Part 3: Digital Twins (Only their mother can tell them apart!)
Written by Andrew Holz
Part One of this series, A Taxonomy of NFTs (Collectibles and Assets and Digital Twins, Oh My!), outlined the definition and broad categories of non-fungible tokens. Part Two, Digital Scarcity (Am I Original? Am I the Only One?), dug into purely digital, consumer collectibles. This installment will tackle the needs specific to creating NFTs which are “digital twins” for real-world things. The platform needs are quite different once you move past the generic value DLTs provide for token proxies tied to physical objects.
Part 3: NFTs as Proxies for Real World Stuff
Unlike fully digital NFTs which are the asset, this class of NFTs represent other objects or assets. Sometimes this type of NFT is referred to as a digital twin. For the immediate future having ownership of the NFT may not be the legal equivalent of owning the item itself, but more on that later. The NFTs of real-world objects represent a reliable way to track the history, collect key information and provide a shared digital view of the object. It is more of a Certificate of Authenticity or a deed paired with a verified shared log book than anything else. Both of these functions provide additional value to the asset itself, underlying the huge potential value to be gained through the systematic pairing of digital representations in a DLT with real-world objects.
Contrasting this category with the collectibles analyzed previously, our real world proxy NFTs are less about broadcasting and more about tracking and highly targeted information sharing. The features needed from the platforms and applications supporting them are therefore quite different.
Understanding the additional value accrued to assets
Efforts are underway to create NFTs to represent a wide range of physical assets including real estate, vehicles, art, and even racehorses. No matter what type of asset it is, there is value that accrues to them when they are backed with an associated NFT.
First, the NFT acts as a certificate of authenticity or a digital title to the asset in question. A myriad of different questions about authority arise from this. The process is not, however, a transition of authority -- but of the primary source of truth. If the technology implementation is done correctly this transition can happen gradually.
The fact is that if there are disputes of ownership today, to say a piece of real estate, that goes to a court to decide. The court uses the paper title and contracts and filings as their key pieces of data in rendering a decision. That same paper and all the relevant contracts can be made a PART of the real estate NFT. The NFT is an unalterable, fixed date, history. At the beginning, it may provide a small supplement to folders of paper, but over time the digital record will take on a progressively larger role.
Possession is nine-tenths of the law
The NFT backing an asset does not replace a court when disputes arise but it is a big improvement, a strict upgrade in fact, in the source of evidence. A comprehensive immutable history in fact reduces the room for disputes as it becomes more complete. As time goes on, the amount of data recorded to the appropriate NFT increases enabling it to become the primary source of ownership history. From a platform perspective, the most important characteristics are the flexibility of the platform to hold all types of potentially relevant information (not as just a pointer to another storage system) and the ability for that data to stand alone or be moved BETWEEN DLTs or standalone outside of the blockchain/DLT it has been built in.
That last claim may seem counter-intuitive so let's break it down. Assets like real estate (never mind art) have histories that go back decades. We need to store the immutable history and paperwork in a form that is resistant to technological entropy and is portable to new solutions as they arise. If we had CD ROMs of every land record in the US, the first thing we would need to do is port them onto something accessible. Therefore the ideal blockchain/DLT for storing asset information will allow for export of the encapsulated, but still immutable, information. (Tupelo, the DLT from Quorum Control has a unique way of accommodating this.) Technology will evolve, blockchains will become obsolete and a long term digital history is only as valuable as its ability to be complete and evolve with it.
Building up a verified accumulated history makes the asset more valuable
A detailed history of ownership contributes to the value of assets by providing traceable provenance. It contributes to authenticity. Having this in a digital accessible form not only reduces the fees associated with transfer (title insurance?!?) enhancing liquidity but also acting as a form of fraud protection. The longer the history is, with verified dates and identities which can be checked, the harder it becomes to provide false information be that about price or other pertinent details.
In fact, additional data sources recorded about assets such as services or improvements to the asset can be just as value-enhancing as the ownership history. If my roof was really done by a reputable roofer just three years ago, seeing it immutably recorded (three years ago) and not relying on the hearsay of the agent showing me the property lets me value the fact at a much higher level. Proper maintenance, expert assessments or perhaps pedigree papers can all be attached both protecting the paperwork (it's no longer in a folder somewhere) as well as the potential buyer.
More sensitive data requires more robust permissioning
Adding more and more valuable details about our asset enhances the value but it also increases the sensitivity of the information. With consumer collectible NFTs, not only did I want the data about them to be public, but I wanted everyone to know all about it. With valuable assets we must take a much more circumspect approach and our NFT platform of choice must support that.
It's critical that when I share the history to a prospective buyer they know the information is accurate and immutable and has been accumulated over time, but it's unlikely I want every transaction to be fully available to the public. The platform storing the information should therefore make a very small amount of data easily available but have a mechanism for easily requesting and granting temporary access to progressively more details as a negotiation progresses. Taking this a step further the ideal platform would actually enable a service provider (e.g. our roofer from above) the ability to write some aspect of the history of the property in a way the owner can neither fake nor edit.
Nuanced permissions are the only feasible way to realize the full value of backing assets with NFTs.
Fractional ownership turbo charges liquidity
Liquidity for assets is one of the largest determiners of the ultimate value. Once an NFT is created fully describing an asset, its history and its key attributes it can be split into small pieces which can then be owned by different entities. Essentially the overall asset is an NFT but then FTs (fungible tokens) are issued against that NFT. The NFT “on top” sets the rules and facts that surround the asset but rather than a single owner there are MANY owners each with equivalent rights to the shares of it they own. Each sliver can then be independently sold or exchanged. Smaller discreet pieces with lower price tags and established parameters make transactions significantly easier.
Optionally the fractional owners can be part of the decision making through NFT level governance but this is not required. The more “digital” the governance the more efficient it can be. Using smart contracts to fully power all decision making can be problematic however as security exploits get exponentially more powerful as the “on-chain” decision making powers increase. Outlining the rules of decision making and attaching the legal contracts as a record rather than as code is sufficient and often times preferable. Trying to account for every case and make them not just actionable but bullet-proof is simply beyond the current state of the art. The NFT platform must recognize this and provide a path towards the ideal without requiring it from the get-go.
Enterprise NFTs can power robust and complex supply chains
Moving from NFTs for assets owned by individuals to those owned by enterprises shifts the purpose though most of the same platform requirements remain.
The purpose most enterprises have for representing things in their supply chain as NFTs is about finding efficiencies, sharing data between a limited set of players and meeting oversight requirements by regulators where it is necessary. This last category is particularly well suited for DLT backed NFTs because the accumulated immutable history as materials or equipment is moved between players is improved dramatically with the accountability DLTs provide. In the future it is likely that the regulatory bodies will force the adoption of this technology if enterprises do not do so first.
Digital twin NFTs provide the flow of responsibility (a form of ownership), a collective cross-party collection of data about common objects as well as a source of truth about those objects for observers.
Tracking and Identification technology enhances the value of NFTs in the supply chain
Enterprise supply chains have grown increasingly complex with each year that goes by. This means a wider variety of parts and vendors and raw materials. With increasing specialization comes greater interdependence. This interdependence is in direct conflict with the current reality of silohed data and systems. At every transition point between players in the supply chain (more aptly a “supply cloud”) data exchange is difficult as the targets on both sides are complex and ever-changing.
NFTs can help with this as they model one (or a batch) of the things moving smoothly between the players. With the NFT transfer, each player takes responsibility for their part of the supply chain be they a refiner, a transportation agent or the final manufacturer. This required fluidity, however, means the underlying NFT platform and the data attached to each object must also be fluid. It cannot be structured like an RDBMS with every field that every participant might want or need hard coded. Sadly many smart contracts require this prescriptive approach which undermines the efforts at deploying blockchain/DLTs from the outset. Instead, the NFT needs a flexible model like a document database that has some high-level data points identifying, classifying and potentially tracking the origin of the object, but with flexibility for each agent along the path to record their relevant details without the pre-arranged agreement of every other party.
As with modeling expensive assets, the key is flexibility. Every field of every facet of a mineral can’t be pre-set, but rather conventions must be set for understanding and the precise details of the NFT need to remain flexible.
The handoff of objects, as well as the ability to analyze the flow, is greatly enhanced through location and identification technology. As supply chains go beyond basic barcodes and implement more robust solutions like RFIDs or smart wifi/ZigBee tags or video recognition its critical these systems are integrated not just with suppliers internal systems but with the NFTs tracking goods moving between manufacturers. These all benefit from flexible and lightweight agents capable of logging basic facts about NFTs in the collective supply chain view.
Again the themes of flexibility within the data model, the smooth transfer between parties and nuanced permission options are the key features an NFT platform must support.
Enterprise NFTs can go full circle and fuel the consumer demand for accountability
Bringing our tour of NFTs as real-world proxies full circle the tokens being tracked for materials are part of the solution for the transparency and sustainability that consumers are demanding. With the right, flexible system in place, this can be a literal transformation of the same data and tokens.
Essentially the consumer view into the NFT is “just another view” like those of a regulator into where materials were sourced, how they were transported along the way and how they were processed at various steps. This ultimate view of a world powered by DLT backed by the transparency NFTs can provide may feel far fetched today but many of the factors involved are aligned and solutions can move fast when there is value to be unlocked.