This state is either in the real world or the digital world.
Digital state is a great fit for blockchains, since it can be easily mutated. Real world matters are more difficult, due to the Oracle Problem.
While we can strive to solve the Oracle Problem in a Resilience manner, turning a blind eye to it will likely create more damage than harm, as it is a single point of failure for a system.
Footnotes
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The Network State book proposes steps through which digital authorities can evolve into gaining legitimacy in the real world, which is very much related to the enforcement issue mentioned above. ↩
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How accurate is this assumption of the internet being “free”? See here. ↩
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In some sense, I am debunking the entire class of “Let’s tokenize this Rolex and put it on a blockchain” ideas, or at least claiming that they are a big compromise in Resilience. There is no meaningful way for a blockchain to know about the existence of a Rolex, other than introducing another form of human-based authority/oracle that needs to be trusted. ↩