Digital Assets “A Girl’s New Best Friend Forever”
Digital assets are like diamonds.
Source: Australian Marketing Institute
Diamonds are a girl’s best friend, according to the 1940’s song. Fast forward 80 years, digital assets are now starting to compete with these small pieces of carbon for BFF status (best friends forever). Diamonds, like digital assets, share the following intrinsic traits: difficult to mine, small and extremely portable, pretty to look at, incredibly durable, easy to verify authenticity, and a relatively common (price per carat) global value. Furthermore, their inherent attributes include universal acceptance, divisibility (i.e. carats), fusibility (i.e. pile of diamonds). Additionally, their intuitive value is fairly easy to recognise, just ask anyone in the trade or pop into your local jeweler.
In the diamond business, according to Tiffanys — and they ought to know a thing or two about this matter — diamonds are valued based on the four “C”s colour, clarity, cut, and carat. This translates directly into the digital asset world of inherent, intuitive, and intrinsic value. These three “i” (‘3i’) describe the value of digital assets in a very similar manner. Storage of value, perceived appreciation, tradability are very objective and measurable. These 3i then affect speculation (or sentiment-based belief in a digital asset), certainty in value, certainty in the protection of the law, and tradability. Ultimately, resulting in a digital asset, where its suitability for certain types of transactions can be quickly determined. Some examples of digital assets like Bitcoin, Ethereum, or Dogecoin have 3i values that are completely different. All have 100 percent settlement at the time of the transaction, however, each one has different values and acceptance traits. Examples include Bitcoin, relatively good for long-term storage in a high inflation economy, Dogecoin is not. Ethereum by some is seen as good historically for building apps and, e.g. in the case of Initial Coin Offerings (ICOs), for raising capital. Dogecoin is good for short-term speculation.
Breaking down their traits into constituent components helps us identify their value. Firstly, all of these digital assets, like physical diamonds, can be well defined and protected by law for possession but there is no supra-enforcement mechanism that currently exists (such as a court of law) to then enforce ownership. Possession of a digital asset (via its private key) which is effectively ownership. This makes them often unsuitable for institutional investors when seeking the benefit and surety of the courts to define ownership in the legal jurisdictions in which they operate. Courts have no physical means to compel change of ownership of even forfeiture of these types of assets. The owner must be coerced by the court into changing ownership by his/her own volition.
Unlike physical diamonds, the value of most digital assets has no independent, intrinsic, trusted value. Instead, they have the extrinsic value of the market and what another person is willing to speculate and pay for them in a moment of time which then generates liquidity for that digital asset. This has led to wild swings in the perceived value of digital assets and the inability to use most digital assets in commercial or long-term contracts. No contract can reasonably include such highly speculated digital assets since the value over the short to long term is totally unpredictable.
In summary, these non-real world digital assets e.g., Bitcoin, Ethereum, and Dogecoin are primarily useful for speculative investment either short or long term. This is not conducive for long or even short-term use in daily commerce or for long-term contracts.
So what can be used as a substitute for them?
As described above, these non-real-world digital assets are just that, imaginary with extrinsic but no intrinsic value. Real-world digital assets such as wrapped fiat coins e.g., stablecoins are real like diamonds, however the polar opposite of ‘imaginary digital assets.’ It is possible to create a digital “claim of title” on real assets, whether they be backed, secured, pegged to equity, a bond, a commodity such as a diamond, or some real estate.
Real-world digital assets can be better protected in a court of law with the enforceability of ownership and value. They have an intrinsic, common, recognised value like a barrel of oil or building. They are also relatively stable over the medium to long term. More importantly, ownership can be moved as easily and as swiftly as diamonds with the same level of confidence.
In conclusion, the difference between imaginary ( or crypto) and real-world digital assets condenses down to two basic differences: the legal enforcement of ownership by a court of law and a trusted, transparent, digital representation of a physical asset. One has ownership and control of movement entirely controlled by the owner, the other can use the court system to enforce or change ownership. These two factors help in deciding if the digital representation of real-world trusted assets is worth accumulating just like diamonds.
A series of articles by David Parsons, Co-Founder of TrustMe™ Property Exchanges — for Digital Bytes, a weekly analysis of developments in the Blockchain and Digital Assets sectors, to get your copy email Jnny.Fry@Teamblockchain.net