Blockchains allow us to exercise ownership of real-world assets in a form that has not been common for a millennium. This form of ownership is called allodial title, and it works where traditional legal title does not.
Over the last decade, the dominant blockchain narrative has moved from digital cash to digital gold to code as contract law. Bitcoin has proven its mettle as an (extremely volatile) global store of value. Various companies have begun anchoring real-world assets like company stocks to the Ethereum blockchain using a combination of blockchain smart contracts and traditional legal contracts.
INTRINSIC VS. EXTRINSIC ASSETS
In the blockchain economy, there are two types of assets: (1) intrinsic assets which maintain value because of the protocol and (2) extrinsic assets which have value absent the protocol.
First, public blockchain protocols such as Bitcoin and Grin define an intrinsic asset (a coin or token) that may be transferred between users of a blockchain network. The tokens are digital bearer instruments analogous to cash or gold coins, but possession is determined by knowledge of a secret cryptographic key rather than physical access. The properties of these tokens, such as BTC for the Bitcoin network, are entirely determined by the rules of the blockchain protocol and the history of the network. Once one decides to participate in the Bitcoin network by running a full node, one need not trust any third parties. A blockchain coin has value (today 1 BTC = 3600 USD) because participants in the blockchain network believe it to be a good game of money, recognizing that other participants are likely to value these properties as well.
Second, tokens referring to extrinsic assets can be placed on a blockchain, commonly Ethereum. Like intrinsic assets, the token itself is controlled by the blockchain protocol. But unlike intrinsic assets, the extrinsic asset the token represents is not. A blockchain token may represent a digital asset like a Fortnite skin, a physical asset like a Walmart avocado, or a financial asset like a Tesla share. The ownership of these real-world assets cannot be directly verified or controlled by any blockchain, so these references to extrinsic assets require trust in the controller of the asset which in most cases is one or more third parties. Consider a blockchain token that represents ownership of a gold bar. If the actual gold bar is stolen, the blockchain token’s reference has lost its referent, even though nothing intrinsic to the blockchain has changed. Extrinsic assets can only be anchored to a blockchain token by trusting something outside the blockchain to refer back to the blockchain token to adjudicate claims to the extrinsic asset.
Extrinsic assets can be anchored to a blockchain through legal mechanisms, like articles of incorporation and investment agreements that specify that a particular blockchain token represents a share of the company analogous to a paper stock certificate. For example, the 22X fund offered investors ownership in a group of startups as ERC20 tokens on Ethereum. Regardless of whether a company share is represented on Ethereum or in a Carta capitalization table, its value depends on the actions of the company, the company’s willingness to fulfill its obligations to investors, and a court’s ability to uphold investors’ rights. Thus, trust must be extended to such third parties. While this approach to anchoring assets to a blockchain may be effective for large holdings of company shares, it may not be suitable where legal expenses would outweigh an asset’s value. Many are skeptical that this is the future of on-chain real-world assets.
Thankfully, legal anchors are not the only option. One can enforce property rights by extrajudicial means.
ALLODIUM & ALLODIAL TITLE
In Commentaries on the Law of England, Sir William Blackstone contrasts two forms of title to assets that were first articulated in the Medieval period:
The true meaning of the word fee (feodum) is the same with that of feud or fief, and in its original sense it is taken in contradistinction to allodium; which latter the writers on this subject define to be every man’s own land, which he possesseth merely in his own right, without owing any rent or service to any superior.
By this standard, a property title in Montana is feodum because it is qualified, i.e. secured and taxed by the Montana and United States governments. In contrast, BTC is allodium because possession is defined by knowledge of a private key alone: there is no superior party that can extract rent or seize the asset. Several clarifications on allodial title are important.
First, allodial title is not a measure of protection. An enemy army may storm a poorly defended allodial castle, or an attacker with a $5 wrench may torture someone for his Bitcoin key. The distinction between feodum and allodium rests simply on whether one possesses a thing by defending it with one’s own force or by trusting another who defends it with his or her force.
Second, allodial title is not a legal title in the same sense as a property title or vehicle title. It is a more fundamental form of ownership. A typical title to Montana real estate is a declaration that one acknowledges the jurisdictions of Montana and the United States and that within this game, the rules, referees, and pieces have aligned such that one holds the property. An allodial title to the same property is a declaration is that one is playing a different game, and that the jurisdictions of Montana and the United States are irrelevant. Of course, those who make claims like these may quickly lose their allodium as more powerful parties reassert jurisdiction. Several states including Nevada actually toyed with a form of allodial title. But these titles were allodial in name only, as they included limitations and were administered by the states rather than the property owners who held this title. Those who assert allodial title do not need to reference supporting legal codes. They have armaments and fortifications.
Finally, Blackstone refers to allodial title only in the context of real property rather than personal property. Applying the concept of allodium to personal property may be a legally tenuous step. But, in the spirit of allodial title, we will proceed anyway.
In the fragmented Medieval landscape, allodial claims were common (perhaps in the simple “your property or your life” form), and today the clearest example of an allodial title is the defended territory of a sovereign state. But until very recently, there were no other good examples of allodial title because defense against adversaries such as sovereign states is a monumental task. But allodial title is making a comeback from an unexpected direction.
ALLODIUM IN PRACTICE
The iPhone is allodium.
Without the correct key in the form of a passphrase, face, or fingerprint, an iPhone can protect its contents from almost every adversary, including petty thieves and hostile states. The photos, messages, and contacts inside an iPhone are part of another realm where cryptography is the law of the land. Unlike other attempts to assert allodial title over the past millennium, these defenses may hold.
What makes this possible? Apple has taken a strong pro-privacy stand and engineered their devices carefully. But the iPhone is part of a broader trend.
Modern allodium looks like sophisticated, affordable, and practically impenetrable electronic agents whose loyalty is determined by possession of a cryptographic key.
This form of allodial title has only become practical recently due to the digitization of controls, commodification of strong cryptography, and pervasive internet connectivity. To attackers, stolen allodium is only a blank and lifeless form, with the real value protected by unknowable and unbreakable enchantments. Perhaps the allodium can be destroyed, but it cannot be used.
The Bird scooter is another example of allodial title in practice.
Forget the unicorn valuations and frustrated cities. The most interesting thing about these scooters is how they are defended. The scooters can be trivially stolen, and they have no title document or VIN. Prosecuting thieves and recovering stolen scooters would be laughably uneconomical (the manufacturing cost is perhaps $250). Bird cannot assert legal title to these scooters practically or economically.
Instead, the real defense is that the wheels lock and it’s hard to unlock them until one pays. The scooters’ allegiance is to Bird, but the scooters fend off would-be assailants themselves, without resorting to Bird, the courts, or any other superior power: that is the essence of allodium.
Of course, these defenses are penetrable. Within a few days of their release in San Francisco, enterprising attackers were gutting scooters in search of parts or free rides, and online sellers now offer conversion kits that replace the scooters’ original circuitry with more compliant alternatives. Effective exploits probably exist for all allodium, including iPhones. But the field of battle is always changing, and the real question is whether modern allodium is sufficiently strong for the task at hand.
Our most important communication devices are already allodium. The electronic systems that make allodium possible will likely get less expensive and more secure. Allodial title will be used for larger and more important items, perhaps only as a first line of defense in the beginning, with a fallback to legal mechanisms when necessary. Imagine a house where every single functional element is allodium, variously loyal to the tenant, landlord, and utility companies. This future is already here, if unevenly distributed.
Put a Blockchain on It
What happens when the rights to allodium are placed on a public blockchain?
Modern allodium can be the trusted agent outside a blockchain that automatically refers back to a blockchain token to adjudicate claims to the allodial asset itself. If access rights to an allodial device are determined by ownership of a specific blockchain token, then market participants can buy or sell the token with confidence that it represents a real-world asset. The allodium will change loyalties as the ownership of the blockchain token changes.
Some trust is necessary: one must assume that a particular allodium has not been hacked or compromised by another party, and is truthfully representing its capabilities and loyalties. The on-chain history of the allodium may provide evidence that these assumptions are sound. If one extends this limited trust to the allodium itself, a blockchain ecosystem enables one to transact in ownership rights to the allodium with other wholly untrusted parties using standardized mechanisms: smart contracts, exchanges, wallets, block explorers, etc.
This will increase the liquidity and automation of allodium transactions. Imagine Bird scooters without Bird, autonomous delivery robots, or communications satellites whose resources may be anonymously purchased via the blockchain. It is impossible to be certain where this liquidity and automation will be most valued, but given the colorful history of cryptocurrencies to date, we can be confident that many unexpected applications will be found and tried.
Thanks to Lawson Baker, Anthony Sanderson, and TJ Kastning for reviewing this post.
I discovered that Nick Szabo, as usual, thought of many of these considerations many years ago, in this case all the way back in 1997. He has a great article called Formalizing and Securing Relationships on Public Networks that includes an example of a vending machine as embodied smart contract (and, as it turns out, allodial title).