September 19, 2017

Digix first mover in tokenizing assets on the blockchain

Source submitted by jeriaska on 2016-05-28
Videogames are expanding into virtual environments. And with the recent crowdsale funding the Digix organization in Singapore, there is now a way to represent and securely trade discrete, valuable assets like gold on the blockchain. This is a practice that will influence online commerce in the short term, and soon impact virtual reality.

This week I inspected 1400 grams of Digix gold, held six meters underground at FreePort, known as the Fort Knox of Southeast Asia. While no photographs are allowed inside the vaults, first-hand reports indicate that priceless collectibles are held there before being auctioned at Christie's, the world's largest art business.

Digix co-founders KC Chng and Shaun Djie provided the tour, which required two facility personnel to open the vaults. This level of security safeguards the gold's physical status, while the digital tokens to which they are tied are trustlessly secured on the blockchain.

Singapore has created a regulatory sandbox for financial technology companies and is the only place currently where, from a regulatory perspective, tokenization of gold on the blockchain is likely to be permitted. Digix therefore has clinched a first-mover advantage in the digitization of assets for online commerce today, and the impact will be felt in the future in shaping virtual worlds.

The Double Spend Problem

Digix has generated a digital token called DGX that represents a gram of gold held in FreePort. Before the Bitcoin blockchain was invented in 2009 by an pseudonymous cryptographer called "Satoshi Nakamoto," there was no reliable way to transfer such a token without inviting the possibility that it might be spent more than once.

Nakamoto's answer to the double-spend problem was to create a cryptographic open ledger, updated in intervals called "blocks." Securing the network by authenticating this chain of blocks, while adding valid new blocks of transactions, earned blockchain "miners" bitcoins. These bitcoins incentivized the miners' efforts and compensated them for the electricity bills racked up by their computer hardware. This "proof of work" secured the network and endowed the tokens with market value.

A bad actor attempting to spoof the network by proffering a plagiarized blockchain would have their work cut out for them. They would be required to fool all the other peers on the network, and unless they controlled at least 51% of all the mining power would quickly be unmasked as a fraud and rejected. Bitcoin tokens could be transmitted anywhere in the world at practically the speed of an email, though traffic on the network caused transactions to require some minutes to settle.

In comparison to bitcoin's exclusively digital token, the monetary value of the Digix DGX token is far easier for the layman to grok. If you have one hundred DGX tokens, you can show up to FreePort with the Digix team to claim your real-life 100-gram bar of gold from their vaults. The digital private key for a DGX token needs to be held by no one but the owner, allowing greater control over the funds than a trusted third party like Western Union or PayPal can offer.

The Decentralized Autonomous Organization (DAO)

What has allowed Digix to leap ahead, securing funding from the peer-to-peer community, is the familiar nature of its business model. Where Digix differs from traditional precious metal dealers is in its decentralized status. The first ever Decentralized Autonomous Organization to hold an on-blockchain crowdsale, Digix raised the equivalent of millions of dollars in Ether digital currency through a Kickstarter-esque fundraising event.

Owners of the tokens purchased during the crowdsale (called DGD tokens) can vote on proposals, and the tokens will appreciate in value as Digix generates revenue. Token holders will soon vote on a proposal submitted by team members at Attores for writing up customizable smart contracts. (Disclosure: the author participated in the crowdsale and purchased some DGD).

A more recent alternative to the Bitcoin blockchain, the Ethereum blockchain is a Turing complete smart contracts platform that allows for the exchange of tokenized assets like DGX and DGD. It is a "trustless" system, meaning that no trust is necessary between two parties for them to transfer an asset like gold in a virtual space. Using a smart contract, cryptographic proof can be offered that the gold exists and that it will be transferred according to the terms of the agreement.

Auditable proof of smart contracts allows for the transfer of verifiable and unforgeable assets as the basis of decentralized Ethereum applications, or Dapps. A curated list of such apps can be found on the State of the Dapps website, designed by Digix team member Chris Hitchcott in Singapore.

State of the Dapps

Eventually the Ethereum project aims at launching its Metropolis release, the upcoming third stage on its Roadmap. The update will introduce a Mist browser for non-technical end users to connect to Dapps through a full-featured user interface. As a first step toward disrupting the business of videogame music, a netlabel called Ujo Music and virtual goods trading platform named Freemyvunk are currently demoing services using the Ethereum blockchain.

The Digix DAO is a for-profit undertaking, concerned with generating profits from the trading of gold to secure a return for its token holders. At the same time, the decentralized organizational structure of the DAO upends the traditional centralized model of businesses by allowing all holders of tokens from all over the world to vote on proposals. A token holder's influence over the direction of the DAO is in direct proportion to their supply of tokens and frequency of voting.

Digix foresees a day when frictionless, global DAO-to-DAO business will allow for the disintermediation of startups. Decentralized organizations seek to establish a provably fair form of governance that can be audited by anyone simply by checking the records and smart contract code secured on the blockchain.

When discrete physical objects like grams of gold become programmable, paradigms shift. The disruption that awaits is as palpable now as when the internet first came online or when smartphones first hit the market. It is no longer a question of whether blockchain technology will make an impact on virtual environments. It is only a matter of time before we find out just how the blockchain disruption unfolds.