Re-Defining The Meaning And Scope Of Digital Assets – Part 2
Ralph Windsor, DAM News Editor concludes the second part of this article series: Re-Defining The Meaning And Scope Of Digital Assets.
In the first part of this article, I described how there were now three different understandings of the term ‘digital assets’ and discussed the first two: digital assets with binary essences and metadata-only digital assets. In this piece, I will consider digital assets as commodities, blockchains and how digital assets might have a role to play in more cutting edge technologies like Virtual Reality, Internet of Things and 3D Printing. Finally, I will assess how enterprises can begin to devise a strategy to manage digital assets in an applied (or task-specific) and organisation-wide manner.
Digital Assets As Commodities
As was discussed in the previous article, most current examples of digital assets are (to a greater or lesser extent) unique entities. This is what gives them their intrinsic value because otherwise it is possible to substitute one for another and obtain the same benefits. As described in Appreciating The Value Of Digital Assets: Understanding The Potential Of DAM In 2016 however, digital tokens like Bitcoin and the blockchains (or distributed ledgers) used to record transactions using them are gaining momentum and becoming accepted as more than just experimental projects. A term now being applied to refer to them is commodity digital assets.
An issue that has been debated is whether digital assets like Bitcoin are currencies or commodities, mainly because they frequently get called cryptocurrencies and there is currently a legal case to decide is Bitcoin are US currencies or not. The view that I tend to agree with is that these are commodities because the value of them fluctuates according to supply and demand. As most of the developed world’s central bankers have collectively demonstrated since 2008, the supply of money (i.e. fiat currencies) can be increased at will, an option which is not available to other commodity classes like energy, agricultural goods or precious metals etc. Digital tokens like Bitcoin depend on a finite supply or the hard-won trust they have only just begun to acquire would evaporate very quickly.
If we are dealing with a digital commodity, there must be intrinsic value, or to put in simpler terms: something tangible you can sell. In the case of Bitcoin this is the artificial scarcity (which is a product of the cryptographic complexity involved in solving the equations or ‘mining’ as it is referred to) and also the size of the network and ubiquitous nature of it. The reason why Bitcoins have value is because there are a limited number of them and enough people think they are worth something now which will not disappear in the future. Bitcoins still have some characteristics which make them like early-stage internet stocks (and the corresponding volatility which accompanies that comparison). As digital assets in their own right, they have limited intrinsic value, but still enough for people to want to own them.
Another technology which is similar but more focussed on the utility that can be derived is called Ethereum. This provides a common token (known as ‘Ether’ or ETH) along similar lines to Bitcoin and also uses a blockchain to record transactions in an immutable form. The purpose is to facilitate exchange of value rather than it being a digital asset in its own right, but as I will discuss later, this does not stop people speculating on them for the same reasons they do with Bitcoins.
Ethereum (amongst its other attributes) is an example of a digital asset infrastructure which I have mentioned in the past needs to exist to enable digital asset value chains to become reality. So far, most of the ‘dapps’ or de-centralised applications running on Ethereum seem a bit limited in their appeal, but the potential of what could be implemented if adoption takes off is hard to ignore. Ethereum also has its own scripting language (based on Python) called Serpent which is more expressive and sophisticated than the Bitcoin Script language.
While Ethereum provides the building blocks and application logic for delivering commodity digital assets, the intrinsic value itself still has to be generated. Large-scale batch data processing seems like a basis for generating that value which has still not yet been fully explored, but it is a subject which many already involved in Digital Asset Management may have some familiarity with. Some examples might include:
- Data mining of website logs to identify visitor trends.
- Large-scale analysis of asset price data (e.g. for trend-following or momentum studies).
- Analysing medical experiment results to help develop medicines and pharmaceutical innovations.
- Batch processing of media like images or videos.
No one single transaction from any of the above processes is likely to be remarkable in its own right, however, the results from being able to carry out lots of them are what generates value, whether from the activity itself or the insights/innovation which can be subsequently commercially exploited. While it would be possible to use a conventional incorporated company equity ownership structure to establish an operation to hold these assets and distribute profits from them, this involves not inconsiderable legal costs (and the process is time consuming). If tokens can be used to represent shares or sub-divisions of the value generated (and ownership proven as a result of blockchain transactions) then these are effectively tradable digital securities that could avoid many of these complications.
As discussed in the comments section of the earlier article, one prototypical model for how the value might get generated was the SETI@home project which analysed radio waves to search for extra-terrestrial life by distributing calculations to those who installed the software on their computers. For more profit-oriented endeavours, those participating are going to want to get paid and this is where digital commodities could provide the necessary liquidity and fungibility to make a market for them a feasible proposition.
The role of metadata is not diminished with digital commodities, however, the focus moves up from each individual instance to the commodity as an asset class (or sub-class) itself. To explain this, consider how conventional physical commodities of the same type get differentiated from each other. If you buy a barrel of oil or a bushel of wheat, although one unit should be identical to another, there are certain key features of the subsidiary class it belongs to which can impact its value and therefore the price charged (e.g. West Texas Intermediate or Brent Crude for oil). Similar effects will come into play with digital commodities, probably more so since by virtue of them being digital in the first place, there is likely to be a considerably greater amount of metadata available to help producers and buyers assess demand and how it is correlated to supply.
Blockchains As Interoperability Protocols
I would contend that the real power of technologies like Bitcoin and Etherium is their blockchains or distributed ledgers. The blockchain is a relatively simple idea, each transaction has a an encrypted reference to the one that preceded it. This link to the last transaction makes it impossible to re-order the sequence or remove references and therefore, provides an immutable record of all activity. The ledger is de-centralised and copies of it are stored globally with updates being transmitted across the network as transactions are made in real-time. This concept has some similarities with how DNS (Domain Name System) works, although blockchains are not hierarchical in nature as DNS is (which is either an advantage or disadvantage depending on your perspective).
A few years ago, I wrote an article for CMSWire: The Building Blocks Of Digital Asset Management Interoperability. One of the essential components I described in that item was a global unique identifier for all digital assets since this would allow different systems to access assets in a generic manner. With the benefit of a few years’ hindsight it appears that the blockchain would fulfil this role. This is an idea that has the momentum and levels of adoption to make it more likely that other technologies will be able to connect into it.
In addition to globally recognised common unique identifiers, one of the other issues with digital asset interoperability is access to asset metadata. The Bitcoin blockchain provides a fairly limited facility for storing metadata about transactions due to concerns about spam and the increasing size of the blockchain itself. Various solutions to this are emerging, however, for example, the Coloured Coins protocol. This uses a pointer or reference to a metadata record which could be much larger and is stored outside the blockchain. Coloured Coins is open source and it is interesting to note that the project team responsible describe it in digital asset terms:
“Colored Coins is a concept that allows attaching metadata to Bitcoin transactions and leveraging the Bitcoin infrastructure for issuing and trading immutable digital assets that can represent real world value. The value of such digital assets is tied to a real-world promise by the asset issuers that they are willing to redeem those digital tokens for something of value in the real world.” [Read More]
These innovations certainly give the impression that they might provide the basis of a protocol for DAM interoperability and a far more credible one than has been proposed hitherto. As I will discuss in the following section, however, there are issues with blockchains which relate to their close relationship with cryptocurrencies which could affect the pace with which they get adopted.
Divorcing Cryptocurrencies From Blockchains And The Role Of Sidechains
It could be argued that a major stumbling block holding back corporate adoption of commodity digital assets is the use of coins or cryptocurrencies as tokens to represent blockchain transactions.
For those who originate from a corporate environment, the blockchain as a shared ledger opens up some potentially interesting opportunities for cost de-duplication and interoperability. Needing a cryptocurrency to use it, however, adds a lot of other complex issues which limit the benefits. The de-centralised and anonymous aspect is not much of an advantage to most organisations of any significant size because they are already obliged to maintain detailed records about where funds were received or spent in order to calculate tax liabilities as well as demonstrate compliance with legislation.
A further issue is volatility of their prices. For example, the BTC/USD (Bitcoin to US Dollars) cross-rate has increased from $235 to $430 in the last year with a 118% low/high range. The value of Bitcoin has also been as high as $1242 in 2013. By comparison, the EUR/USD (Euro to US Dollar) cross-rate has changed from approximately $1.11 to $1.09 in the last year (with a one year range of roughly 10%). With some of the less established cryptocurrencies or so-called ‘altcoins’ like Ether (ETH) the situation is even more extreme and moves of 300% in the course of a single month can occur. This might make cryptocurrencies interesting to speculators, but most conventional businesses are looking for stability and predictability so they can plan budgets with a degree of certainty.
It should be noted that many conventional commodities which are integral to the operations of a large number of businesses are also subject to significant price variations (oil being a recent example) and even major currencies can have dramatic movements in a single day. There are some established methods to mitigate and hedge against these effects, however. While there are similar options slowly emerging for cryptocurrencies like Bitcoin, the regulatory framework does not yet properly exist to allow them to be used for larger volumes (and sizes) of transactions.
I suspect many corporations who might be interested in blockchains would prefer to do so using major fiat currencies, or at least via a token with a pegged exchange rate. One potential method for avoiding these issues, but still using the Bitcoin protocol are so-called ‘sidechains’, which were described in a widely cited whitepaper: Enabling Blockchain Innovations with Pegged Sidechains. My understanding of sidechains is that a Bitcoin transaction on the Bitcoin blockchain can be used as a node to a separate and independent blockchain that serves an independent purpose and has its own rules and value transfer protocol. The following quote from the sidechains whitepaper
“The core observation is that “Bitcoin” the blockchain is conceptually independent from “bitcoin” the asset: if we had technology to support the movement of assets between blockchains, new systems could be developed which users could adopt by simply reusing the existing bitcoin currency” [Read More]
While this does not, itself, resolve the issue of volatility in the price of Bitcoin, the ability to control a separate blockchain (or sidechain) allows transactions on it to be dynamically hedged (or pegged) to a conventional currency far more easily. The sidechain encapsulates one blockchain network within the Bitcoin protocol so the benefits of it can be utilised but without exposing the participants to the same level of risk.
Even though sidechains appear to offer a method to sidestep the need for many different kinds of cryptocurrencies, large enterprises may still wish to avoid using them and instead seek to invent their own private blockchain equivalent, entry to which is strictly controlled by them and a very select group of trading partners. This might be either for regulatory reasons or because they wish to maintain a competitive advantage which might be lost if ad-hoc external parties were able to join. There are already startups staffed by a number of personnel with financial services backgrounds who are taking an interest in exploiting these kinds of opportunities to use blockchain technology with larger corporations (as well as the existing open source protocols like bitcoin, it should be noted).
Whether there is a complete divorce between blockchains and cryprtocurrencies, or a form of managed separation remains to be seen, but this seems to be an issue which will feature prominently in debates about the future of digital asset interoperability protocols.
Digital Assets In The Era Of 3D Printing, Virtual Reality and Internet of Things
There are some currently fashionable and ‘cutting edge’ technologies which are getting widely discussed at present such as 3D printing, Virtual Reality (VR) and Internet of Things. VR has been allegedly on the cusp of becoming mainstream for more than twenty years and has turned into even more of an odyssey for those involved in it than Digital Asset Management has. Even though the promise has not yet lived up to the reality, there is evidently the will to come up with saleable products and services from these concepts which suggests sufficient momentum will eventually be generated to propel them into widespread use.
One point to note is that they all rely on object-oriented data structures (or models). 3D printing uses templates to render items, Internet of Things needs a model of the physical world as a data structure and VR needs the same but with a virtual equivalent instead. The obvious paradigm for them is one based on digital assets as I have defined the term in this article: i.e. something of intrinsic value which is enhanced through extrinsic value (i.e. metadata).
As these technologies mature, they will generate their own digital asset management problems, which will in-turn become someone else’s digital asset management opportunity. Further, unlike media assets where the origination process had to be incrementally converted to digital over a period of decades, all will start life as digital entities to begin with (and therefore generating metadata which can be converted to extrinsic value right away).
The role of digital assets is developing along two axis. On the one hand, there are multiple specific use-cases, such as those I have discussed in this article as well as the one that preceded it. They demand an applied perspective where subject-specific expertise is critical to success. On the other is an appreciation that digital assets are like an architectural model underpinning how organisations will operate in the digital environments that we will increasingly inhabit. The two perspectives interact with each other and identifying the relationships between them could uncover opportunities that were not available in the past.
I believe the management of digital assets is in the process of dividing into two separate (but related) disciplines, the shorthand for which might be termed ‘applied’ and ‘enterprise’. A lot of vendors and consultants already use the term ‘Enterprise Digital Asset Management’, but I do not think they properly understand what it means and just use it as a substitute for the word ‘large’. In the wider context of the use of the term ‘digital assets’ which I have outlined in this article, ‘enterprise’ means that it affects the whole organisation rather than one business function like marketing, operations, finance etc.
- Applied Digital Asset Management is what has characterised the early and current period of DAM. It is concerned with how to make best use of digital assets for some specific task, e.g. marketing collateral management, customer relationships, digital preservation, image processing, document management, invoicing, metadata management, data mining etc.
- Enterprise Digital Asset Management is focussed on more fundamental issues like infrastructures for moving digital assets across value chains, interoperability and metadata models to represent extrinsic value. An alternative term (which non-commercial entities might prefer) could be ‘Pure Digital Asset Management’.
Applied DAM should test the theories of the pure aspect and validate (or invalidate) them. Enterprise or Pure DAM should generate strategic insights which can be incorporated into an Applied DAM strategy to optimise it and highlight opportunities which might have been missed.
My expectation is that there will be some initial resistance to the idea of DAM as a discipline in its own right for a while (especially because those people that have heard of it still think in terms of digital media when the term is mentioned). Given that there are going to be exponentially increasing numbers of digital assets in circulation, however and the scope of what they represent is also expanding, this seems to be the only practical way to deal with the problem they will generate in a way that allows organisations to consider them generically on the one-hand but with a specific business problem in mind on the other. Both perspectives are necessary so that lessons learned in one initiative can be transferred to others and that there is an infrastructure or framework to enable digital assets to move unencumbered not only within an enterprise onward to its supply chain partners also.
I plan to explore what this wider definition of digital assets (and the management of them) might look like over forthcoming articles.