Forget Bitcoin, Ethereum is the future of car ownership.

The most topical use of block chain is the digital asset Bitcoin and is made infamous by its run-away valuation which is now approaching a previously inconceivable capitalisation over US$1 Trillion. But how does blockchain work and why has it added value to Bitcoin and more recently Ethereum (and many more).

Essentially, a Blockchain is an electronic ledger that records participants and timestamps whenever a transaction takes place between two parties, the transactions (or blocks) are then linked in a chain which can then be refenced to discover the history or to verify the owner of the asset.

What makes the blockchain special and valuable, is that transactions are verified by a network of 3rd parties (not by a centralised authority) by using computing power and cryptology to securely record and ensure that every transaction is correct. 3rd parties then cross-reference their record to ensure that each new ‘block’ is accurate and as long 51% of 3rd party participants agree then the ledger is confirmed and added to the blockchain.  

Miners or validators are incentivised to use their computing power for this validating task (Proof-of-work) because they are rewarded with new coins in the chain, therefor closing the link and perpetuating the sustainability of the system. Therefore, validating comes at a cost.  

A huge negative of using blockchain to verify transactions is the ever increasing computation power being funnelled into hashing (or mining). As the price of crypto-currencies increase, so does the incentive to throw more computing power to verifying transactions.

A more recent innovation is to use the validating power of the blockchain to also issue smart contracts, these smart contracts can record the authenticity and transactions of anything digital but also assets in the physical world. A car, for example could be recorded on a blockchain network so it’s true owner could be verified, essentially replacing the vehicle registration and contract system we have today.

However, with a car you don’t just want to record that a transaction has taken place, you would also want to validate the type of car, Make, model, the VIN, colour, odometer, maybe even the condition. With this added complexity the cost of validating and verifying would also increase.

Today, most cars are transacted every 5 years or so. Therefor the efficiency gains from a decentralised ledger does not add much value to the vehicle transaction and besides, the cost of registration is mostly government taxes rather than raw transaction costs. However, trust could be improved between transacting parties (especially in private vehicle sales) when an autonomous blockchain ID is linked to a drivers licence, mobile phone or other physical identifiers.  

The use of blockchain could also facilitate car sharing where the legal owner of a vehicle could then easily sell fractional ownership of the vehicle or use a ledger to record sharing of their vehicle asset with minimal fuss or expense. This could appeal to those users who would prefer to not deal with a centralised platform and reveal their identity, which would only be disclosed in the event of an accident or dispute. This functionality could be hard-coded into the smart contract, which is made possible by Ethereum. Of course, this is all theoretical, whether this would be made possible by a Government is an entirely different blog post.

At the time of its creation, Bitcoin was not designed to incorporate smart contracts into its transactions, therefore Ethereum (or something like it) is the only platform that could record future vehicle transactions. Elon Musk and Tesla has recently built up a position of over $1.5B Bitcoin, has he bet on the wrong horse?