Case 58: Blockchain Can Provide Alternative to Digital Asset Management
First, we must consider the minimum requirements for a ledger for digital assets:
- User security: The ledger needs to implement adequate authorization protocols to identify ownership and permit transfer or issuance of assets
- Counterfeit resistance: The system needs to have mechanisms to ensure impossibility of counterfeiting assets
- Auditability: The system needs to store all asset transactions in order to permit audits of activity (e.g., by regulatory bodies) There are several additional properties that, while not required, can influence adoption of the system by users and its regulatory compliance, such as internal immutability (i.e., immutability ensured by intrinsic properties of the underlying computing system rather than from the identities of system operators).
One category of digital assets are electronic money, where the asset is a claim to a real-world
currency. Centralized electronic money systems (PayPal, WebMoney, Google Wallet, Apple Pay, etc.) are commonly used in e-commerce. In essence, a centralized asset transfer system provides its users with a web interface and a database back-end to store account balances and transaction history. The system could use a two-factor password-based authentication vulnerable to various attack vectors such as phishing. The system also provides merchants with proprietary tools (such as APIs/SDKs) in order to accept payments from customers.
Centralized digital asset systems necessitate significant investments into back-end infrastructure, user authentication and regulatory compliance, therefore making them difficult to deploy and maintain for small and medium enterprises (SMEs). The users and auditors of such systems could be concerned about possible mutability of transactions, high availability of the system and its transparency (or lack thereof ). These concerns would be higher in the case the system maintainer is a comparatively small company without sufficient public reputation. For similar reasons, centralized digital asset infrastructure (i.e., infrastructure with a single entity controlling all aspects of the asset management) is unlikely to capture consumer-to-consumer markets.
Blockchain-based ledgers provide an alternative to centralized digital asset management. Blockchain technology allows to decouple the basic tasks performed by centralized e-money processors. These tasks include:
- Transaction processing: This could be performed in a decentralized manner by geographically distributed nodes of the network. Moreover, defining the rules for transaction processing (i.e.,defining valid transactions) could be split from the processing
- Asset issuance: In the most general case, this could be performed by any user of the blockchain network.
- Securing user’s funds: This could be performed by third parties using custodial or non-custodial wallets.
- Identities of services (and optionally customers): This could be established by building public key infrastructure based on a blockchain
- Application development: This does not require cooperation with blockchain maintainers
Thus, blockchains provide a decentralized digital asset management model, which could be less demanding and more appealing for asset issuers, services and customers. For asset issuers, blockchainbased ledgers could be considered a specialized platform as a service (PaaS). While blockchains are not the only possible type of PaaS for asset management, the core features of blockchain technology, such as increased auditability and user security could make them more attractive than potential general-purpose alternatives. Additionally, the absence of reliance on a single vendor and the associated decreased cost of operations could be a further advantage in the case of permissionless blockchains or blockchains with a diverse participation of transaction processors.