2:4 Distributed Intellectual Property Framework
As we begin to wrap up the book, we need to ground concepts from previous chapters into a unified framework that references what we’ve learned so far. This framework can be used as a high level overview for how businesses can leverage the unique properties of DLT to augment their existing business lines, or create blue oceans of new market opportunities.
Consider this chapter a complement to our discussion in Chapter 2.2 Public Ledgers Matter, where we introduce the concept of the public/private distributed ledger stack, combined with the previous Howey Test chapter, where we discussed how such a technical framework might interact with existing legal frameworks. The first step in any IT project is to scope which of the available technologies are best suited for the specific needs of the project.
Step 1: Choose the Right Ledger
Distributed ledger projects who post open source code are effectively saying, “if you think you can do better... go ahead”. This is how dozens of derivative versions of Bitcoin get created. Even if you have no coding experience at all you can still fork Bitcoin using and automated fork generator.
From our discussions in Part I, we know forking your own protocol level ledger like Bitcoin makes exceedingly little sense unless:
you can somehow convince miners to support your version of Bitcoin at scale.
Change the consensus race to something other than SHA-256 and you are also out of luck as a lack of mining equipment exists to secure your network.
With too low of a network difficulty because no one is using your base chain, anyone can 51% attack your chain for a few thousand dollars worth of electricity.
For the vast majority of businesses wanting to leverage distributed ledger technology, it makes no business sense to build your own base ledger. The technical challenges mentioned above are likely far out of whatever the core competency of the business trying to implement a DLT solution is. If you are a trucking and logistics company, hiring developers to build your own elliptic curve cryptography is counterproductive and potentially dangerous as poor lower level programming can lead to devastating security breaches.
As we learned from our fingerprint internet discussion, proof-of-work systems like Bitcoin are useful to secure hashes of important data in a provably secure place, or eventually as a base settlement layer, but not as a primary development layer. For actual development, there is no reason to build on top of a fundamentally not-scalable base ledger. So what kind of NOT proof-of-work base ledger is an enterprising business person to use?
One that offers an:
inexpensive / secure / open base layer
a smart / private / permissioned layer
This structure is crucial for distributed ledger based businesses to succeed. Many protocol projects in the space understand the need for both solutions to work in harmony, while some only focus on building an open ledger, or only on building proprietary tool sets to create permissioned ledgers.
In no particular order, some projects that contain both robust public and private structures include:
NEO + Ontology
Stellar + Interstellar
NEM + MIJIN
Waves + Vostock
Nexus + NexusHybrid/NexusPrivate
as well as projects using completely different development paradigms like Holochain where each instance is an open source private network that does not require consensus to post data to the network. Regardless of the consensus rules for the network, every robust infrastructure level project should offer two variations of the same underlying open source tools.
The base open ledger designed for fingerprint internet type data that dApps want to store in a secure global registry.
The private permissioned layer that interacts with the public layer in either an open, closed, or hybrid source manner.
By keeping the majority of transactions on a private ledger with occasional writes to the base public ledger, dApps can both scale while maintaining data integrity and immutability. This structure also allows businesses to protect their intellectual property from being wantonly copy pasted, as the public is not able to see any data on their network without the correct permissions.
By using public base ledgers to secure a private business ledger, each business using the protocol natively supports open source development by paying network fees for every transaction posted to the public network. In turn, when new open source tools are launched on the open ledger, closed source IP ledgers gain access better/faster/stronger protocols and toolsets.
Many people may ask why the base open ledger is needed at all? Two reasons:
As controversial as this statement may sound, purely private implementations of “distributed” ledgers are NOT distributed ledgers. What stops an inter-bank consortium from cooking the books behind closed doors and faking a few dozen databases instead of a single database? Only with public hashes will the light of transparency shine into dark corners like centralized finance.
Think of every piece of useful internet infrastructure today from Golang to Apache. They are ALL open source (even if constructed by closed source IP monopolies like Google). Why? Because more unrestricted eyeballs fixing and improving code will always beat proprietary tool sets locked in an ivory tower.
With this structure in mind, we next need to layer on powerful reasons why companies would be willing to switch to dApp development over centralized App development.
Step 2: Align Incentives
If you want other people to join your “movement”, you need to give them a good reason. The ability to programmatically set reward structures that are run autonomously and immutably by shared infrastructure lies at the heart of the DLT value proposition. At the most basic level, business tactics (regardless of the IT stack) involve a carrot (positive reinforcement), stick (negative reinforcement), or some combination of the two. For the purposes of this chapter we will narrow our “movements” to for-profit equity like schemes, though non-profits and other structures can be viewed creatively in this same light.
FAANG platforms are great at dangling carrots in front of you. “Free content” mixed with potent dopamine rushes for conforming to group norms is a proven strategy for success. Of course, carrots don’t last forever. To maintain dominance you need a good stick to keep your chattel on the platform. Users most likely will not leave when they cannot take any of their data with them, or if they do it is out of context and useless.
Even if you pay real money for an eBook on a centralized platform like Amazon Kindle, try moving it to another platform. You can’t.. you are locked in to only access through a single intermediary for all time. The game is rigged to benefit the incumbent platform.
While open source base ledgers are default competitive as their shared commons IP minimizes anti-competitive moats from forming, there are still carrot and stick strategies DLT projects can use to create similar incentives. If a business develops some truly novel new intellectual property like a cancer curing drug, or a better industrial adhesive, what stops that IP from being leaked? More importantly, how can the IP be used in a way where all parties benefit from the original inventors through to society as a whole?
Before the digital age, data leaks where much easier to thwart as an adversary might need to physically infiltrate the R&D lab to take pictures with a micro spy camera. Today, the instant the 1s and 0s that describe the IP are released onto the open internet the game is over. Thus what do are corporates obsessively invest in? IT security!
The current centralized data silo paradigm is about locking digital files away where accessing and sharing information becomes prohibitively difficult. If sharing = theft, there is no incentive structure to share. But what if data could be shared securely without the ability to be wantonly copy pasted?
Remember the major take away from the beginning of this book: READ and WRITE but not MODIFY and DELETE. A structure where many ledgers track the movement of data rather than just one intermediary allows for any piece of digital content to become provably unique and verifiable.
Unique in that a hash of the content perfectly express the combination of 1s and 0s that make up the content be bit a DNA sequence or an industrial glue recipe.
Verifiable in that the hash is stored in a globally redundant backup system that cannot be modified or deleted.
If a file from a centralized data silo is leaked there is no provenance on the data making enforcement next to impossible. Now imagine the same file “leaked” on a DLT platform. Instead of the 1s and 0s being replicated off network, they can only be accessed via the distributed ledger. When a bad actor with a stolen key attempts to access the file, the transaction can be flagged and tracked. Not only can we find out the unique ID that accessed the account, but also their entire transaction history.
Locked Down Freedom in Action
What if there was a better way to handle data than our current “lock everything down until the centralized cookie jar is smashed and everything gets stolen” data structures? Solving the smash-the-cookie-jar problem IS the killer use case application for the fingerprint internet. Secure public base ledgers with encrypted dApp layers on top to keep Intellectual Property secure. This solves the carrot incentives (use open source base ledgers and get rewarded with tokens) with stick incentives (data inside of ledgers can be as locked down or open as businesses deploying their own private dApps want)
By decentralizing access to data we can create many layers of interconnecting key layers each protected with their own encryption, yet also accessible by anyone willing to pay for key access. While this does not sound much different from the current App Store paradigm where you pay Netflix $13 USD per month for key access to a library of video content, in the next paradigm there is no singular gatekeeper at the center of the system with ALL of the keys. Instead, a network of interconnecting data owners from small independents to large conglomerates can set their own prices and exchange value with each-other without a centralized intermediary taking the standard 30%+ vig.
To explore this notion with a use case, let go to the not so distant future where DNA printers are in every local hospital and biotech lab. Imagine such a machine exists that will turn digital 1s and 0s into real world sequences of DNA. In this world, you can send a .DNA file to such a machine from anywhere in the world. The lab then prints your sequence for you, and mails the samples back in 48 hours or less.
There are two equally scary futures that can happen.
A magic gene therapy cancer drug could be given basically for free to anyone on earth. This sounds great! However, without incentives to invest massive CAPEX into finding the cure, there won’t be any research in the first place as labs need money to pay researchers, and a profit motive to incentivize the large scale coordination required and minute chance of actually finding the cure instead of going bust. We will sidestep the 20 year IP window to genericizing drugs conversation as there is a nothing to stop a 1, 20 or 100 year timelock from being added to data. Computers will do whatever they are programmed to do, the IP laws we as a society adopt determine the rules.
Any nefarious actor with an internet connection can print the Ebola virus.
Both possible future scenarios demand a new generation of digital rights management to securely track what’s being printed globally in real time. This book of course dramatizes by using the most stark example possible (Ebola), though this same line of thinking works for any unique content like:
books (unique string of words)
news (unique strings of words cross referenced)
movies (8K pixels at 48 frames per second for 90 minutes)
and even app stores (packaged software code) which we will expand to later.
To have a shot at keeping this experiment called civilization going, we need to get our act together when it comes to managing the digital world. If we have an immutable place to store anything in a way that cannot be deleted by any centralized actor, what prevents someone from uploading ebola.DNA to the bitcoin blockchain?
Then what prevents ebola.DNA from turning from a digital file to a real world epidemic?
A permissioned ledger sitting on top of a permissionless ledger of course!
DNA Printer DLT Business Model
Our DNA printing company enters the office of a top shelf consulting firm that claims to specialize in Distributed Ledger Technology. Fortunately, the consultants have read this book and did not even think to pitch a glorified SQL database parading as an actual distributed ledger. Instead, they choose to use off the shelf public infrastructure to design a permissioned ledger for the printing business. Some basic specifications include:
The ledger needs to create a unique hash for each file uploaded to the system for printing. By being unique, the file cannot be copied as the copy would not match the original and would be rejected by the network during the print sequence.
The hashes need to be compared with a global database of known banned sequences. Governance consensus systems then vote on, update, and modify parameters for what sequences are approved on the platform.
Hardware integrity systems to check that the unique serial number of each DNA printing machine matches the authorized list of 1st party manufactured devices. To prevent reverse engineering hardware attacks, each part of the manufacturing process is tracked to ensure the process remains sufficiently protected at every step.
As a top tier consulting firm, the actual design of the system goes into far more detail than the above cursory bullet points, though they illustrate the lines of thinking needed to build businesses of the future on top of DLT infrastructure.
New Economic Frontiers
As impactful as permissioned IP protection applications are in the information security realm, they can have even larger implications given the new economic models they unlock. Imagine you have come up with a plan to create an even better DNA printer based on new research coming out of an obscure lab somewhere in the world. Right now there is no transparent way to reward all of the people responsible for bringing such an innovation to market, as each jurisdiction has different rules on intellectual property (or a wanton disregard for them in an effort to jump-start their newly industrializing economies).
The actual inventors of the technology should of course be rewarded, but also the lab where they were given resources to perform the research, then further down the line to investors willing to take massive risks that the technology can actually be commercialized.
Enter a permissioned token framework sitting on top of public infrastructure. In such a future, a simple GUI is all it takes to launch 1,000,000 PRINT tokens at a par value of 1 dollar with a smart contract writer to stipulates in plain language the governance rules for inflating the supply, vesting option pools, etc. Because the startup is tokenized from the outset, they can include logic that only allows sequences to be printed with their machine if a network fee is paid.
1 Magic Liver Cancer Cure (MLCC) Token = 1400 PRINT Tokens
Send 1.5 MLCC + Patient DNA profile 34629dd2dsFDa to:
Print Machine 24tvr54623ddeA located in Lansing, Michigan
Network Fee: 1 Print to account “Treasury”
Lab Print Fee: .5 Print to account LansingLab “24tvr54623ddeA”
Basic Research Lab Network Ownership 3.7%
Basic Research Lab Revenue: .037 Print
As shown in the example above, this is just one of an endless number of ways to reward all participants that support the network. Other ideas include:
A marketplace for DNA sequences with maker/taker fees going to the network. Instead of only Magic Liver Cancer Cure, imagine thousands of sequences all purchasable and downloadable at the click of a button.
A marketplace for users to sell their DNA and receive micropayments when their data is used in big data analysis.
Funding vehicles for new DNA sequences to pay for research, development, and testing with purchasers receiving built in royalties for each future sequence sold. Price discovery can take place at every step of the process with a real time market value changing based on project fundamentals.
With the assumption in place that the hardware is secure and upgradable just like the DLT software component, we now have an economic model tied to the real world that rewards all participants depending on the distribution of the tokens.
If setup properly, the basic research institution, early investors, and founders will all receive royalty income on each sequence of DNA processed by the machine. Rather than relying on fallible centralized institutions like IP courts to protect them, encryption makes it possible enforce IP via a native decentralized solution. If the company is successful and wants to raise more funding, they can dilute themselves by opening up new tokens for sale with the underlying IP as direct collateral.
Are these new funding mechanisms securities? Absolutely. Is the underlying protocol that allows these new innovations to occur a security? We hope the “sufficiently decentralized” guidance of William Hinman shows there are distinct levels within the distributed ledger stack, each with equity and non-equity like properties that must be analyzed using careful consideration to balance consumer protections with the relentless pace of innovation.
Our ultimate goal is to create what some in the space call “Decentralized Autonomous Organizations” or DAOs which is just a lofty way of saying “transparent credit and debit machine”
There is nothing inherently different from the way a current centralized C Corporation works from how a future dCorp might work. Both systems would have a board of directors, voting, internal hurdle rates, HR policy, etc. The only difference is all DAO accounting is computed in real time allowing for better data tracking and integrity as all parties can trust the accounting is being properly recorded in an immutable format. It seems science fiction to accountants used to closing the books at most once a month, but such as a realtime settlement future is possible with DLT. While real time settlement is theoretically possible using a massive centralized database, it is next to impossible to get disparate competing players running a patchwork of legacy systems to agree on anything, let alone a single standard to share sensitive data.
For our DNA printing DAO to work, no one else in the value stream needs to run on distributed infrastructure to get the project to minimum viable product. Eventually as suppliers come on line, the company can provide key access and documentation for how vendors can interact with their data. While easier said than done, the toolsets are coming to make API access to distributed ledgers as easy as SQL databases running on a centralized cloud providers.
In the next chapter, we will explore the larger continuum individual ledger projects reside within by explaining the relationship between IOT, AI, and DLT.