By Lucas Jolías, Ana Castro y Jesús Cepeda
Blockchain and Web 3 have great transformative potential in our public institutions, but how can they achieve it?
Blockchain is a technology that allows us to exchange value or goods without the need for a trusted intermediary (Nakamoto 2008). One of the functions of institutions is to provide trust in transactions, processes, or exchanges (Antonopoulos 2014, Buterin 2013). For example, if I accept to board a plane piloted by a complete stranger, it is because I trust that various institutions (company, regulator, state, etc.) have evaluated and certified the technical and psychological conditions of that pilot. Institutions give me confidence that this person is qualified to pilot the plane, so I personally trust the system and board that flight.
In addition to institutions, there are trusted technologies that complement the work of professionals or organizations (Tapscott and Tapscott 2016). The simplest example is carbon paper: it allows making copies of the same document or information instantly, ensuring that, for example, all parties involved have the same copy of a contract. Blockchain, like carbon paper, is a trusted technology (Iansiti and Lakhani 2017): it is a distributed database where a record is kept of each transaction or exchange made with the same copy instantly available to all parties involved in the network. This is where the innovation lies, since once a record is validated and distributed to each of the members (nodes), manipulating, falsifying, deleting or creating any type of modification implies not only convincing the majority of the members of the change, but also reconstructing all subsequent blocks in the chain, which requires computing power of such magnitude that it could be considered impossible with today's computational capabilities, which is why it is considered "unhackable
What do we talk about when we talk about Blockchain?
It is necessary to mention that when we talk about blockchain we are talking about distributed digital records or DLT (Distributed Ledger Technology). These DLTs can be public or permissioned. Public ones are those that have more years of experimentation and are largely used for cryptocurrencies. The most well-known public blockchains are Bitcoin's and Ethereum's (Kasireddy 2017, Buterin 2013, Antonopoulos 2014, Nakamoto 2008). Being public means that anyone can be part of that blockchain, no permission is required to participate, and they are anonymous, so they do not require the identity of their users. Private records are less explored and are mainly used in private company processes. The main difference is that being private they have permission systems (only those "invited" can participate), require node identification, and do not necessarily need a mining mechanism to validate transactions as with public blockchains. Since they do not have a mining system, it is not necessary to have a cryptocurrency or token that rewards miners who certify transactions, nor is the computing power of public networks necessary. Likewise, the speed of transactions is much faster, since the ecosystem is smaller and the amount of transfers much lower. However, one of the main weaknesses of these DLTs is their ability to build trust among their members. While in the case of public blockchains (at least Bitcoin and Ethereum), their strength lies in the large number of participating nodes, the large community that supports these ecosystems, and their anonymity; permissioned blockchains lack these advantages.
Why can Blockchain have a positive impact on the State?
Because the State is based on bureaucracy, and bureaucracy is primarily a ledger. A ledger confirms facts: when there are doubts or no consensus, we go to the record. In the State, one sees records everywhere. What certifies my nationality, the ownership of my house, or my identity? A large database managed by the State. Property records assign who owns what and whether their land is subject to certain rules or liens. Birth, death, or marriage records certify the existence of individuals at key moments in their lives and use that information to confirm identities when those people interact with others. Citizenship is a large database that records who has rights and is subject to obligations arising from nationality (Jolías 2018). What does not exist in a ledger does not exist for the State. Hence, thinking about distributed ledgers or records is a novelty in government circles. Blockchain could make the way public records are managed more efficient, as well as improve the interoperability of the public administration (Jolías 2017, Atzori 2015). As we will see later, having an unalterable distributed ledger allows us to record information about credentials or official documents without the need for each agency to share their databases with each other.
As mentioned earlier, blockchain adds security to information since being a distributed database makes it almost impossible to alter or hack the information contained in the chain. Secondly, it is worth highlighting integrity since it guarantees that data has not been modified since its creation without the consent of those who participate in the process. Furthermore, and unlike digital signature, blockchain also allows certifying the existence of a document or file. The data contained in the blockchain comes with its own history, and history is a fundamental part of proving its integrity; this is a very powerful quality (Casey and Wong 2017). Digital provenance, that is, the proof that a digital event occurred, is the most valuable contribution of this technology. Another strength is that it simplifies the traceability of a process, making it easier to audit, which in turn provides transparency, so third parties can audit and control the State's actions thanks to distributed information.
First trend: certification
Currently, experiences in government are experimental. The vast majority tends to use blockchain as a digital notary, certifying documents, information or stages of a process (Jolías 2019). These types of applications are just the tip of the iceberg and are commonly where governments start experimenting. It consists of using the existing mining process in public networks (such as Bitcoin or Ethereum) to certify documents or information in general. By having a time-stamp, one can certify that certain information exists and has not been altered. For example, in the municipality of Bahía Blanca (Argentina), this process has been used to certify the delivery of municipal subsidies, and the national government of Argentina uses it to certify the Official Gazette. The Bitcoin network already offers its own digital notary service, allowing any agency or individual to certify information.
Second trend: digitization
A second trend is marked by the digitization of official documents under international standards. For example, we see the Singaporean government announcing that soon all official documents will be in the possession of its citizens and under a single digital wallet, which promises to act as an enhanced digital identity that makes life easier, allowing access (with blockchain-powered features) to more than 460 government agencies and over 1700 digital services at their fingertips. Adhering to standards means moving official documents towards the concept of verifiable credentials, whose main goal is to facilitate portability and exchange of official information easily verifiable by any third party, creating an open, trustworthy, and connected ecosystem that enables a new digital economy that drives efficiency in service delivery and with it, economic development.
Third trend: NFT
A third trend has to do with the tokenization of an asset (fungible or non-fungible - NFT), whether physical or digital. Let's take the example of a person's identification. In the pre-digital world, simply possessing a document or a passport certifies a person's identity. However, that paper (document) only serves if it is recorded in a ledger.
A person's identity is given by appearing in the national database, while the document or passport is a token: a physical representation of the information contained in the ledger. In a paper world, possessing the token indicates ownership of that right, whether in identity or private property matters. In the digital world, it is possible to unify possession and ownership of an asset. For example, digital passports allow immigration authorities to consult the national database and determine if a passenger can travel. Hence, many countries have begun to experiment with digital identity or property titles based on blockchain. The process of ownership and transfer of assets, whether physical property or financial instruments, usually involves multiple interactions and a long paper trail (Constantino Collindres 2016). Government agencies are beginning to streamline this process by digitizing information about asset ownership and storing it in blockchain registries. Countries such as Estonia, Georgia, Canada, Singapore, and Finland are experimenting with digital identity or property registration. By having distributed databases, all actors in the same process or "business" have the same information, breaking down the stagnant silos characteristic of public administrations and solving interoperability problems.
Fourth trend: DAOs
And finally, a fourth trend denotes the creation and recognition of Decentralized Autonomous Organizations (DAOs). An example of this is the state of Wyoming where a DAO is legally recognized as a legal person, specifically as an LLC (which in Mexico would perhaps be a SA de CV). Since LLCs can own land, this creates a powerful path for decentralized land ownership. Projects such as CityDAO in the state of Wyoming are exploring decentralized ownership of assets, starting with land in Wyoming where each parcel of land is an NFT (non-fungible token, or unique token) that can be collectively owned by the DAO or individually owned. The digitization of physical assets democratizes access, increases transparency, eliminates gatekeepers, and reduces the complexity and costs of transfer and verification of ownership or fraud. In other words, putting land on the blockchain has several benefits: transfers are instant (reduced legal complexity), access to property is democratized through crowdfunding as currently, land is only available to large investors who can afford a full parcel, and a database is created that stores land ownership in open and transparent digital records.
This opens up a possibility for new mechanisms of public budgeting that go from taxes towards democratized investment in public services that not only improve services but also provide returns to citizen investors.
The increasingly widespread adoption of cryptocurrencies and blockchain signifies the advent of a new era of the internet. The first generation of the internet (Web 1), from the 1980s to around 2000, was characterized as a reading internet for the individual and the birth of large companies like Yahoo, LinkedIn, Google, Apple, Facebook, and Amazon. The consolidation of these large companies gave rise to the second era of the internet (Web 2, from 2000 to the present day), which allowed millions of people to easily access (read and write) services and applications on the internet at low cost, but brought with it challenges of fake news, manipulation, invasion of privacy, and ethical use of information and algorithms, which called for decentralization. Today, the maturity and capabilities of blockchain technology and the call for decentralization give rise to Web 3, which is characterized by a unique user (digital identity and set of credentials), tokens (cryptocurrencies and NFTs), and new governance models (DAOs and smart contracts), all driving the evolution of all industries, including the public sector.
Lucas jolías, Director of OS City for Latin America
Ana Castro, Growth leader at OS City
Jesús Cepeda, CEO at OS City