New blockchain application: The rise of real world assets backed cryptoassets
During the past few years we have seen amazing feats from some of the cryptocurrencies available in the market — Bitcoin's price high point surpassed the price of gold for the first time ever in March, while other cryptocurrencies such as Ether, Dash, and a few others managed to gain over 200% in value in some short weeks.
More and more people are now understanding how cryptocurrency works, and are starting to view cryptocurrency as an emerging asset class.
To give a little background, Bitcoin is the first decentralised cryptocurrency, and is made possible by the underlying technology, blockchain. Since then, the substantial development and rapid evolution of blockchain technology has spawned many new cryptocurrencies.
What is interesting however, is that with the latest developments in blockchain technology boasting of properties such as being tamper-proof and trust-less, numerous other new services are made possible. Not just the creation of cryptocurrencies.
Cryptoassets – a new asset class for a decentralised world
One such blockchain application that is emerging is the creation of digital assets backed by real world assets. Basically, it is a creation of digital representations of the usual assets that we know of. For example, suppose we own a car in the real world. We can create a digital asset to represent said car and because it is now represented digitally, we can then have a "programmable car" asset. We can program it such that only the person who owns this digital asset (and those given permission by the owner) can start the car.
We have also started to see other types of real world assets being digitised: diamonds, gold bars, real estate, and many others in the works.
Typically, real world assets are sent to a custodian to be kept in trust, while the digitised version is circulated, with a clear protocol on how the digital asset is linked to the real world asset that backs it.
For example, in the case of gold, for every digital gold coin that is distributed, the protocol can define that 1 gram of physical gold is to be kept in the custodian's vault, hence making a direct connection between the digital gold coin and the physical gold, i.e. 1 gold coin is equal to 1 gram of gold.
A nifty advantage of having a digitised asset is that it is programmable. Following the example of gold above, suppose someone has 1 gram of physical gold, and wants to include it in some kind of will or as part of payment to another party. Currently, they can appoint a 3rd party escrow agent to complete the whole cycle – to give out the physical gold whenever a certain condition is reached. With digitised assets, this part can be excluded completely.
Smart contracts to replace escrow agents for digitised assets
One of the capabilities of the newer blockchain technology is the creation of “smart contract”, which is basically software code that is installed on the blockchain. In the scenario above we can create some kind of escrow smart contract to automatically send over the digitised gold coin to another party upon completion of certain conditions. This will yield the same effect as sending over physical gold because there is a 1-to-1 relationship between the digitised gold coin and the physical counterpart.
The combination of smart contract and digitised asset has the potential to really change how we currently do a lot of things. Creation of online wills without any agents' involvement? No problem. Setting up an insurance structure where claims can be automatically accessed and paid out whenever a certain event occurs? No issue. Deploying an online pawn shop where anyone can pawn their digitised asset, according to a pre-programmed rules and conditions? Someone is already working on it.
We will continue to see interesting use-cases being developed, deployed and tested. We will witness old assumptions challenged and new paradigm introduced. Only time will tell how these changes will ultimately affect our current way of life.
The challenge for cryptoassets now? Mainstream adoption
The rise of the technology, however, doesn’t guarantee mainstream adoption immediately. There are a lot of challenges that need to be addressed before that can happen.
One of the main challenges for the adoption of digital assets is the technical prerequisite that is needed before one can fully appreciate the risk associated with it, especially relating to its security.
Imagine having a physical wallet in which they is some money. We know naturally how to keep our wallet secure, be it by putting it in a locked drawer, or just by being mindful not to leave it unattended while in public. Similarly with digital assets, we need to know how to keep our valuables secure albeit in the digital world, and it is more than remembering a password.
More public education in this area is needed before we can really see mainstream adoption of blockchain technology. Nonetheless, It is undoubtedly a very interesting space to look forward to.