Case 71: Blockchain Can Ensure the Security of Digital Assets

Digital assets are a relatively recent development related to the spreading use of information technologies in the financial services. Digital asset is a floating claim of a certain service or goods ensured by the asset issuer, which is not linked to a particular account, and is governed using computer technologies and the Internet, including asset issuance, claim of ownership, and transfer. Digital assets have numerous use cases, including:

  • Shares and financial securities
  • Smart property
  • Tie to a fiat currency
  • Local community money
  • Coupons
  • Digital collectibles
  • Access and subscription to certain resources

Using blockchain infrastructure for digital asset management enables creating pure digital assets (i.e., self-sufficient assets not acting as a “proxy” for real-world assets), which could be considered a transformative technology. Digital asset management could leverage security properties of blockchains, which include:

  • Impossibility of counterfeit
  • Immutability
  • Disintermediation and ease of transfer
  • Transparency and ease of auditing
  • No overhead related to transaction processing
  • Network effect brought by the unified infrastructure for multiple types of tokens

Blockchain-based digital assets (which we call digital asset coins, or simply asset coins) could be used in both financial contexts and in emerging consumer-to-consumer markets and Internet of Things (IoT). Blockchain architecture was introduced in. We retain categorization of blockchains from. In particular:

  • Public blockchains are blockchains that grant read access and ability to create transactions to all blockchain users. Users can transfer value without the expressed consent of blockchain operators. (Note that ordinary end users are not required to store any blockchain data.)
  • Private blockchains limit read access to the predefined list of entities (e.g., blockchain operators and auditors). End users need to rely on interfaces provided by blockchain operators in order to read and submit transactions.
  • Permissionless blockchains allow anyone to participate in building the blockchain. The core property of these blockchains is censorship resistance, i.e., any valid transaction broadcast over a permissionless blockchain network would be included into the blockchain. The term “permissionless” corresponds to the fact that there are no blockchain-wide policies restricting the use of the blockchain (although service providers can implement service-specific restrictions). Thus, a permissionless blockchain is by definition free for entry / exit for end users and application developers.
  • In permissioned blockchains, blockchain building is restricted to a set of known entities. The term “permissioned” reflects the fact that the entities building the blockchain may introduce policies to arbitrarily censor transactions, therefore potentially restricting the blockchain use by end users and application developers.

Public blockchains could be either permissionless (e.g., existing cryptocurrencies) or permissioned (e.g., the federated sidechains concept); private blockchains could only be permissioned. Public permissioned blockchains eliminate possibility of Sybil attacks, thus in principle providing a greater degree of scalability and flexibility compared to permissionless blockchain designs. Unlike private blockchains and similarly to permissionless blockchains, the correct operation of blockchain operators in public permissioned blockchains would be mostly mechanical.

The properties of public blockchains – easy entry and exit, openness, transparency, built-in precautions for operation in untrusted environment – could be benefitial for their adoption for decentralized applications. Thus, public blockchains could create ubiquitous infrastructure for the Internet of Value (IoV), with digital assets being one of its core parts. In contrast, private blockchains could retain reliance on trusted third parties for basic operations, thus limiting their innovative potential. For these reasons, our study will be largely focused on public blockchains; for the review of restricted access initiatives, one could refer to the Permissioned distributed ledgers report by Tim Swanson (note that the report does not contain information on newer ledger initiatives, such as MultiChain and Openchain).

Among existing permissionless blockchain networks that could be used as a basis for overlay asset protocols, Bitcoin is more secure than alternatives, both in terms of attack costs and intensity of study by cryptographers. While Bitcoin lacks a native support for user-defined assets, digital assets could be implemented with the help of overlay asset protocols – colored coins (e.g., Open Assets protocol) and metacoins (e.g., Counterparty). These protocols rely on the ability of the Bitcoin protocol to store small amounts of data on the Bitcoin blockchain. An alternative to overlay protocols is blockchains with native support of digital assets, which could be pegged to the Bitcoin ecosystem in terms of currency supply (sidechains) and/or in terms of security (merged mining, blockchain anchoring).