Digital certificates of authenticity
Can blockchain be used to improve traceability and establish digital trust chains?
So you are walking down the street and suddenly Del Boy pops up offering to sell you a Rolex.
One of a kind he says! One of a kind limited edition. Signed by Roger Federer himself. You see, it was gifted to Roger Federer by Rolex (the company) when he won his 20th Gran Slam tournament in career. But, he was short for some cash one evening when he was gambling in a casino in Monte Carlo, so he sold it. You see, Del Boy has found himself there at that same table, winning his 5th straight up in a row. But I digress. Mr. Federer offered his brand-new watch for sale to Del Boy. It was a fair price, as Roger wanted to keep playing roulette. Roger and Del Boy struck a deal at $25000.
But now, our salesman here — Del Boy is cash strapped he is selling it for just $15000.
You smile and wave your hand in denial.
It’s obviously fake, as fake as your story.
But, Del Boy is quick to interrupt you. He claims that he possesses a NFT token which proves that the watch is genuine.
Huh, you cry out in confusion.
Now we have to pause this story for a moment to explain NFT tokens and how is this is even relevant to this story here.
Fungibility is not about fungi
Entries in a distributed peer-to-peer database, i.e. — blockchain are colloquially known as tokens. Tokens can be monetary, representing a currency, loyalty points, or shares in a company, but they can also represent something different — like a real-world item. When representing real world items on the blockchain it is important to make sure that the token is not fungible, i.e. to make sure that this token represents this specific item and not all similar (or same items).
To explain what non-fungible tokens are, an introduction to the concept of fungibility is needed. For example, cash is fungible. Each individual unit of cash money is interchangeable and functionally indistinguishable from each other. A ten-dollar bill is interchangeable with any other genuine ten-dollar bill. One could argue the dollar bill is not fungible because it has a serial number on it. However, making a rule like ‘I only accept dollar bills with even serial numbers’ is illegal precisely because it breaks the abstract concept of the fungibility of the dollar.
In economics, fungibility is the property of a good or a commodity whose individual units are essentially interchangeable, and each of its parts is indistinguishable from another part. — Wikipedia
Non-fungible means just the opposite, non-fungible items/tokens are unique and special snowflakes.
So in the context of our little story here, it’s a digital representation of exactly this specific watch, and no other watch. Ownership of this token is demonstrating that sometime in the past a valid transfer of the watch happened. Think of it as a record, a record that demonstrates that a legitimate transfer between trusted parties did occur sometime in the past. This is done on a blockchain in the form of a token because a blockchain is (usually) immutable which means that such a record can not be undone by any party.
How much does the trust cost?
Naturally, you would not buy a $15000 watch on the street from a black market hustler like our boy Del here as you expect it to be a fake. You know it is fake!
But, should you find yourself in a lavishly decorated steel and glass retail shop and review this watch through a tempered glass from 50 cm of distance, tucked comfortably in velvet. Would you buy it then? Would you at least trust it to be legitimate? You probably would, because you trust this institution to not risk their reputation over a single watch. The watch is probably more expensive here in this shop, it’s likely double the price of what it is with our boy Del. But you are likely prepared to pay that, as you know that you are also paying for peace of mind. The store knows this, and they are happily overcharging you.
The store has likely obtained the watch directly from the company or directly from R. Federer. In both cases all steps of the transaction chain are considered honest — so the watch can be claimed genuine with a high degree of certainty. It’s a chain of trust, all parties are trusting each other not to cheat as they have the economic benefit of behaving ethically — they get to keep selling overpriced watches.
Traceability is the capability to trace something. In some cases, it is interpreted as the ability to verify the history, location, or application of an item by means of documented recorded identification. — Wikipedia
What would happen if you try to sell this watch to a 3rd party?
For example, you buy this watch today in this very store for $40000 and try to sell it to a random stranger on the internet for $50000 in five years from now. I don’t think that would go smoothly. The stranger would not trust you to not try to hustle him for 50 grand. But you would insist that it’s legitimate and that you have a certificate of authenticity issued by the store. The stranger would insist that this certificate is easy to forge and would ask you to seek an arbitrage by a third party that you both find reputable. This can be the store itself, you can go back and have their expert examine the store and vouch for it. The store is a clearing house in a way, it enables trust between parties.
To summarize, you need to call back to the existing chain of trust in order to prove that the item you own is genuine.
And to answer the question, trust costs a lot.
Can we make this any easier if we use a blockchain?
Maybe, maybe not. Let’s dissect the matter. I am a strong believer that blockchain should be used as a tool that lowers friction. Let’s see if that is possible, can blockchain lower the friction in rare item trade?
Alice wants to purchase a rare Rolex watch. One of a kind, unique and genuine. She proceeds to buy it from the specialized store which deals in rare luxury items. This store is keeping up with times and uses NFT tokens as certificates of authenticity.
How procedure goes:
- Store does a full KYC procedure on Alice, so they can internally associate Alice with a blockchain pubkey (address).
- Alice creates a blockchain pubkey in order to receive an on-chain certificate of authenticity(COA) that the item is genuine (a NFT token). On-chain COA carries the description of the item: date and time of purchase, dimensions, description, Statement of Authenticity, photo(s), 3D rendering, video, and other metadata like that.
- Alice deposits the payment (over the counter) and receives the item and NFT token in her mobile wallet (hopefully she does backup later).
Nothing has changed here over how things usually go. Usually, the store would keep an internal ledger and records of the transaction, and now that ledger of trades is on a (presumably) public blockchain.
Some time passes and Alice decides to sell the watch.
Alice publishes an ad on relevant online marketplaces and forums, the watch is now on sale. After a while, the potential buyer reaches out. Alice explains how the watch is on sale and is genuine, claiming to possess a certificate of authenticity. The buyer (Bob) demands to inspect the watch in person to determine if the watch is genuine.
Hypothetical procedure of Alice to Bob transfer:
- Bob inspects the watch, it closely matches descriptions of the item available publicly online.
- Bob asks to inspect the COA, Alice brings up the app on the phone which showcases the certificate and thorough description of the watch along with its history, i.e. ledger of all previous trades.
Of course nor Alice or Bob must know that this is record is sitting on a public blockchain somewhere and metadata is pulled from IPFS or something. They just want to consume this information is an easy and understandable way.
Bob can use the same app on his own phone to check out that same COA, his app will render the same information. What is important here, is that the buyer can use his own device and internet connection to fetch the same data. He can also convince himself that COA was issued by a reputable 3rd party — the store.
3. Bob sees that information presented in COA checks out, but he still can’t tell if this COA was issued to Alice. Is Alice pretending to be someone else? Has Alice stolen the watch from someone?
Bob clicks a button in his COA app: “verify identity”. This button calls to store servers and asks for the unlocking of identity data associated with the COA. The store server proceeds to send an inquiry to Alice (her app), asking for permission to show identity data to Bob. As Bob is right there with Alice, and they are working on establishing trust in order to make the trade — Alice accepts. Bob now sees full data associated with the COA in his app, including the picture of Alice and her birthday.
Bob looks up smiling, asks Alice to confirm her birth date. Alice answers April 5th. Just like my Mum, Bob answers back.
4. Bob has sufficient evidence to conclude that Alice has purchased the watch from the Store, on May 18th, 2018. And that Alice is now trying to sell it to him. What evidence he does not have yet is whether or not this is the genuine watch or not.
This is especially true if Bob is not well versed in horology. In this case, it is recommended they both take it to a local expert or just go back to the store where the chain originated and have their expert verify it.
For stupidly expensive and rare watches this may be required but for most items in this world, it may not be needed.
Has this procedure made it any easier? Well, somewhat. It has saved Bob and Alice a trip down to the store if nothing.
So, how much does the trust cost?
Bob has sufficient evidence to learn about the history of the item and that Alice obtained the watch directly at the store. As he trusts the store to be a reputable party and trusts their certificate — he accepts the trade.
Bob has every incentive to ask Alice to transfer the COA NFT to him, so he can demonstrate a fully transparent chain of trust to the next buyer. If the chain has gaps, it becomes useless as you don’t have full history. You don’t trust it.
As she recieves the money, Alice sends the COA NFT to Bob in order to complete the trade. Now all interested parties can observe in real time that watch has changed ownership. Store knows it as well and asks Bob to deliver KYC information to them so they can vouch for him in the future when he decides to sell the watch.
In the end, we can conclude that the store is a still clearing house in a way. The trust begins and ends with the store. Even without bringing the item back at all, the store still served as a source of trust by providing the evidence that it was Alice personally who bought the item over the counter. Because the house is the source of trust, the house could charge a fee per every transfer. Tranfer fee can be automatized, using a smart contract or similar abstraction. Furthermore, if parties require re-verification of the item and it’s state (is it pristine) — the store can charge that service too. I am certain the buyer would pay for piece of mind.
Well anyway, the point of this story is that blockchain tech can be used to lower the friction in this niche as well. Not by much though. Maybe similar concepts will see some usage soon as part of general blockchain mania and we get to see the results of the experiment.
Going back to where our story begun, with Del Boy and mr. Federer — we can easily imagine a roulette table in Monte Carlo and mr. Federer and Del Boy trying to navigate their apps and QR codes to move the COA NFT from one app to another. OK, maybe not with those actors indeed but that future may be just around the corner. As I’ve demonstrated, NFT tokens can be used as certificate of authenticity for use in peer-to-peer trades and transfers. However, decision lies with trading parties if they will accept the NFT COA at face value and trust it or will they take it to the store in order to verify that item is indeed genuine. For all we know, Del Boy may have kept the genuine watch to himself and had a copy made for cheap — copy which he then proceeds to sell on the street.
P.S.
Do watch Fools and Horses, it’s a classic.
