Physical asset exchange with IOTA

DLTs (Distributed Ledger Technologies) are the latest evolution of the public register to designate the ownership of properties and assets since the Middle Ages.

While most of public registers record only the variation of the asset’s ownership, DLTs incorporate additional features:

- they can record the change of ownership of an asset;

- they can record the value of the asset;

- they manage the fund movement from the buyer to the seller.

These features are clearly visible in the Ethereum platform, where an ERC#721 token can change ownership recording the applied price and moving the funds.

Hence, I wondered: is it possible to create a marketplace of valuable physical products that provides the same features that Ethereum provides to a digital product?

The first answer that arises spontaneously is no. DLTs are able to guarantee consensus only on the DLT’s native information, i.e. the balance of a wallet at a given time.

In the absence of authority that certifies and above all guarantees (therefore commits itself to cover the damages in case of errors) the value of a balance registered outside the DLT in a given moment, it is not possible to reach consensus on the on-chain representation of the off-chain wallet (what happens, for example, with most stablecoins).

However, there is a category of real assets that have a particular property: by nature, they cannot be duplicated, or if duplicated do not lose value.

For example, a house is an asset that even if built identically in another place does not lose value. A piece of land cannot be duplicated. A livestock item, even if cloned, does not lose value, etc.

Even simpler products such as luxury goods are unique. Of course, it is possible to create a perfect fake or a very similar replica, but if there was a tool that could identify a specific product, then even this category of objects would not lose value in being cloned because the clone (and the original) would be easily recognizable.

In fact, there are countless reproductions of Leonardo’s Mona Lisa that have no ambition at all to be considered original. This sort of secondary market increases the value of the original because there are no dubs that a clone is a clone.

The good news is that such a tool exists: it’s ProductID.

We presented ProductID to the market a few weeks ago. In short, ProducID attributes to a physical object a unique digital identity recorded on the IOTA ledger, the Tangle.

At this point to the question “is it possible to create a marketplace of real goods that provide the same features that Ethereum provides to digital goods?” we can answer yes!

How the marketplace can be created

ProductID uses a Smart Card to grant digital identity to objects and assets and uses an IOTA MAM (Masked Authenticated Message) channel to register the digital identity as a digital twin of the real product.

Once the twin exists in the IOTA ledger it is possible to manage it with the ledger functions.

In other words, we can create a digital market place of non-duplicable assets represented in the IOTA ledger.

The application environment requires:

- the owner of a valuable product or asset (wner identity can be provided by a third-party system);

- the digital twin of the asset created with ProductID;

- a potential buyer who intends to acquire ownership of the asset (identified through a third-party system).

The current state of the asset is recorded in a MAM channel. Each time the Smart Card is read a message is added to the channel with the essential data (the public key, the token usage counter, etc.) and the owner’s data (possibly in anonymous form but validated by a third-party system).

The MAM channel is written by the ProductID system’s back-end, that has been designed to be very versatile: in a basic use case it only writes a new message every time the tag is read and validated, but it is designed to also operate as an escrow too.

This can be the executive flow:

- buyer and seller negotiate the price;

- once an agreement has been reached the buyer sends the amount (in IOTA) to an address provided by the ProductID system;

- the owner can see the confirmed transaction on the IOTA ledger;

- the owner provides the tag to the buyer and informs the escrow;

- the buyer scans the tag to accept and commit the transaction;

- the transaction is completed and the ProductID back-end can deliver the fund to the seller’s wallet while updating the MAM channel recording the identity of the new owner.

The transaction moved the funds and traced both the new owner and the exchange price.

Risks and vectors of attack

Currently, the ProductID back-end is centralized, so it has the same risk factors of every centralized system, except one: it does not have a unique central database where critical information resides. All system’s information is stored on the IOTA ledger.

• Risks of cloning real estate properties are obviously non-existent, but clearly someone can create a digital twin of one fake or of a non-existent asset. This risk can be addressed in many ways. In my opinion, the best option is that is the digital identity have to be released by a public authority. A public notary service, for example, can create the digital twin and certify the existence of the real asset represented by the smart card. This information is recorded by ProductID system on the Ledger. After the Smart Card’s initialization by the authority, the asset is tradable on a digital marketplace without further involvement of the authority being required.
• A manufacturer of valuable goods can try to deliver two original products on the market with a single digital twin. This risk is non-existent because one of the two product will miss the tag and it can’t be sold as original.
• The owner of two assets tries to sell one with the tag of the other. This is possible but he is practically selling the asset with which the tag belongs to. In the first stage, the buyer can evaluate this attempt.
• The risk that a fraudulent act will be executed from within the ProductID system is also practically non-existent. The system cannot generate digital signatures instead of tags. Therefore, it is not able to attribute the ownership of a digital twin to those who are not physically in possession of the tag itself.

The system is, therefore, able to provide a high-quality escrow service. But we aim to decentralize the back-end anyway.

What if the buyer to not scan the tag in receiving it? the escrow will release the funds to the seller in any case after a specific amount of time.

What if the buyer wants to revoke the transaction? Within a specific amount of time, he can send the tag to the escrow platform. The escrow verifies the tag, ships it to the seller and sends the funds back to the buyer.

Real world use cases

The described scenario can be applied to many markets of valuable products.

Affirmed stakeholders such as auction houses and valuable products sales networks should evaluate this kind of service in order to increase the transparency of their operations.

In addition, the adoption of this tool may be requested by insurers in exchange for discounts on anti-theft premiums.

Conclusion

The token economy that developed on Ethereum in 2017 has given controversial results. The main issues are the poor performances of the Ethereum network and transaction fees and, in the end, the small number of users willing to use the service represented by these tokens.

However, the creation of digital non-fungible tokens representing real estate assets or valuable products does not create money out of thin air but can increase the security of trades and reduce the risk of frauds.

The use of a cryptographic Smart Card allows us to build an automatic escrow service even without a having smart contract.

This is possible because the smart card is able to confirm the Eecrow operation (change of ownership) by signing an event, so basically, it executes out of the DLT what the Smart Contract does internally, guaranteeing the consensus on the event.

The future availability of Qubic should allow us to decentralize the ProductID back-end, thus achieving a perfect similarity with a smart contract on the Ethereum platform.

Therefore, ProductID is the perfect tool for creating innovative platforms that can create additional value in established markets.

It does not replace the notarial function, which is indeed essential to initially identify some assets and its initial owners and create the digital twins, but makes it possible to update the public register of valuable properties and creates a public exchange platform, which is missing at the moment.