Introduction

Blockchain and smart contract technology enable P2P trading (DEXs), have given rise to Decentralized Finance (Defi), and are on track to rewrite the entire Internet (Web3). This tech has also produced a new class of assets called stablecoins and synthetics. Both of these enable the creation of digital copies of real-world assets. For stablecoins, this means cryptocurrencies that always trade at the price of their fiat counterparts. For synthetics, this means the same but for any arbitrary stock or bond. 

These last two applications leverage oracles to ensure that the trade value of the token remains fixed to the asset it's "pegged to." Oracles are off-chain data feeds that make data available to on-chain smart contracts. This connection allows blockchain code to execute in response to real-world events. When the price of the "real world" asset changes, the smart contract gets notified, and its internal state is updated with the latest data. 

Tokenized physical assets are the holy grail of the Web3 vision and a currently unsolved problem. They've been called the last boss of crypto. Simply put, they map physical ownership to digital ownership with a digital certificate (NFT).

The Promise

Tokenized physical assets are not an extra. They're a necessity for several reasons. 

1. They provide a hedge against the volatility of crypto. Tokens that go up fast come down just as quickly. You can't have highly speculative assets without volatility. They are two sides of the same coin. 

2. They're a hedge against inflation. Retreating from the volatility of crypto to stablecoins is jumping from the frying pan to the fire. Governments are debasing fiat at record levels. 

3. They represent an ultimate trifecta of treasury diversification. A combination of native tokens, stables, and physical assets is a recipe for programmable risk management.

Tokenized physical assets open unimaginable possibilities in efficiency and coordination and explode our preconceived notions of the total addressable market of crypto.

The Main Challenges

If this is true, why haven't we solved it yet? Governments have yet to come to grips with Bitcoin, much less Defi, NFTs, or DAOs. Technological progress in Blockchain and AI has outrun governments' ability to craft competent technical or legal guidance. A legal framework for tokenized physical assets is not coming soon, and everyone knows it. The other and more pressing issue is how exactly to do it. This is the syncing issue, and it has two sides.

1. What happens if the physical asset is sold apart from its token representation? 

2. What happens if a person gets their wallet hacked and the token moves without the asset? 

An Approach

I want to offer a possible solution. I won't claim it's bulletproof, but I hope it invigorates the conversion and stimulates the reader's imagination. 

Much like the other synthetic assets I mentioned, I think using oracles offers a clue to solving the puzzle. I will use car titles as examples to illustrate the proposed mechanism, but you could apply a similar pattern to other real-world assets. This approach applies to any physical asset with a public or semipublic record of ownership.

Part 1: The Peg

Like digitally pegged assets, we need a way to peg an NFT to a car title such that selling the token means the title has been transferred. And just like digitally pegged assets, our peg begins with the use of an oracle. One of the most well-known blockchain oracles is Chainlink, and you will see shortly how ideally suited Chainlink is for this use case. 

Car titles contain two classes of information, the vehicle's public ID number (VIN) and private information about the owner, namely their name and address. This second piece of information is not available to the public due to The Driver's Privacy Protection Act (DPPA). This national law prevents car owners' names and addresses from being indiscriminately accessed. So far, we can craft the following setup:

One solution is introducing a third actor to act as a Privileged Access Proxy API or a PAPA for short. This PAPA would possess privileged access by operating in compliance with the DPPA law. This compliance would entail getting permission from both counterparties and doing so in such a way as to keep that information private. A PAPA would request personal data from DMV in a legally compliant manner and pass it in hashed form along with the public data.

This PAPA exists to legally comply with the privacy laws and retrieve title owner information to the oracle. Several parties could produce these to compete to create resiliency and decentralization.

The parties maintaining the PAPA could also provide the minting mechanism and be viewed as a "dealership" in this model. They could also collect a cut of sales to sustain the PAPA and create incentive alignment.

Part 2: Minting

Now that we have established a mechanism for making title info available on-chain, we have the means to connect the physical certificate of ownership to a digital asset. We initiate this connection through the process of minting. The privacy of the owner's information comes to work in our favor in this scenario. 

Owners mint their car titles as NFTs by submitting their VIN and personal data to a smart contract that hashes the private data and presents it with the public data to the PAPA to query the DMV. If the data matches, a dynamic NFT is minted, and a persistent connection is established between the DMV, the oracle, and the NFT. Any changes to the DMV record will be detected by the oracle and subsequently be displayed by the NFT. If the public or private data on the title changes, those changes are shown in the NFT's properties.

Part 3: Auctions

The auction is the third and final part of this approach. Typical NFT sales are made by swapping an NFT for some specified amount of crypto. Similarly, our crypto car auctions happen through a smart contract, aka "a dealership." The following decision tree illustrates the flow.

1. Seller

   1. Owners initiate an auction by placing their minted NFT title into a specialized smart contract. 

2. Buyer

   1. Buyers place bids on the car by depositing funds into the contract with their private info encrypted using the seller's public key.

3. Bids

   1. When a seller is happy with a bid, he initiates the acceptance. This action:

      1. Locks the NFT and crypto in the contract for N days.

      2. Reveals the bidder's private data required to transfer the title.

   2. The seller then initiates a title transfer through the appropriate traditional physical mechanisms.

4. Auction Success

   1. Once the DMV updates the title, that change bubbles up to the NFT, and if the private hash matches the hash of the bidder's data, then the NFT is released to the buyer, and the funds are released to the seller. 

5. Auction Failure

   1. If an update occurs to the title and the private data hash does not match the supplied secret data hash: 

      1. Funds are released back to the bidder

      2. The NFT is burned

      3. The auction is concluded

   2. The same happens to any auction that exceeds the escrow time lock limit. My assumption, in this case, is that the person in possession of the NFT doesn't possess the right to transfer the title. 

6. Decoupling

   1. Any ownership changes in the source data feed to a minted NFT outside of an auction result in the NFT being burned. Both of these work together to ensure the NFT and title stay linked. 

Conclusion

Is this ideal? No. In an ideal world, there would be no DMV or paper titles to sign. In a perfect world, there would be no need for a peg because the digital asset would be the same as the certificate of ownership. But we are not there now. We surely will be, but the rate of technological progress and the market demand for increased efficiency will not wait for traditional government institutions to catch up. 

Does that mean that the above approach is worthless? No. One of the chief affordances being made possible by the blockchain revolution is incredible improvements in our ability to coordinate efficiently. And that is what the above mechanism provides. It does not contradict or work against the existing legacy system but introduces a streamlined coordination mechanism that can grow alongside it. 

We can draw an analogy with what has been described above with robotic process automation (RPA). RPA is an approach to creating automation for systems lacking accessible or properly functioning APIs. It uses software bots that click and interact with an application's user interface just like a human user would do to produce desired automation goals. The above mechanism for tokenized titles effectively does the same by interfacing with the existing American legal system while assuming no changes to its underlying function.

Particle is working to solve the tokenized asset puzzle. The community purchased and tokenized Banksy's Love is in the Air and is now building an entire platform to support a community-operated museum. This is just the start. Join the DAO and help us rewrite and redefine fine art collection, ownership, and governance.