FAT Ecosystem Whitepaper
Version 0.1
The emergence of tokenization has caused a stir in the financial and securities industries. The idea that you can tokenize equity, commodities, and goods is not new as evidenced by our longrunning derivatives and commodities markets, and the advent of currency. We don’t often see the traders on wall street toting tons of steel or pounds of gold, they trade the tokenized version of their chosen asset digitally and instantly.
The potent combination of cryptographic techniques and digitization that have flourished in recent years offer new opportunities to more securely and efficiently trade tokenized goods. Removing trust and 3rd party involvement decreases transaction costs significantly. Transactions become instant with better technology, and liquidity increases between assets on the open market.
A requirement for a tokenized economy is a permanent, cryptographically verifiable record of transactions that occur. Factom fills such a role perfectly: Factom is fixed cost, immutable, cryptographically verifiable data storage. Although the Factom protocol is data agnostic, interpreted applications can be built using Factom’s data structures to achieve the tokenization and transfer of assets. Such a solution would have predictable costs, be affordable, and enjoy many of the benefits of the base Factom protocol.
Good candidates for Factom tokenization are assets that can be uniquely identified and rely on authenticity/uniqueness for valuation, or have high transaction costs.
Digital assets are goods that are synthetic in nature, and represent a store of value, work, or achievement. Such assets are already quite common in our culture, and many people transact and purchase digital assets without realizing it.
Traditionally equity in a company is represented by units of stock, each of which is unique and indivisible. In many ways, stock in a company is already tokenized equity, which itself may be traded with and redeemed for fiat. Stock certificates have a unique serial number and are issued by the company to its shareholders.
Digital tokenized equity is analogous to traditional equity, except it is ruled by cryptographic and mathematical laws that can be used to prove its authenticity. Instead of issuing stock certificates, a company may issue cryptographic tokens to a limited quantity of shareholders. Each issuing transaction is recorded immutably and must be authorized by the company using a cryptographic signature. This results in equity that is traceable, impossible to double spend, and can be transferred with very little cost.
Many of the benefits tokenized equity provides fly in the face of modern regulatory industries such as the SEC. Over the course of 2017 and 2018 we witnessed regulatory agencies crack down on several ICOswhich allegedly issued securities to unauthorized investors. Digitally tokenized equity is still a viable option for accredited investors to transact securities, legally, at a low cost.
Currencies based on an existing platform, similar to Ethereum’s ERC20 Tokens, can be employed to create special use Layer 2 tokens and economies. This is especially relevant when designing Layer 2 applications that use tokens as incentive, currency, or fuel.
The emergence of “digital consent” and “digital ownership” require permanent public digital record keeping. They can then license and authorize the distribution of their work to others at very little cost compared to traditional methods. Projects like P.oet are attempting this as we speak, but depend on Ethereum instead of Factom resulting in unpredictable cost and performance. Imagine if an upcoming artist could prove they created their new creation cryptographically, accept funding, and sell their new album online all with nominal fees based on the stable Entry Credit instead of expensive contracts with record labels.
Digital goods and items such as “In-App Purchases” have a virtual utility can be tokenized to make them tradable on secondary markets, traceable, and auditable. Although some may have a hard time giving the concept credence, many people attribute real world value to virtual items in the real world. The virtual goods industry was worth over $15B USD in 2016 and continues to grow at a CAGR of ~6%.
Several platforms such as Wax have launched on Ethereum to do such a job, but Factom offers a much more realistic, cost effective, and secure solution.
The traditional system of centralized land registries, titles, and deeds can be streamlined to be vastly more efficient using tokenization. Combining tokenized land rights, use of digital identities, and the blockchain, land rights can be authoritatively verified and transferred between parties much more efficiently.
In the United States, title searches necessary for purchasing land can take two weeks or more. It could be possible in our lifetimes to be able to purchase a home and legally own it the very same same day, or even instantly.
Land right’s on the blockchain are currently being explored as a solution in localities where corruption clouds the true story of ownership. Using Factom for such an application would result in a low, predictable cost on the order of cents for documenting ownership and transferring land between parties.
Much like land ownership, the Factom blockchain can be applied to create a cost effective, trustless, and auditable system for transacting and registering the titles of vehicles.
To legally purchase or sell a Vehicle in the United States, you must transfer the title of the vehicle through a central party such as the Department of Motor Vehicles or Bureau of Motor Vehicles. This requires multiple forms of ID and sometimes physical attestation.
The DMV in the United States is a prime example for replacement. In the state of California alone, the DMV was allotted a budget of $1.1B USD for 2018 operations.
Using a tokenized vehicle registration system obviates the need for oversight except by administrators, and can decentralize the authority of the system. Administration can be conducted from a central office or remotely with the same degree of trust, using the power of cryptography. Similar strategies can be applied in many other areas of government work to reduce costs and increase efficiency.
Authorities already use internet databases to track and disincentivize the sale of stolen and black market art. Art that is reported stolen has a drastically decreased value and liquidity, and cannot touch the legitimate market without scrutiny. Works of art can be tokenized and placed on the blockchain to attest to their creation and ownership, and decrease the cost of authenticating and transferring works of art.
Valuable legacy works of art can be uniquely identified by chemical composition and many other scientific methods. New works of physical and digital art can be fingerprinted and identified using existing low cost methods and secured immutably to the blockchain.
Using Factom for such a purpose would provide a low cost way to record and audit transactions of art on the open market.
Banks thrive on fees. Currently having of a bank looks something like this:
- Maintenance fees for keeping an account
- Fees for withdrawals from non bank branded ATMs, additional fees for international withdrawals.
- Fees to create cashiers checks
- Engaging in wire transfers often requires fees on both ends, with additional fees and scrutiny for international transfers.
- Many more exciting and expensive items...
Tokenization, specifically of currencies, offers a way to limit or completely remove banks from the equation by reducing costs. Although the banks may not like this, incentives for businesses and individuals drive the market over time. If costs are lower to transfer money outside a bank, it will happen. We’ve seen this through the 2000’s and 2010’s with the launch of services like Paypal, Venmo(By Paypal), Zelle (U.S. Bank), Squarepay, and the like.
Creating accounts on most cryptocurrency networks is free. Currencies living on the blockchain usually require minor fees to perform transactions. In May 2018 it cost approximately $0.19 USD to send a arbitrary amount Bitcoin from one party to another. On Factom it will cost $0.01 USD per arbitrary Factoid transfer, forever. Token transfers are likely to be similar in cost, with additional transfer costs for complex applications.
The companies responsible for verifying, and transferring, and insuring the ownership of property can be largely replaced by tokenizing real estate. Ownership of property can be verified and transferred cryptographically, securely, and in the open using low cost technologies like Factom.
Title companies thrive on charging closing and title fees. Using a public blockchain for property ruins the justification of a title company charging extra fees. On the next page is an example of a title company quote
A typical home mortgage in Berkeley, California, United States:
Many of the costs, such as title fees, are not applicable to blockchain solutions such as those that may be built on Factom. The largest cost on the sheet by a large margin are the taxes charged by the County for the conveyance deed, each of which have an operational cost that can be lowered.
Digital identity protocols on Factom will be crucial to creating an authoritative system to tie real world identities to those on the blockchain. Factom has already developed digital identities which are currently in use by Authority Node Operators to sign transactions on the network and receive payment. The Factom core team is currently developing higher level functionality for Factom digital identities.
For a token economy to be realistic, everyday users will need to use sufficiently secure encryption techniques. Although this may seem too complicated for the layman, using hardware encryption modules can be simplified to the point of mass adoption. We’ve recently seen this with the advent of the Yubikey and other openly available hardware solutions.
Paper deeds and hardware security devices can be physically secured in identical manners. Users may also use paper based digital identities if they wish.
Factom Smart Contracts will be useful for creating and defining standardized token mechanics on Factom. Smart contracts are immutable programs that define the rules of how a chain or application may be interacted with, and what is considered a valid transaction or action. Due to Factom’s design, it’s currently impossible to prevent unauthorized entries to an applications chain, meaning that clients will need to interpret and filter the blockchain to use an application. Progress is currently being made on this topic on behalf of DBGrow and the Factom community.
For a simple tradable token on Factom, only a set of asymmetric cryptographic keys and a few Entry Credits are required.
The idea is to create a set of minimal rules, datastructures, cryptographic protocols to issue and trade assets on Factom, and a rudimentary protocol that parties can validate transactions against to achieve consensus. Factom can host and organize discrete units of metadata in the form of Entries in Chains. Theoretically Factoid transactions can be used if the Factom protocol is modified to allow them to hold metadata. However, this comes at a much increased expense over Entries.
Similarly to ERC-20, fungible assets can be represented with floating point numbers representing balances. A simple asset suffices to achieve this functionality. The initial issuance entry contains the total number of units issued, with each following entries representing transactions of the balance from one address to another. Tokens in this system are fungible and may be in fractions of a unit.
Similarly to Bitcoin’s Colored Coins and ERC-721, Factom can tokenize non-fungible assets by representing them as metadata in the content of an Entry. Assets are tokenized by proving their existence using defining features. This may be a unique ID, hardware identifier, or other permanent feature.
Assets that may only be exchanged with the authorization of a third party, like regulated securities, may be achieved on Factom. This is very similar to the ERC-827 standard of Ethereum. To transfer an asset, the transaction must be countersigned by the issuing party or regulatory agency. This is applicable to both fungible and non-fungible assets
For such a system to be valid, a few simple rules must be followed:
- Each entry in the system must resolve to valid JSON
- Each asset must be uniquely identifiable among all assets on Factom
- Assets may only be transacted by the address that owns them
- Each valid transaction of an asset must be signed by its current owner and contain a unique identifier (nonce) that has never been used before. Transactions with duplicate identifiers are invalid.
The below diagram represents a simple set of datastructures to support the aforementioned token mechanics using Factom Chains and Entries:
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Issued Assets Index Chain
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- A chain generated deterministically from a digital identity
- Each entry in the chain represents a reference to an asset issued by the digital identity
- Exists for indexing purposes. Each index entry and linked asset issuance entry must be signed with a private key of the referencing digital identity to be valid.
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Asset 0: A Simple Asset
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- Represents a fungible or singular non-fungible asset. The first entry in the chain describes the issuance of the asset, including its fungibility, identifying information and other metadata.
- Each following entry represents a transaction of the asset from one address to another.
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Asset 1: Multi Element Asset
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- Represents a group of non-fungible or uniquely identifiable assets issued by an identity, like shares of stock, luxury items, or cryptokitties.
- The first entry in the chain is an issuance entry describing overall asset class and other metadata. Following entries on the chain represent individual assets issued by the Identity.
- A separate transaction chain records transactions of the issued assets from address to address
- An identity can issue additional assets as necessary
- Every individual asset’s history is traceable, and must originate from a transaction from the issuer to it’s initial holder.
A standard definition of how a Factom based token works will be paramount to creating a widely adopted token economy. Similarly to Ethereum’s popular ERC-20 token standard, we must create a standard token interfaces so that tokens can be ubiquitously traded between accounts.
A placeholder for the initial Factom Asset Token standard supporting fungible assets. Most akin to ERC-20.
A placeholder for the initial Factom Asset Token standard supporting non-fungible assets. Most akin to ERC-721
Both protocols will support the ability for 3rd parties to authorize transactions
Tokenizing an asset effectively reduces it’s rightful ownership to the possession of a secret. If this secret is lost, it is still possible to prove ownership using the transaction history of the tokenized asset. However, loss of a secret means the assets in the account become non transferable, as the ability to sign transactions from the account has been lost.
This is not terribly dissimilar from losing a birth certificate, PIN, or password. However, using a blockchain solution, there is no centralized party to restore access to an account or records unless custodianship is handled. More specifically, restoring access that allows individuals to transact assets can not be done by a centralized party without obviating the trustless nature of the identity system. Robust and secure methods of proving and restoring ownership must be devised so that it becomes possible to regain access in the event of theft or accidental loss.
Currently, Factom Inc. is developing functionality to allow rotation of an identity’s private signing keys, which provides a partial solution. If a key is compromised it may be marked permanently invalid. However, if the root key used to generate private signing keys is compromised, the identity will be lost.
The underlying technology facilitating tokenized systems, smart contracts, are still very new technology. Architecture and design bugs in smart contracts based on Ethereum, EOS, and other platforms are responsible for the loss of millions of dollars in funds.
If we are to have a tokenized asset economy based on this technology, it needs to be secure. No one will implement a system that puts their home, car, assets, or identity at risk. This goes doubly for governments deciding to implement solutions based on blockchain.