Tokenization of Assets – Physical versus Digital

I claim that tokenizing digital assets is compelling because it creates opportunities to do new things, and tokenizing physical assets usually doesn’t.

A simple thought experiment:
If we each paid $1000 USD to someone who offered us gold, but they inform us that they actually have $1000 USD worth of gold, and $1000 worth of gold-backed tokens, would you prefer to own the tokens? I believe that most of us would want the actual gold.

Is there an analog with digital assets? Why not?
I think you’d have to agree there is a difference.

I’m going to oversimplifiy things slightly in order to highlight the differences, while still addressing the rather nuanced situations in a variety of cases. I will not be talking about composite items, that have both physical and digital components. I will not be addressing securities on the blockchain – i.e. ownership in a company or legal entity governed.

I believe the thought experiment posed above illustrates that tokenized physical assets incur additonal risk. This is the first key difference in my view.

Tokenization of Physical Assets Have Increased Levels of Risk

Let’s begin with the extreme case – real property whose ownership is represented by a token. This will be governed by the local laws in almost any jurisdiction. If I show up in court with legal title and you show up with a blockchain-based claim of ownership, we can be pretty sure which one of us has the valid claim in the eyes of the law.

A car, or any other physical asset that must have ownership information registered with the state can also have ownership based on possession of a token, but the official claim will take precedence when ownership is contested.

If we’re talking about a book or a painting, then a token representing ownership is viable, and can serve as an agreement about ownership and transfer of said ownership, but would seem to offer few advantages.

Whether or not it seems viable to have ownership of a particular physical item represented by a token, it does seem to present additiional risks. New methods of fraud are made possible online, and new ways the owner or creator can defraud buyers are enabled.

In summary, there don’t seem to be advantages tokenizing physical goods that mitigate the new ways problems can arise when using digital representations of ownership for physical items.

Tokenizing digital assets allows the creator to continue to add new functionality after the intial sale

Suppose I sell you a token representing ownership of a digital work, let’s say an image. It’s easy to imagine a few ways of enhancing the digital good that you’ve purchased from me.

Perhaps I’ll make additional related works available to you as an exclusive perk, like the DJ Pepe Card, a raprepepe card does. You still own the combination of token plus card image, but also get access to some exclusive beats from DJ J. Scrilla.

Maybe I’ll let you use the token for additonal things like access to a special website for owners of said asset. Easy to imagine, right? When you buy the combination of token and card image called Battlecorn, you’re also granted access to play the Bitcorn Battle game, and possibly other games in future.

Those things require no additional trust from the consumer of these added services or content, just the trust in the same software-based authentication and authorization.

Contrast that to the world of physical goods. If you own real property by virtue of possession of a token, the issuer may still offer you additional items based on that token ownership. This is no different than the case of non-tokenized assets.

They might even provide you token-controlled access, but now new hardware systems are needed to intermediate. As we extend more trust to new systems (e.g. hardware in this case) we open up new avenues for attackers and fraudsters.

Suppose physical access to a house or car requires token ownership. We still need to trust the software that validates token ownership and validity. but now we also need to extend trust to the hardware manufacturer, the supply chain, the vendor who operates and/or maintains it, and the physical security that prevents it from being tampered with.

Tokenizing digital assets enables persisting control after the intial sale at no additional cost

This boils down to software controlling data, and endless possibilities can be imagined for creating items that function over time in unique ways. I ahve a couple ideas about this, and I don’t want to spill the beans, but let’s consider the earlier example of DJ Pepe tokens, that allow holders early access to songs and/or videos.

Bottom line – tokenzing physical items incurs additional risks and requires extending additional trust with limited or no benefits. Physical – additional risk and trust requirements and for what? Digital – additional capabilities without adding risk or requiring additional trust.

Stay tuned – if enough interest I’ll argue the other side in the next post.

Author: chain rat

crawlin around where nobody's lookin, gnawing on the crufty bits