What is Trust Worth?

A story, a case study, a call to action

Twin Forces

At LAVA, we invest in businesses involved with “simple finance” and/or “trust”.

Simple finance is easier to explain: it covers any financial products or services that empower ordinary people in Africa. This includes everything from enabling people to send and receive money freely, to accessing cheaper and less predatory lines of credit, to diversifying their savings and hedging against inflationary currencies. This also includes products grounded in local realities and culture that connect Africa to the world and the world to Africa.

Trust is a more nuanced word. In the world of cryptocurrency, people often call blockchains “trustless”. But what they really mean is that shared ledgers which no-one owns remove many of the assumptions required to consider any system “trustworthy”.

Trustworthy is defined as “able to be relied on as honest or truthful.” Truth has two roots: the Latin word veritas and the Old Norse word truwe. We often focus on veritas, which has to do with verification. Anyone can–in theory–verify for themselves that a public blockchain is operating as intended. This is often interpreted to mean that its operation is “trustless”. However, access to the education, tools, and compute power to actually verify the operation of any blockchain–especially in Africa–makes this a questionable interpretation at best.

We’re more interested in truwe, which means reliable, strong, stable. We’re looking for businesses who are creating more trustworthy infrastructure and applications which do not require that we assume trust in any single owner, operator, agency, institution, or government.

In truth, we see a deep interplay between the ability for any individual to verify the operation of technology we invest in; and their stable, reliable, shared operation in the communities who use and are empowered with them.

Shared Registries

In order to demonstrate this interplay, we’ll present a case study of the sort of “trust infrastructure” we’d like to help grow. This is intended as an instigation, more than a statement of an exact product we want to see in the world, though we will lay it out in such a way that it demonstrates the sort of attention to detail we look for, even in pre-seed projects.

Our case study will be a registry of motor vehicles. This is not a new idea. Registries for vehicles and property were among the first “not explicitly financial” use cases presented by advocates of Bitcoin (the thinking being that one could use “coloured coins” or a similar approach).

However, it has been difficult to make these registries a reality because current registries are all managed by governments and–in Africa–tend to be dysfunctional. Making their operation trustworthy therefore requires interfacing with said governments, alongside a few technical tricks which have only recently become viable.

The need to interface with governments is where a lot of the theory around trust-as-veritas falls short. Technology is a human phenomenon and so, while we can create code whose operation can be independently verified by anyone, actually having people use that code in a meaningful way still depends on who you can convince to run it.

Getting people–especially institutions and governments–to run the sort of trustworthy code we’re interested in here requires aligned incentives, and is greatly assisted by preexisting relationships. Such relationships are a strategic advantage we consider when doing diligence on any business we see as fitting into this category, though we remain most interested in aligned incentives, precisely because these are more stable and reliable in the long term.

“Aligned incentives” here generally translates to the need to have multiple different parties all participating in a system, often with divergent economic interests. If each one can potentially earn a profit from the system running as intended, then the incentives are aligned in that each party will of their own volition ensure the veracity of each transaction and all resulting state changes.

Individual verifiability operates hand-in-hand with communal reliability.

Case Study: Motor Vehicles

This is why we choose a vehicle registry to illustrate what “trust infrastructure” could look like in Africa. There are a great deal of different parties who could benefit from the trustworthy operation of a shared registry, from manufacturers, to insurers, repair shops, car dealers of all kinds, rental companies, individuals, and government services.

Problems to solve

In many places in Africa, there is:

1. No digital proof of ownership of motor vehicles (“MVs”).

2. No digital collateral and related exposure management facilities for financiers.

3. Without a trustworthy and publicly accessible registry, MVs cannot currently be pledged as collateral for loans, leases, instalment sales, rentals or other vehicle finance instruments.

4. Without a trustworthy and accessible registry, third parties cannot upload data which is relevant to the value of the MV, such as mileage, condition, service history, major parts replacements, repairs by panel beaters, accidents, towing, insurance write-offs, border crossings, entrance/exit from parking garages, etc. A Book-of-Life with verified data would improve the accuracy of vehicle valuation.

Technical requirements

1. Each MV is different from each other MV, even if both are the same model, and are made by the same OEM in the same year. MVs are thus non-fungible. In particular, identifiers for each vehicle can include the VIN, as opposed to some existing registries on the continent that only register make, type, and year.

2. Non-fungible tokens (“NFTs”) are fit for purpose here. A particular way of using NFTs, defined in KSPEC, enables large amounts of data to be attached to an NFT through the use of the `data` parameter in the safeTransfer() function of the ERC-721 standard. This data exists not in contract storage, but in the transaction logs.

3. The technical idea is to structure the contract such that any party could “transfer” the NFT so long as that transfer sends it from the current owner to the current owner, and no-one else. These acts therefore do not affect ownership, but enable anyone to attach large amounts of data to the NFT, without bloating the contract state and paying exorbitant gas fees, while nevertheless having this data remain verifiably on-chain.

4. The data uploaded may use zero-knowledge proofs to achieve three distinct goals: keep asset, ownership, and price data private where required by law; keep data to a reasonable size (even though it uses calldata); and ensure that only relevant third parties can upload data without requiring complex access controls in the contract itself.

5. As is invariably the case with trust infrastructures, the code is still the easier part. The real challenge lies in meaningfully linking each NFT to its respective physical asset, i.e. the MV in question, in a secure and efficient way.

Non-technical requirements

1. Example Company (“EC”) needs to provide a custody service so that owners can lodge the original vehicle registration certificate, plus a blank signed ownership transfer form, against which the NFT could be minted and issued, much like a Depositary Receipt for shares. This is how EC can link each NFT to each physical asset, or, at least, to its paper-based proof of ownership. Linkages to the physical asset itself would arise intermittently as third parties upload data gathered from physically interacting with the MV.

2. A trustworthy Custodian with a national footprint would add value, given that it is still essential to retain conventional controls over the issuance process because the holder of the NFT will be entitled to reverse the process by presenting the NFT and taking away the papers (which constitute proof of ownership plus an open-ended ability to change ownership). The NFT can then be burned.

3. EC, or the Custodian, should also provide a service to transfer ownership in the relevant National Registry when the respective NFT changes hands.

Who are the first customers?

This is a critical question when we look at trust infrastructures. The customers of “simple finance” applications tend to be retail users and the businesses who serve them. Ideally, such services enable end users and MSMEs to serve each other directly, in a peer-to-peer fashion without the need for bureaucratic intermediation.

However, the first customers of improved trust infrastructure–ironically–may be banks and governments and other large institutions who all stand to benefit the most from accessible, public systems which incentivize all players in a given market to cooperate.

1. Let’s assume EC has strong relationships with the banks that finance MVs. The key problem for such banks is that the owner of a MV can sell it, pocket the full proceeds, conceal the encumbrance, and fail to repay the bank, which means banks stop lending, credit becomes more constrained and the economy falters. The new owner also suffers a surprise when the bank eventually claims the MV. An NFT could solve this problem by immutably recording the encumbrance from inception, and the smart contract could direct the proceeds, or part thereof, to settle the debt and lift the encumbrance.

2. NFTs may enable banks to securitise their Vehicle Asset Finance (“VAF”) portfolios. This would allow banks to maintain their relationships with their clients without having to hold the regulatory capital and liquidity. Enabling VAF securitisation at scale would be incredibly valuable to banks. VAF is just one product in a broad and deep client relationship. Understanding these dynamics is how EC could create a networked marketplace with aligned incentives for many different actors with divergent interests.

3. Looking more broadly at other potential market segments: an outstanding loan which is secured by an NFT is determinable and visible to the debtor at all times. The value of the collateral is also visible at all times if we are able to provide improved real-time valuations based on the latest history of that specific vehicle.

4. However, using NFTs as collateral presents a privacy problem on both sides of the ratio. Reference prices (for the numerator) may link assets to people, which is prohibited by personal information laws in many African jurisdictions. Loan balances (for the divisor) are also private between the banks and their clients, and settlement balances often differ from outstanding balances by reason of early settlement penalties. This necessitates careful thinking about how the data uploaded through the safeTransfer() function is encrypted and will require, at the least, some application of zero-knowledge proofs in order to remain compliant in the jurisdictions we’re interested in.

5. Online Classified Advertisements are generally where prices are set in more established markets on the continent. They offer the prospect of peer-to-peer sales of second-hand MVs, but transferring ownership and receiving payment present risks which scare off most potential peers. NFTs and local stablecoins (another example of trust infrastructure we’re interested in) offer the prospect of instantaneous delivery-versus-payment (“DVP”). Initially, market-making and price discovery should remain where it currently occurs. The evolution of a market for the NFT itself lies in the future, but creating legitimate NFTs will make the journey there a more natural progression.

6. NFTs might provide the holder with other facilities, such as immobilising the MV or gaining admission to parking at an event or at a shopping centre.

7. A service for repossessing MVs from defaulting borrowers, selling such MVs to repay the financier and returning any residual equity to the borrower is also valuable in this context. Today, finance is supplied by banks, who have in-house repossession and realisation departments. Starting the registry may give EC an information edge which might enable EC to outperform such in-house functions. In the new world of peer lending and securitisation an outsourced repossession and realisation service will be highly valuable.

Insurance

1. Financiers may insist that the MV is insured but may not insist on that being done by their in-house insurers because conditional selling is prohibited.

2. Where insurance is procured from a third party, proof can be given to the financier before the finance is paid out, but such insurance can lapse, mainly on account of non-payment of the premium, or be cancelled.

3. Ongoing proof would be required for investors in securitised VAF agreements or for peer lenders. This requires leveraging existing relationships with said financiers, who could start the ball rolling.

4. High quality vehicle valuations are clearly valuable to an insurer when it comes to a claim, and for the ethical ones who decrease the cover, and hence the premium, in line with the decreasing value of the MV.

Your Thoughts Here

Of course, this covers only the superficial aspects of what a trustworthy registry for motor vehicles might really look like. We are sure that we’ve missed important architectural details, technical requirements, and non-technical insights all of which would be required to make something like this viable. We invite you to add your own thoughts to this and use it as you will, or adopt this as a basic template for your own work while improving and extending it as needed.

We can only make truly trustworthy systems together, collaborating in the open as we all, in our individual and unique ways, drive the future of coordination on the continent.

Drive It Home

We hope that this level of detail gives you some insight into what we mean when we talk about “trust infrastructure” at LAVA. This is just one suggestion about how to build “trust" infrastructures, and our primary intention is to illustrate the nuance held in such a term. There remain many, still unexplored ways, that we can, together, shift behaviour and incentives at scale.

For instance, the vehicle registry in Kenya is digital and more advanced than what we have described here. For companies there, we’re more interested in specific local realities around how public transport works and what this means for alternative means of vehicle financing. In South Africa, private companies handle most of the interactions with the national registry and provide web2 versions of much of what is described here, which makes this kind of thing more difficult to create in the face of fairly entrenched competition with established relationships. Each country comes with its own particular nuance, and opportunities.

We often ask ourselves, "Who can effectively leverage frontier technologies and build generational businesses?" We believe it is the founders, builders, and businesses who are willing to search for the truth of how these systems can genuinely serve all the people who share them.

Often, doing this sort of work will mean sacrificing some ideological purity about the value of fully decentralised systems, while simultaneously requiring even more skillful use of the technologies available to us. What it requires most of all is a deep attention to the way things are, coupled with the practical optimism that arises from such attention and committed focus on the particular details of a problem real people really face today.

Trustworthy technologies are not built with abstract visions: they require relationships with other people and right perception of how and why things are the way they are. Genuine and lasting trust is a function of attentive care and skillful implementation, in combination with maturity. We’re looking for the people who can bring this kind of maturity, nuance and balance to the way they implement cutting-edge technologies in Africa.

Together, we aim to be the sort of participants who inspire global excellence.