How to link non-digital ‘real world’ assets to Blockchain?

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December 22, 2017

Real world assets prove to be a worthy challenge for tokenization on the blockchain. But why do we need to tokenize real world assets? Because we need to bring in the impeccable features of the blockchain technology which are:

  • Impossibility of counterfeit
  • Immutability
  • Disintermediation and ease of transfer
  • Transparency and ease of auditing
  • No overhead related to transaction processing
  • Network effect brought by the unified infrastructure for multiple types of tokens

One approach can be the Proof-of-Existence (PoE) as a fundamental binding model for the blockchain of real world assets, like the concept of Proof-of-Work (PoW) and Proof-of-Stake (PoS) as observed for digital assets on the blockchain. In a PoE model, a user can simply store the signature and timestamp associated with a document in the blockchain and validate it at any point using native blockchain mechanisms. To register ownership of an asset, a transaction is created with a reference to the physical asset. This information is stored on a Blockchain record, holding roughly 40 bytes of data, and can be associated with all manner of goods or services. The owner of the private key to that public record is then registered as the owner of that asset. For example, Factom is currently using this approach and working on a system that secures and proves authenticity of records, documents and other important types of data. The Factom system will ultimately consist of a four-tier architecture designed to both produce verified chains of information and secure that data within the Block chain. They have a variety of use-cases, such as creating trustless audit chains, record keeping for sensitive personal, medical and corporate materials, and identity management as a KYC solution.

The possible area of exploration is creating off-blockchain assets ‘synthetically’ on the blockchain.

Let’s see some possible instances and how can we issue real world assets (or non blockchain centric assets) on the blockchain:

  1. A working model for ‘oracles’ into the blockchain so that information from the outside world. For example, LO3 Energy is in the business of energy based blockchain solutioning where electricity can be traded peer-to-peer. Their transactive grid (Oracle as a metering solution) is a hybrid device that measures a building’s energy production and use, and communicates with the network to collectively manage energy on the blockchain.
  2. In shipping and transport industry, there is tracking of the origin and movement of high-value items across a supply chain, such as luxury goods, pharmaceuticals, cosmetics and electronics. And equally, critical items of documentation such as bills of lading or letters of credit. In supply chains stretching across time and distance, all of these items suffer from counterfeiting and theft.

The problem can be addressed using blockchains in the following way: when the high-value item is created, a corresponding digital token is issued by a trusted entity, which acts to authenticate its point of origin. Then, every time the physical item changes hands, the digital token is moved in parallel, so that the real-world chain of custody is precisely mirrored by a chain of transactions on the blockchain. The token is acting as a virtual “certificate of authenticity”, which is far harder to steal or forge than a piece of paper. Upon receiving the digital token, the final recipient of the physical item, whether a bank, distributor, retailer or customer, can verify the chain of custody all the way back to the point of origin.

  1. Another approach to bring off- blockchain assets is public key infrastructure used in IBM Open Blockchain. Certificate authorities in Open Blockchain issue two kinds of transaction related certificates:
  • Long term enrolment certificates linked to identity of their owner such as a physical person, a service provider or a validating node
  • Short term pseudonymous transaction certificates, the linkage of which to real-world identities could be requested from Central Authority (eg: by an auditor or by law enforcement)
  1. In a fresh and new scenario, the chain acts as a mechanism for collectively recording and notarizing any type of data, whose meaning can be financial or otherwise. One example can be an audit trail of critical communication between two or more organization, say in the healthcare sector. For example, Patientory empowers patients, clinicians and healthcare organizations to safely access, store and transfer information, aiming to improving care coordination while ensuring data security. Patientory interconnects with any EHR system and enables doctors, care providers and consumers to communicate on a single easy to use platform. They use:
    1. Encrypted middleware to meet the high-volume demands of modern day Health IT
    2. APIs with Electronic Health Records for fast medical information transfer
    3. HIPAA-compliant protected health information storage that adheres to region-specific regulatory guidelines

The platform acts as a shared database into which all medical records are written, with each record accompanied by a timestamp and proof of origin. Thus, Patientory can act as a trusted intermediary, whole role is to safely collect and secure healthcare records on the blockchain. While Patientory employs encrypted data for its blockchain, in terms of actual data stored on the blockchain there are three popular options (which can be used basis the case at hand):

  • Unencrypted data: This can be read by every participant in the blockchain, providing full collective transparency and immediate resolution in the case of a dispute.
  • Encrypted data (which Patientory enables): This can only be read by participants with the appropriate decryption key. In the event of a dispute, anyone can reveal this key to a trusted authority such as a court, and use the blockchain to prove that the original data was added by a certain party at a certain point in time.
  • Hashed data: A “hash” acts as a compact digital fingerprint, representing a commitment to a particular piece of data while keeping that data hidden. Given some data, any party can easily confirm if it matches a given hash, but inferring data from its hash is computationally impossible. Only the hash is placed on the blockchain, with the original data stored off-chain by interested parties, who can reveal it in case of a dispute.

In summary, we are able to see that blockchain can also work with real world assets (or off-blockchain assets) with intermediation. Either the protocol serves as the mediation for off-chain assets, or we deploy an external agent (either a device, a service, or a central authority) to act as the link between the blockchain and the real world. There is room for further experimentation in this arena and only time will tell how exciting and fast this real world tokenization model will evolve into, which will only lead to more effective and efficient business models.

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