Before Blockchain: 3 Historical Examples of Distributed Ledger Technology.
“The idea of a Blockchain is certainly not new” (Alexander Lipton, 2017)
While conducting research for my Master Dissertation on Blockchain Technology and Business Models, I stumbled upon the sentence above. It comes from a really interesting article from Alexander Lipton (MIT): Blockchain and Distributed Ledger in Retrospective and Perspective. In his paper, Lipton gives several examples of past Distributed Ledgers Technology.
I will attempt to follow his thoughts and explain few historical examples of Distributed Ledger Technology. Some former practices from China, and Tribes share common features with modern DLT as we know them.
Blockchain or Distributed Ledger?
The terms “Blockchain” and “Distributed Ledger” are often used as synonymous. In my opinion they are not. However, a difference exist between both.
Not every platforms out there use Blockchain as their underlying infrastructure.
But rather a different form of Distributed Ledger Technology.
Directed Acyclic Graphs (DAG) are an example of a different form of DLT.
The Tangle used by IOTA is an implementation, of such specific type of DLT. It remains a distributed + replicated database, but data is not contained in blocks linked together sequentially. Rather, transactions are all linked to each other, pointing into one unique direction “endlessly”.
Distributed ledgers enable the creation of “decentralised system of trust”. At their core, DLT applications (like cryptocurrencies) are built around the principle of a universal, inviolable ledger, made fully public and being constantly verified (Vigna and Casey, 2016).
Although the verification in cryptocurrencies like Bitcoin or Ethereum is made by computers, nodes (as called inside the network) are simply entities that act independently of each others. The term decentralised emphasises that, but mostly...
… verification occurs at the edge of the network, not at the center.
This subtle difference shows that Distributed Ledger Technology can take many forms. Since the beginning of Bitcoin in 2009, DLT are mostly known as either a chain of blocks (Bitcoin, Ethereum and many other cryptocurrencies), or as a linked list of transaction (IOTA).
But how about other form of DLTs?
If we look through history, long before the digital era, we can find several examples of DLT. The examples below all share the same features of modern DLT as we know them:
> an asset database that can be shared across a network on multiple sites, geographies, or institutions.
> some “technological means” are used to keep the records updated and accurate in multiple locations on a large scale.
> all within the system can have access to the ledger via copy or connection to the larger database.
The “technological means” as we know them today revolve around computer network protocols.
This article concern “older technological means” used to build older (and rather different) forms of DLTs.
1) Shanxi Banks (Piaohao) (China, 19th Century)
Chinese records dating back to the early stages of the Qing Dynasty (1644–1911) indicate an equally complex distributed ledger system in the Chinese Banking System.
Shanxi Banks (also known as Piaohao, or draft banks) came into existence because of the need to transfer large volume of funds across China.
Around 1823 in the city of Pingyao (Shanxi Province), Lei Lutai, a merchant, decided to convert his “Xiyuchen” Pigment Shop into the Rishengchang Draft Bank (The Rising Sun). Through this conversion, he created the first Shanxi bank specialised in silver exchange (picture below).
Other merchants in the Shanxi Province followed by opening their own silver exchange shop, creating a network of branches. These were first used to provide commercial remittance, from one branch to another.
Overtime, larger amount of cashed started to be transferred from one branch to another. Then, the company decided to introduce drafts (picture below), cashable in silver in the company’s many branches around China.
The model worked as follow:
1. The shop branch A would first receive money from a remitter (depositer) .
2. The shop branch A would give to the remitter (depositer) a small receipt: a draft.
3. The remitter could travel safely and withdraw cash at branch B using the draft.
4. Profit was made on the exchange rates between silver and copper currency in various area (Hsu, 2012).
The draft stated the name of the depositer (= the remitter), the quantity of silver deposited in tael ( 1 tael = 37.7994 grams ), the branch where he deposited and the bank where he could withdraw.
The use of draft removed the dangers inherent to long distance silver transportation (=theft).
But what about the risk of forged drafts?
According to the history, the Shanxi Banks never suffer any loss from forged drafts. You may ask how?
Despite the separated and extended branches, the technological system was supported by a multitude of sophisticated record keeping techniques, supplemented with a heavy amount of communication.
- Special handwriting: when the first Rishengchang Draft Bank was built, all the drafts were written by Lei himself. To preclude forged drafts, he required that all the branches must be familiar with his handwriting. Lei wrote the drafts carefully, in a unique handwriting style.
Yet soon, his solution was challenged with the rapid rise in trading volume. Lei became too busy writing every draft himself. So he came up with another solution to avoid forgery.
2. Special material: Lei started producing special anti-counterfeiting paper with watermarks visible only under a special light.
But still, what about if someone who could forge his handwriting stole his paper ?
Lei came up with an old story:
Gen Gong Liang, an old military strategist, used a poem as a code book to send messages to his troops during battles. The first word of each lines of the poem represented soldiers, generals, army provisions and weapons.
If a troop A fell short of soldiers, they would write the code word for soldier + stamp a seal on the document and send it to troop B. In this way, someone from troop B receiving the document would be clear of the troop A needs.
Even if the document felt on enemy hands, they would not know what it meant, and would only see words.
3. Special codeword: Lei borrowed the idea and created his own codeword system to prevent drafts forgeries. He used 12 words representing 12 months and another 30 words representing 30 days in a month. He also regulated the codeword for number 1 to 10. 10 Chinese words were used to represent 10 numbers. Moreover, these code words were not fixed and used to change from time to time. The code words were only known to the relevant workers (like the miners, solving a puzzle in the blockchain). Except from the shop keepers, no one knew what these words meant. As a result, outsiders would be kept in the dark.
special handwriting
+ special paper
+ special codewords
= very difficult to forge a draft.
Shanxi branches became the first form of private bank in China. The practice of draft banks eventually caught on and the Shanxi families (owners of these banks) established themselves as centers of commercial trades within the Qing Dynasty. Their power is observable through their sheer numbers. In total, there were 32 piaohao with other 475 branches covering most of China. Some piaohao had sub-branches that extended across other countries such as Japan, Mongolia, Russia and the Malay Archipelago. By the last year of the Qing Dynasty, the piaohao were handling most types of financial affairs (Hsu, 2012).
In essence, the Chinese banking system of the Qing Dynasty was an incredibly advanced technological system that was able to support the heavy amount of trading with the use of accurate record keeping in the form of distributed ledger.
2) Genealogical trees of Royal Families.
Some of the earliest example of Blockchains and DLT are the genealogical trees of Royal Families. This example is by far my favourite! 😃
Alexander Lipton gives a great comparison with Blockchain.
“Blockchain naturally occurs whenever power, land or property change hands.”
When it comes to genealogical of royal families, the resemblance with blockchain is even more apparent, because of the way communication used to operate between royal families.
to agree on their respective legitimacy and marriage eligibility, royal houses had to inform each other about births, deaths, marriages and other life events, thus keeping their versions of the history in sync.
We can perceive a similarity with the participants in a p2p network. The term “their version of the history” would be comparable to “their version of the ledger” in the modern blockchain world. In the case of Royal Families, life events were relayed between members, while in Bitcoin, nodes automatically relay transactions to ensure that all the network is aware. The aim is stated in a similar way in the Bitcoin whitepaper.
The only way to confirm the absence of a transaction is to be aware of all transactions […]
To accomplish this without a trusted party, transactions must be publicly announced […]
As an early example, the genealogical tree of the House of Habsburg was distributed to other royal houses, as well as all imperial cities in the Holy Roman Empire.
An other fact about many royal families - such as the House of Plantagenet of England - is that most of their members spoke and used french at the time to communicate (Latin in comparison was the lingua Franca used for science and literature).
In addition to be a Distributed Ledger, a Genealogical Tree is also a Blockchain (Lipton, 2017). In such a Tree, the transfer of power from one sovereign to the next is governed by well-defined rules.
The “family fork” analogy
In most cases, the transfer of power occurs without commotion. However, when these rules become ambiguous and open to interpretation, the tree can undergo a hard fork. Historically, forking a succession tree is associated with wars and other acts of violence.
In blockchain, hard forks occur when the rules of the protocol change radically. This lead the network to split in two different group of nodes: one running the old software version with the old rules, and another running the new software with the new protocol rules.
Each group of nodes end up in their own branches, where each branch share their transaction history up until the point of the split. Nodes failing to upgrade to the new consensus rules can no longer participate in the consensus mechanism, and then making them forward incompatible with the main chain.
Think about the similarity about royal familities, and the succession of kings / queens. Take a look at the genealogical chart below of the House of Capet. Does that look something familiar?
The Protocol rules of the Capetian Dynasty
In France from the period 987 to 1316, french kings always had a direct male heir. In other words, a son that inherits the throne.
From the reign of Hugues Capet up until Louis X “Le Hutin”, the throne passed from father to son. This is what is known as a hereditary monarchy, where the order of succession follows the rule of agnatic primogeniture.
agnatic primogeniture = the first born (eldest) male child must inherit the throne.
This rule was considered as the proof of the legitimacy of the royal power for the capetian dynasty.
Until Louis X “Le Hutin” died… without a living son.
…
The death of Louis X = The longest vs Heaviest Chain
Once Louis X “Le Hutin” died, the protocol rules got severely mixed up and bended.
Louis X had no son, so no heir to succeed him. But he had a second spouse. And she was pregnant!
Therefore, Louis X’s brother Phillip “Le Long” becomes regent, while waiting for the son to be born, and so for an (eventual) male child heir to become King of France.
Few months after, Jean Ier “Le Postume”, the so awaited heir son was born. But unfortunately, he only lived 4 days (NB: this also make him the only King of France in the french history to have reigned from born to death).
The situation then become very complicated and uncertain.
Who should inherit the throne ?
Who should be the next King of France?
or next Queen?
In fact, Louis X had also a daughter, Jeanne, from his first marriage. But the french noblesse is reluctant to see a women accessing the throne. (In addition, there were suspicion about the legitimacy of Jeanne rights towards the throne, as her mother had been accused of adultery).
French nobles favour Phillip “Le Long” to become the next King of France. They support their argument by stating an old french law (to add an extra rule and more strength to the succession protocol): the salic law.
salic law = female members of the royal family do not have rights to inherit the throne.
The beginning of the Capetian Hard Fork
Philippe V “Le Long” is then named King of France. But his access to the throne does not solve the situation. He then in turn dies without a heir son.
His brother Charles IV “Le Bel” succeed to him. But also dies without a heir son.
From this point in time, several person start claiming the throne:
- Philippe d’Evreux, claim the rights from his spouse Jeanne (second spouse of Louis X)
- Philippe de Valois, cousin of the last Kings, and closest male heir in the dynasty.
- Edouard III, King Of England, son of Isabelle de France, Isabelle being Louis X’s sister.
Since the Salic law was previously used, it was applied to the same extend, to decide on the next King. All pretendants to the throne with a link to a women from the Royal Family got excluded.
It is then Philippe VI de Valois who is selected as the next King of France.
This succession crisis finally ended with Edouard III, claiming back the throne, and then declaring war to France. This will be the beginning of the Hundred Years’ War.
A very complex diagram of the Capetian Dynasty can be found here on Reddit. It shows the complexity of the of the succession rule overtime. See also the original Reddit post.
3) Rai/Fei Stones of the Yap tribe (500 AD)
Natalie Smolenski, a cultural anthropologist and VP of Business Development at Learning Machine, gave a great anecdote to the Forbes magazine.
In 500AD, the habitants of the tiny micronesian island of Yap (the Yapese) used a strange form of currency to trade between each other: Fei stones.
These stones were made of a specific mineral: aragonite, a white glistening limestone that could only be found on the island of Palau (250 miles away). The stones were shaped into discs with holes in the centre in order to be carried on long poles, facilitating transportation (see photo below).
Early rai stones were small (no more than eight hand spans across). But for larger stones, the transport by canoe from Palau was a long and difficult journey for the Yapese. In fact, some stones could weight from one to four metric tons for three meters in diameter.
Although attractive to look, this form of currency was not practical to move around when buying and selling.
Back in the days, some European traders arrived in the area, which allowed the Yapese to transport larger stones back to their villages. However, the difficulty of carrying stones remained. In the village, it was frequently too inconvenient after an exchange to transport these giant limestones rocks to their new owner.
Instead of moving the stones, the Yapese developed an alternative solution to their “Fei stone problem”.
1. After a transaction, the stones were left in the possession of the previous owner rather than exchanging hands.
2. Rather than recording their ledger centrally, they distributed the knowledge of Fei stone ownership across all the habitants of their village.
3. Every villager kept a mental record of: a) who owned each stone, b)who they got it from and c) when that transaction took place.
4. When a Fei stone was spent, that new transaction was shared across the village to update everyone’s “mental ledger”. (back to step 2)
5. If someone came along and tried to wrongly claim a stone, the village would consult each other (checking the “mental” decentralised ledger)
The mutual understanding throughout Yapese society was simply that ownership rights of Fei stones could pass from one person to another in a series of transactions, thereby providing a mean of settling “outstanding debts”.
William Henry Furness (1910), an American Clergyman and theologian lived one year in Yap island. His observations from his book The island of stone money: Uap of the Carolines help to better understand the early distributed ledger of the Yapese tribe.
Rai (Fei stones) needn’t be exchanged directly, especially the larger variety. Rather, Yapese were often content to transfer mental ownership of a Yap stone, leaving the stone sitting in place.
It is not necessary for its owner to reduce it to possession. After concluding a bargain which involves the price of a rai too large to be conveniently moved, its new owner is quite content to accept the bare acknowledgment of ownership and without so much as a mark to indicate the exchange, the coin remains undisturbed on the former owner’s premises.
An even more extreme example provided by Furness shows how the recording system of Rai/Fei stones was similar to a distributed ledger. According to a local legend, two or three generations before Furness’s arrival…
…a large stone in transit was lost at sea during a storm. But the claim to this stone continued to have value, even though the stone itself was unrecoverable.
This form of distributed consensus for a specific currency could be thought as the first recorded example of a decentralised ledger. Yap’s decentralised ledger were impressive creations, although never caught on beyond the island.
Yap stones have been considered significant enough that they have become a recurring motif in monetary economics. Macroeconomics textbooks, including Baumol & Blinder, Miles & Scott (pdf), Stonecash/Gans/King/Mankiw, Williamson, and Taylor all have stories about Yap stone money.
The Stone Money of Yap: A Numismatic Survey (pdf) by Cora Lee Gillilland (1975), which provides a historical summarization of all appearances of Yap stone money in the accounts of travelers, administrators, and anthropologists over the centuries.
Also picked up The island of stone money: Uap of the Carolines (1910) by W.H. Furness. Furness spent a year living on Yap and recorded his observations 🙂
References
Furness, W. H. (1910). The island of stone money, Uap of the Carolines. JB Lippincott Company.
Xu, Z. (2012). China: A new cultural history. New York: Columbia University Press.
Vigna, P., & Casey, M. J. (2016). The age of cryptocurrency: how bitcoin and the blockchain are challenging the global economic order. Macmillan.
The History of Modern Chinese Banking Part 1- The beginning (Youtube)
Bits on Block (Blog): What’s the difference between a distributed ledger and a blockchain?
http://jpkoning.blogspot.com/2013/01/yap-stones-and-myth-of-fiat-money.html
https://ethw.org/Distributed_ledgers
http://www.theworldofchinese.com/2013/12/chinas-first-banks/
