IOTA Digital Assets

This article is a translation of the German IOTA Beginner’s Guide by Schmucklos.

Digital Assets

What are Digital Assets?

The Digital Assets Framework is a single – but critical – part of the IOTA ecosystem that interlocks and relates to a variety of other elements of IOTA (e.g., Smart Contracts). We are moving from a single native asset economy (the IOTA token) to a colorful world of digital assets ranging from tokenized physical assets to data streams to NFTs.

IOTA is a multi-asset ledger. Most DLTs fall into the single-asset ledger category because they are only able to track ownership of a specific base currency within their ledger. Multi-asset ledgers, on the other hand, are able to manage multiple native tokens (1-layer asset) in the same ledger that holds the base currency.

The IOTA digital asset framework creates the foundation for tokenized, scalable, and secure digital assets that exist on the IOTA Tangle. All tokenized assets under the IOTA Digital Assets framework benefit from the same level of security, scalability, and (no) fees as native IOTA tokens. This makes digital assets on IOTA one of the most robust and scalable in the industry, and it will lead to explosive growth in the economic value secured and traded on the IOTA network.

Framework properties

  • The mining of the native tokens is done directly on the base layer, a “marking” or “coloring” is no longer necessary.
  • All native tokens are independent tokens in the IOTA ledger.
  • Each address in the ledger is capable of managing native tokens.
  • Registration of digital assets, or management of asset designations, is supported by the Firefly Wallet.
  • Native assets can be included in smart contract chains (2-layer). Moreover, the chains themselves can act as issuers of native assets.
  • All native tokens can be transferred directly (without a bridge) from one smart contract chain to another smart contract chain (i.e. between different 2-layers).
  • Define their own token creation scheme for native assets, for example, for their own inflationary or deflationary currencies.
  • Time controlled transactions can send tokens to someone. If they haven’t used them after a certain time (which you define), you get them back.
  • And much more, it’s a framework that’s really designed to be as flexible as possible.

Why tokenization?

Tokenization allows real assets to be managed, traded, bought and sold on a distributed ledger technology (DLT). The impact of this technological breakthrough cannot be overstated: Tokenization will change the concept and exchange of value as we know it. Tokenization is breaking down barriers and enabling greater democratization of finance and investment, while creating a more secure, transparent, and easier-to-manage environment for assets.

Furthermore, a feeless and scalable protocol like the Tangle will completely change the very concept of tokenization. Whether an individual is making a micro-investment in real estate, an artist is securing intellectual property, a restaurant operator is issuing gift certificates, a car company is issuing shares in its mobility fleet, or an IoT device is selling access to its data stream, IOTA’s digital asset framework will provide the architecture for everyone to tokenize and use assets securely and cost-effectively.

The possibilities of the IOTA token

Tokenization that leverages IOTA’s Digital Assets Framework will open up a world of new possibilities and opportunities. From issuing digital securities to trading NFT art, we are enabling our ecosystem to leverage the limitless potential of tokenization for concrete business use cases. Aside from the obvious business potential, tokenization also has a fun component that allows you to create and trade any type of tokens, reward coins, and whatnot.

The most exciting use cases:

Production-ready enterprise-level tokenization as part of the machine economy: tokenized assets operating on IOTA can provide real-time data feeds in a lightweight footprint – think digital twins on steroids.
Crypto applications such as multi-asset wallets and cross-chain uniswaps: IOTA Digital Assets lays the foundation for cross-network asset exchanges, with IOTA acting as a feeless bridge currency. As the framework matures and the tools around smart contracts are created by our community, it will be possible for the IOTA token to represent other assets such as Ethereum, Cardano, or Bitcoin and connect these assets in a seamless way. Instead of creating a bridge between each currency, IOTA Digital Assets will allow a pool and bridge to be built. This means that a single integration into the IOTA Digital Asset framework opens up the ability to trade between all assets on the network.
Non-Fungible Token (NFT): An NFT could represent a piece of art, a collectible, a special edition, or anything that is unique. It is essentially a digital property right that can be traded. NFTs are becoming incredibly popular on other crypto protocols, but IOTA Digital Assets is likely to skyrocket the field with feeless transactions.

Tokenization is a key component for smart contracts

Specific to IOTA’s Smart Contract Protocol (ISCP), the Digital Assets Framework is a critical security component that makes smart contracts possible. With the introduction of our Digital Assets Framework on the IOTA network, smart contracts will also become possible. But beyond the purely functional component, Tokenized Assets will also work in tandem with Smart Contracts to enable entirely new use cases.

Much of the current business that could be conducted more efficiently, securely, quickly, and cost-effectively on distributed ledgers is automatically executed by smart contracts that work with Tokenized Assets. Many of the more complex use cases for IOTA Digital Assets require Smart Contracts for their full realization (e.g., complex rights management for security tokens).

Use cases

The following sections describe some, but by no means all, of the possible use cases. It will be up to the community and industry to find more innovative ways to use the new features of the protocol.

Utility Token

A utility token provides a benefit to its owner by providing access to goods, services or products through the use of a token. A paper-based concert ticket, gift cards collected at a coffee shop, or a monthly public transportation pass are all examples of tokens. They can be used to prove that you actually have the right to use their services.

Native tokens can provide the same functionality in a secure, digital world with additional benefits:

  • Tokens cannot be counterfeited.
  • Tokens are held in the user’s digital wallet. The IOTA Tangle provides a decentralized framework to distribute, transfer and manage tokens.
  • Anyone can create, transfer, or hold tokens in a permissionless manner.
  • Native tokens inherit the feeless nature of IOTA.
  • Utility tokens can be easily integrated into the Firefly wallet.
  • The issuer can easily monitor the distribution, usage, and available supply of the Utility Token by monitoring the IOTA Tangle.
  • In summary, Utility Tokens on IOTA provide a secure, convenient, and affordable way to sell services, organize loyalty programs, and digitize paper-based token systems.

Security Token

Security tokens refer to digital tokens that are financial assets that fall under the category of securities. They are tradable financial instruments that are highly regulated, with conditions varying depending on the issuer’s country.

There is huge potential in the security token industry as they address the shortcomings of traditional securities:

  • Regulatory compliance (KYC, AML, etc.) can be enforced through the underlying protocol.
  • Both regulators and issuers have real-time data on how securities are allocated and traded in the market.
  • Traditionally illiquid assets such as real estate or art can be tokenized, allowing for better price discovery, fractional ownership, and more liquidity.
  • The cost of managing securities decreases dramatically as the protocol can act as a management entity.
  • A security token can be traded on secondary markets around the clock.
  • Security tokens can lower the barriers to entry for smaller or retail investors.
  • It is important to note that a Security Token itself is only a claim on the underlying security, it is not the asset itself.

One of the biggest technological challenges of security token frameworks built on distributed ledgers is how to enforce compliance. Smart contract platforms are well suited to solve this problem by using autonomous agents (smart contracts) at the base layer to manage the security token lifecycle.

IOTA has its smart contract solution (ISCP) on the 2-layer because the base layer of the IOTA protocol must remain lightweight enough to meet the needs of the machine economy. ISCP lends itself to advanced security tokenization, where all the properties of a security token can be programmed and enforced by the smart contract itself. An issuer can control supply, regulate trading, or even reverse transactions if required by law. Of course, this is not possible on the 1-layer, as it would add too much complexity to the protocol.

However, there is another way to perform lawful security tokenization on 1-Layer, using native tokens. An issuer could mint security tokens as native tokens and distribute them to multi-party signature addresses.

  • To release funds, both the issuer and the user must sign the transaction.
  • Transfers to addresses that are not verified would not capture the issuer’s signature.
  • The issuer can stop the trade and enforce compliance rules because it knows the verified identities of the users.
  • The security tokens are still managed in a secure, decentralized and feeless infrastructure, the IOTA Tangle.

In summary, Native Tokens enable security tokenization at the 2-layer like ISCP. These can be implemented as autonomous agents, fully customizable and with self-enforcing rules.

Non-fungible tokens

Digital tokens can be divided into two categories based on their type of fungibility:

  • Fungible tokens are interchangeable with other tokens of the same type because they represent the same value. Cash or IOTA is fungible because a $10 bill can be exchanged for two $5 bills, and 10 MIOTA is equivalent to 5 MIOTA + 5 MIOTA.
  • Non-fungible tokens, on the other hand, are not exchangeable because each token has unique properties that give it its value.

A Non-fungible Token (NFT) can represent a work of art, a collectible, or a special edition. It is essentially a digital property right that can be traded. Some exciting use cases include:

  • Crypto collectibles like crypto kittens, fantasy football league cards, etc.
  • In-game items that can be traded on secondary markets.
  • Digital artwork that is recorded in the ledger.
  • NFTs can also be used as collateral in decentralized finance.
  • Event tickets: NFTs can add great value and transform traditional ticketing to smart ticketing. As NFTs, smart tickets are verifiable, interoperable and have clear ownership. Therefore transparent secondary markets are also possible without the buyer having to fear fraud. If reselling a ticket is strictly prohibited (e.g., personalized tickets), the organizer can enforce this without any problems. NFTs can be made non-transferable in computer code and prevent ticket transfers. In addition, ticketing companies can save quite a bit of money because the cost of minting smart tickets is negligible, especially compared to traditional ticketing infrastructure. Properly structured, hundreds or even thousands of NFTs (smart tickets) could be created for less than a few euros. Another aspect of NFT based smart tickets is after it is redeemed at an event, the ticket does not die, it lives on in the user’s wallet and can be collected, traded or whatever if necessary.

Digital assets are more than tokenization

IOTA Digital Assets are more than just a competitor to ERC-20 tokens and the ability to tokenize things in the IOTA protocol. They are much more important because they enable “consensus over data.”

By creating a single, unique digital asset that you can spend on yourself over and over again, you can create a chain of issues backed by consensus. When you submit data with these outputs, everyone on the network will not only agree on the order of the published data, but will even agree on which data to use when conflicting information is published. This is incredibly important for various use cases beyond tokenization.

IOTA smart contracts will heavily leverage this capability to build “private, non-counterfeitable blockchains” that can only be updated by the digital asset owner. However, smart contracts are also just one example of a variety of use cases that require consensus on data and its order. There are many more, such as Oracle, digital twins, and the DID protocol.

Notes, issues, risks, regulation

  • Although Digital Assets are backed by the same rules as the regular IOTA token when transferred, they are significantly different from ordinary tokens as they represent real physical assets and financial obligations.
  • Any Digital Asset issued by a person or organization represents an additional risk. There will always be a possibility that the issuer of the Digital Asset will not fulfill the inherent obligation. There is even a risk that they will not represent anything real at all and will be completely fraudulent.
  • Because of these risks, rules and regulations will inevitably be required to fully exploit the potential of this technology.

More Details

Tokenization on the Tangle with IOTA Digital Assets – IF

IOTA Tokenization Framework Specifications – IF

Exploring the Properties and Benefits of Native Assets – IF

IOTAs multi-asset multiverse is coming – Medium

Original source

Last Updated on 4. December 2021