Our CEO Arjeh van Oijen will be answering today’s question.
Before we start looking at which assets are ideally registered on a blockchain, we will look into why blockchains are appropriate for digital assets in the first place. Blockchain networks are ideally suited to register and transfer digital assets because they prevent participants from double-spending an asset. Next to that, only a person with the appropriate authorisation and means of authentication can make changes or transfer an asset. We will go into these two aspects in a bit more detail.
Double-spending and immutability
A blockchain network ensures that a digital asset cannot be copied, so you will know with certainty who the owner is of an asset at any given point in time. This happens because changes to the asset are immutably recorded on the shared ledger of the blockchain. Once a change to an asset gets recorded into a block over which the network of blockchain nodes reaches consensus, it is practically impossible for an unauthorised person to change it. Because a blockchain network does this in a distributed manner, meaning that each node keeps a copy of a ledger, any conflicting transactions would not be allowed on the ledger. An example of a conflicting transaction would be an owner of a bitcoin spending a bitcoin twice. The bitcoin ledger would not fall for this trick, because it would know that after a first ‘spend’ the transaction would not be valid anymore since the sender does not own the bitcoin anymore.
When a bitcoin is being send from one account to another it is called a transaction. For a blockchain network to accept a transaction it needs it to be signed by the appropriate private key. In the case of a bitcoin transaction it would be the private key of the owner of the bitcoin, signaling his intention to transfer it to the network. Based on the signature with the private key, the network knows that it is the actual owner of the bitcoin instructing a transfer of it. This concept is called non-repudiation, meaning having a proof that a transaction was authored and signed by the sender.
If we would take these properties and start looking at other digital assets we would see that a world opens up, because so many digital assets would benefit from being tracked on a blockchain network. Next to currencies, such as the bitcoin, also documents can be considered digital assets. Think for instance about invoices, and sending them over via a blockchain network. Based on non-repudiation of origin, you would be certain that an invoice comes from your supplier. Or trade finance agreements, where so many different parties have a stake in the process that looking at one immutable source of truth. Any updates to the status of the agreement would be recorded for all parties to see. With the nearly endless possibilities one could also think about intellectual property rights being digitally transferrable.
Other than digital assets there is also a lot of work being done in making physical goods traceable by blockchain networks. This concept is called a digital twin, where a physical good gets a digital ‘twin’ which can record the ownership and authenticity of a good. This is, for example, beneficial to battle counterfeiting, where manufacturers of a good can proof the authenticity of a product by immutably stating on a blockchain ledger that they have created that particular physical good.
Are you missing a characteristic of blockchain technology which makes it appropriate for digital assets? Or are you missing any asset class? Comment below!