Governed Colored Coins


Recently there has been criticism against using the bitcoin blockchain for tracking assets or other properties. The idea is that by designating a special "coin," (hence the name colored coin) carrying a small amount, and whenever that coin exchange hands, so does the property that goes with it. For example, the coin could represent a piece of land which then can be traded on the open market without involvement of a specific arbitrator. Thus, the infrastructure would provide a cheap, fast and reliable way to trade these assets.

But but but Terrorists!

But there's a problem.

The purpose of blockchain technology is the ability to uphold truth so strong that no single party can rewrite that truth. Blockchain does not make a distinction on how trustworthy that party is; whether he/she's a drug addict or an institution governed by law and courts for centuries.

Some uninformed people still proclaim you can make a "governed" blockchain without realizing that this is contradiction in terms. If you want a single party to be able to rewrite the truth, then there's no point in having a blockchain in the first place.

So what shall we do? For example, what happens if a colored coin is lost? Should no one be able to own that piece of land the coin represents? Or if an un-cooperative convicted terrorist owns that land, and he/she refuses to hand over the coin that represents it?

These are indeed troubling questions which the blockchain technology simply cannot resolve.


But there's a way.

Suppose the government has a registry of items; it's a publicly accessible database on the web where the government publish the current owners of each property it wishes to control. For example,

When these assets are bought/sold on an open market, you will follow the chain of transactions until you get the most recent unspent transaction output (UTXO) which also defines the most recent owner. This registry can also be updated, let’s say at the first day of each month, to reflect the most recent information from the blockchain (to protect the registry from the fact the blockchain can be pruned from spent outputs.)

Thus, in case of a settled dispute, perhaps followed by a processed court order, the government could rewrite the truth on the public registry, thereby forcing a specific asset to change owners.

But why?

The rightful objection is, why then use a blockchain in the first place? If governments can overwrite owners of property, then a central database will just do fine. Blockchain is just an overly complicated piece of technology that obscures this whole process. At least this was initially my objection. But there's a different way you can think of this.

The first observation is that the number of changes a government may infer on the registry will be extremely low, and always followed by court orders (which by themselves are long and tedious processes.) The government would have to convey these changes in a very transparent manner so everyone that are involved can see that the number of changes in the registry correspond to the court order decisions. As with the blockchain, any citizen can also monitor and check that the registry is being honored.

The cool observation is that the registry, albeit a centrally controlled database, is a high frequency read and a very low frequency write database. Its public access makes it possible for every citizen to check that the government is not cheating. Any citizen can check that changes to the truth (the registry) are actually matched by corresponding court decisions.

The Clean Separation

So what's the purpose of the blockchain? The blockchain is providing an infrastructure for people to own digital property. This makes a perfect clean interface between the obligations of the government and enabling high frequency trading of these assets without government intervention. (Remember that transactions can still be made on high frequency platforms such as custodial exchange platforms and/or lightning networks.) This clean separation makes it possible for private companies and/or infrastructures being developed in competition to make it easier to trade these assets. The government doesn't have to provide this infrastructure (which could definitely be expensive.)

To summarize,

  • The government's role is reduced to only resolve disputes and reflect that in the public registry.
  • You'll get full privacy (nobody knows who owns what; occasionally the government may now who owns what at a specific instance, i.e. when a court order is processed and the truth is rewritten)
  • Full check and balances on the government; they cannot "cheat" (any change to the public registry can be double checked by the citizens)

Thus, having the bitcoin blockchain coexist with centrally governed databases is not such a bad idea after all.