Exploring the Properties and Benefits of Native Assets

TL;DR:
From rare collectibles to electric cars, football clubs to smart cities, native assets have the power to transform industries and economies – and the concept and exchange of value itself. When IOTA’s Digital Asset framework is released, digital assets will become even more ubiquitous due to the network’s zero-fee based architecture.

The Digital Asset Framework is one of the most eagerly-awaited features on IOTA. In this post, we will examine the use of native assets. But first, we must clear up some confusion. What exactly do we mean by “native assets”?

Many different names have been used for digital assets on IOTA, causing uncertainty. This will only get worse in the future when there are both Layer 1 and Layer 2 assets. We have therefore revised our terminology to simplify matters going forward.

Types of IOTA Digital Assets

The umbrella term for all assets on IOTA is digital assets.

These assets may exist on Layer 1 (the IOTA mainnet, as customized IOTA tokens), or on Layer 2 (within smart contract chains). To differentiate these asset classes we use two different names:

Layer 1 assets are termed native assets, as they are native to the IOTA mainnet.
Layer 2 assets are termed smart assets, as these exist on the smart contract layer, and have greater programmability.

The process of creating either type of digital asset is known as minting.

Notes:

The terms asset and token may be used interchangeably (i.e. native asset/ native token, smart asset/smart token). For example, if you're referring to a piece of artwork, you'd probably call it an asset, but if you're referring to WenCoin, you'd call it a token.
For the more technically-minded reader, a variable name change will also be made in the native asset's codebase as well as in future wallet and library implementations, with the “color” field being replaced by a “tag” field.

What are native assets?

A native asset (previously referred to as a “colored coin”) is a customized IOTA token that, in certain contexts or specific applications, takes on the function of being a digitized token that represents a tamper-proof and finite asset in the real world.

The term “colored coins” has been a part of the crypto lexicon since December 2012, with the inception of a project built on the Bitcoin blockchain by a team that included Ethereum creator Vitalik Buterin. Meni Rosenfeld’s paper was the first to describe the concept. The project grew from the idea of issuing real-world assets, like real estate, on a blockchain, but it soon became clear that the limited throughput of Bitcoin (and associated fees) would not be able to provide the necessary scalability to this growing sector within the crypto industry. However, the original concept of colored coins opened possibilities for experimentation and laid the groundwork for IOTA’s native assets.

Before we explore the how native assets are created, here is a quick overview of their benefits:

They can represent almost any kind of asset or contract.
No cumbersome and costly third parties are required, either for storing them digitally or for transferring them to a new owner.
They are minted by “tagging” IOTA tokens, meaning that they do not diminish the overall supply of IOTA tokens.
With IOTA’s feeless protocol, creating native assets is inexpensive, and you can distribute your assets for free on the ledger.

How is an IOTA token turned into a native asset?

To mint a native asset, simply take a normal IOTA token and assign a unique identity to it when executing a transaction.

The act of minting native assets takes place on the base level of the IOTA ledger where it is secure, traceable, and immutable. IOTA tokens are assigned a specific meaning, by adding a “tag”, basically giving them a name. Read more on the IOTA Foundation blog.

The issuer of the native assets holds a specific amount of IOTA tokens they want to mint in their wallet and encodes the outgoing transaction in a way that marks those specific iotas to represent whichever asset(s) the issuer wants to assign to native assets.

Currently, one IOTA Token equals one native asset, and the process for transferring the native assets is exactly the same as transferring an IOTA token.

The ‘tag’ is based on the transaction hash created when generating the transaction output. Therefore, the tag is unique and specific to that transaction. This means the same tag can’t be achieved by a second transaction, and a secondary tag cannot be added to the same coin. The tag is always the ID of its genesis transaction: you cannot recreate the same tag again. It also means that it’s easy to look through the Tangle and see when and where the native assets were minted.

A native asset can always be turned back into its original state as an IOTA token: this means that the total amount of a native token in circulation can be decreased by reverting some of the coins to their original state. (And whoever is the current owner of a native asset – that is, whoever has been transferred the native asset by the creator – can revert the native asset to its original state, or even assign a new tag, again by making another transaction).

But the total sum cannot be increased, because of the “tag = transaction ID” requirement mentioned above.

For a detailed technical description of minting native assets, dive into ‘detailed design’ in the GitHub article on colored coins
Also, check out this how-to guide on creating tokenized assets with native assets:

Importantly, metadata can also be added to native assets, ensuring that the coins carry representations of value. By promising to honor the native asset (by exchanging it for its real-world counterpart), third parties (a company, government, or person) can assign real-world value to the native assets.

Let’s dig deeper into the implications of this by examining some use cases for native assets.

Native asset use cases

Just as a loyalty card from your favorite neighborhood coffee shop entitles you to one free coffee per 10 purchases; or a printed ticket to a football match represents money spent on that ticket and gains admittance to the max-60,000 seats football stadium; or a monthly travel pass allows you to use the public transport in your city, or, a prepaid telephone card used to give you access to long-distance telephone calls, a native asset can give you access to specific and limited good, service or product.

But why bother with a digital version of a system that seems to exist satisfactorily in the real world? Because native assets bring with them several important benefits, and these benefits are heightened by the use of IOTA’s protocol, known as the Tangle (the following is adapted from this article):

Native assets cannot be counterfeited.
The Tangle is decentralized, so you can distribute, transfer and manage the assets from your own digital wallet, with no third-party interference.
The Tangle is feeless, so transferring a native asset involves no costs (however, issuers must bear the cost of acquiring the IOTA tokens that are to be minted as native assets – currently less than a dollar for one million tokens).
By examining the Tangle, the issuer can easily monitor the distribution, usage, and available supply of the native asset.
It’s easy to convert a native asset back into a regular IOTA token, the service provider – coffee shop owner, electric car maker, utility provider – can convert the native assets to IOTA tokens and re-mint them to use for another service. Their value does not decrease through their use. They can be reused or sold after use.
Native assets will be seamlessly integrated into the Firefly wallet.

With that in mind, picturing use cases for native assets becomes much easier. A handful of potential use cases – not by any means an exhaustive list and not the IOTA Foundation’s expectations – is listed as follows.

Loyalty programs: For an example of a native asset used to organize loyalty programs, look no further than sports or any other sector that relies on the support of fans for their ongoing survival. Native assets are already being used as reward factors to engage fans, opening up a whole new ecosystem of mutually beneficial transactions and even a whole new sub-economy – a godsend to sports clubs, for example, who have been left out in the cold by coronavirus-driven lockdowns.

European football clubs such as Paris Saint-Germain, Juventus, Turin, and AS Roma are among those listing their fan tokens on crypto exchanges. The market cap of the fan token market has been estimated as being worth several hundred million, according to data from FanTokenStats.

Payment credentials: Native assets are already used by electric vehicle charging brands as a form of encrypted payment. However, the potential is there to transform the industry: the interoperable nature of native assets could bring together the different electric vehicle charging solutions (each of which is largely incompatible with the others) and catalyze the widespread adoption of electric vehicles. Currently, this relies on the customer using a card (or smartphone app) that is pre-registered in the merchant’s system: but what if native assets could be used to make transactions across all the electric vehicle charger brands? On your cross-country car holiday, your native assets could be redeemed for electricity charging at different companies’ charging stations, with a clearing entity doing the hard work of determining which charging station company gets the proceeds from which part of the journey (and what’s more, it could be the vehicles themselves that handle the transactions). Native assets would be a pragmatic approach to reaching interoperability in a realm where incompatibility is limiting adoption.

Utilities: Native assets are also key for the future of smart cities. For example, several cities are experimenting with native assets as a way of incentivizing their citizens to adopt greener behavior (for example, citizens who carpool are rewarded with access to utilities) or behavior that supports the local economy (for example, rewards for shopping locally rather than using a certain online e-commerce behemoth). The potential to create a regional or local economy based on a virtual currency is striking: several local currencies are already in existence, such as the Current in Hudson Valley, New York, the Chiemgauer in Germany and the grama in Spain. These currencies seek to amplify the local multiplier effect and several of them use a form of colorization to track the ‘journey’ of the coin and offer incentives to spend the money locally. Furthermore, an efficient sharing economy is considered to be one of the key solutions to tackle the climate catastrophe. In that regard, native assets like IOTA’s can be considered a green enabler technology.

Smart property: Native assets can be used in land administration to represent land ownership: in a process known as ‘smart property,’ the coins can carry metadata with public registry details such as GPS coordinates, dimensions, date of build, and so on. Sensitive details, such as ownership or identity, can be encrypted so only those with the correct private key can be shown the information – especially important in the context of a dispute.

The benefits of smart property are manifold: it can enable a simpler way to transfer and register property, and it can act as a barrier against sale fraud by using private keys to prove identities, sign documents and authorize transactions. In territories where land registration is especially difficult (for example, in 2012 the UNHabitat estimated that more than 70% of land in developing countries is unregistered), all it would take is a smartphone to issue an inexpensive certificate of ownership. Furthermore, smart contracts can set conditions to allow for the different steps in the transfer of a property, from signing off of a notary to placing funds into escrow. In many cases, municipal offices are subject to bottleneck effects or inefficient processes that can be improved by smart digitization through native assets.

Digital collectibles: The link between native assets, fandom, and rarity comes into its own with the market for digital collectibles. Apps like Rarible, SuperRare, and Myth Market are online marketplaces where collectors can search, swap and display limited collectible NFTs. Legendary names in the world of fandom are already taking note: In June this year, Marvel – home of Spider-Man, Avengers, Black Panther, and more – announced that it was releasing a limited range of collectibles on VeVe, an app for NFTs. According to hypebeast.com, “items will span across rare or even secret, super-rare digital comic books, 3D statues, and other coveted items which collectors can then display in their very own virtual showroom.”

Music: The suitability of native assets as proof of ownership could also make its mark on how we consume and value music. The disruption caused by streaming to the music industry is still being measured – check out the recent UK parliamentary inquiry into the economic impact of streaming (spoiler alert: they’re not fans of streaming). Piracy, reduced revenues, and the challenge presented by on-demand streaming to the intrinsic value of music as a relatively rare commodity all present existential threats to the industry. Native assets could be used in marking official digital goods (signed copies of a record, personalized rarities, live online concerts) from unofficial ones.

Payroll: The transparency of native assets – the ease with which their journey can be followed on the Tangle, from creation to distribution – makes them ideal for highly specific cases of exchange. Take HR: for every hour of overtime completed by a team member, they could receive a special coin which in turn could be exchanged for time off, training, or even bonus pay, secured on a decentralized ledger that complies with GDPR. In a digital nomad landscape, where an increasingly mobile workforce moves from job to job or holds down several jobs at the same time, a trusted, transparent and interoperable means of carrying employee benefits from employer to employer will be of real importance.

Events: A vibrant nightlife is a major contributor to a city's economic health, yet nightlife scenes are famously fragile ecosystems. Parties working within the industry are often faced with obstructive or downright hostile local governments, killjoy neighbors, and, more recently, exorbitant charges on music rights, while the coronavirus pandemic has had a decimating effect. What if the clubs and bars in your city could create a new market, just for themselves, where native assets – minted and distributed at rock bottom prices – could stand in for food and drink stamps, loyalty points, and more.

Electric vehicles: So far, we’ve explored use cases for native assets that are very much in keeping with their popular image as a token for exchange and barter. But what about other, more ambitious use-cases where native assets create a sub-economy?

To make use of the just roughly 45,000 publicly available charging stations for electric vehicles in Germany (the leading European market for plug-in electric car sales), a driver has to choose between several hundred operators to register with. Hardly an ideal scenario: from the operators’ side, each brand must engage individually with customers to settle payments, which can include bouncing or even defaulting payments. And from the customer’s perspective: good luck to the driver who needs to recharge at an operator they’re not registered with! A native asset, accepted by all (or at least a consortium of) the 400+ operators, could be a revolutionary breakthrough.

It could be coupled with fiat currency or energy units.
If minted by a consortium, drivers would have to go through only one registration process but use the token at all participating charging stations.
The native asset could also be sold in gas stations or supermarkets, along with the countless other vouchers for Apple Music, GooglePlay, Amazon, and so on.
It reduces overheads for operators. If the coin is equivalent to one cent, the act of minting native assets worth five billion would cost the operators just 1500€ (and transferring them would incur no costs, thanks to IOTA’s feeless infrastructure).
To gain more than the initially-minted supply, all the consortium would need to do is create a second version of the native asset. This way, they maintain control over the token.
Unlike the current individual responsibility to settle payments, operators in the consortium would only have to settle among themselves, thus reducing overheads and eliminating the risk of defaults.
Sold as vouchers for cash, the native assets become anonymous: This has the added benefit of enabling operators to sidestep the infrastructure costs and security/GDPR issues involved with processing customer details.
Redeemable “energy units” suddenly become transferable and, as everyone on this planet consumes energy, could themselves become a medium of exchange.

But it doesn’t stop there. What if the native digital asset was transferable? The operators in our case study could allow the vehicle owners to sell surplus energy to each other – now the operators have also become market participants: a brand new business model for them.

Key takeaways

From digital collectibles to energy-trading markets in e-mobility: We’ve come a long way from exchanging fan tokens. The potential of native assets is extraordinary and is set to expand even further with smart contracts.
The ability to assign a non-financial or a financial value to digital assets like the IOTA token opens up new markets for trading goods and services.
As long as the good or service is a finite resource, native assets offer transparent, interoperable, and secure means of representing and trading that resource digitally.

Which use cases for native assets are you most looking forward to?

Read more….

Want to explore the topic in-depth?

Check out this IOTA blog post on tokenization.
Watch IOTA Foundation’s Head of Financial Relations, Dan Simerman, explain the different types of digital assets and describe how new business solutions enabled by native assets relate to the development of the IOTA Token economy as a whole.
Ready to create your own native asset on the IOTA 2.0 DevNet? Check out “7 steps to creating a native asset on the IOTA 2.0 DevNet” halfway through this article.