NFTs and the IoT
the real value of NFTs and blockchain is in securing devices and the supply chain
Lenny Kuhne / Unsplash
Like the internet itself, blockchains are decentralized, leaving anyone free to participate in the operation of the network. But unlike the internet, which is stateless, blockchain records are protected by cryptography. Blockchains can also transfer state and value via non-fungible tokens (NFTs), and host self-executing code called “smart contracts.” When all these virtues are taken together, the impact of blockchains for business in the 21st century—from automating the insurance industry to radically optimizing the supply chain—is literally incalculable.
Low Latency Will Bring About True Machine Collaboration…
Twenty or more years ago, the goal of automation across all sectors of the economy was often expressed by the contraction M2M, meaning “machine-to-machine” communication. Today we often use a grander and more abstracted expression, “The Internet of Things,” but the underlying idea—the collaboration of machines in real-time—has remained roughly unchanged. So has its primary obstacle—the miracle of human senses and reaction times that allows people to do things in real-time that machines cannot.
Because the global M2M economy is projected to have annual revenues of at least $1.5 trillion by 2030, solving these automation problems is of major social importance. Latency in our communications networks has been the major impediment. As anyone who has typed on a computer keyboard with a lag in it knows all too well, delays and limited throughput cause errors.
But everyone also knows that we’re on the threshold of a new era in networking. It will be characterized by a drive toward zero latency that has existed since the 1970s but only in esoteric, safety-critical domains like robotic manufacturing, robotic surgery and space exploration. The public has heard about this trend as “5G,” but that’s simply a marketing term. After 5G it will be 6G, and then whatever new language the marketers come up with.
The actual terms used for this are real-time or time-senstive networking (TSN), and the real impact will be felt when TSN of all stripes eventually filters down to every social and business sector, giving manufactured devices the near-instant responsiveness we associate with the central nervous system of human beings.
When that occurs—and it will be in the not-terribly-remote future—machines will send and receive huge volumes of data to each other almost instantly. If one of those machines makes a mistake, it will auto-correct so quickly that humans will never notice the hiccup. The earth will finally have a true “digital nervous system,” and the IoT will come to life.
NFT Architecture and Providers
source: Harbor Research
…But Smart Contracts Will Drive the Social Impact of the IoT
Speed alone, however, does not equal intelligence. We must still code our social and business wishes into these emerging ultra-fast networks. And this is where “computing’s latest fad”—blockchains, and more specifically “smart contracts” and non-fungible tokens (NFTs)—may prove to have a much deeper and more transformative impact than most casual observers today would expect.
Blockchains, first seen in 2008, have had a level of popular hands-on involvement and innovation that far surpasses that lavished on the Internet itself. The very first blockchain was used to create the first cryptocurrency, Bitcoin, and is relatively primitive compared to the networks that immediately followed it. Those second-generation blockchains—Ethereum is the most widely used so far—have sophisticated native languages that allow them to be coded with self-executing “smart contracts.”
The decentralized aspect of blockchains makes transactions stored in their ledgers extremely difficult to reverse. For this reason, blockchains are sometimes called “trustless networks.” Their recorded transactions are considered immutable, and this quality enables peer-to-peer transactions of blockchain-native assets (coins) as well as digital assets created on a public blockchain and controlled by smart contracts.
There’s an old saying from the early days of computing, “the network is the computer,” and this time it’s really true. The smart contracts that “run” on the latest blockchains literally unite the physical and digital worlds. Third-party services called “blockchain oracles” provide smart contracts with validated information from the external world, which allows “on-chain” contracts to respond to “off-chain” (real world) events. In a very simple example, if your car reports that your driving is “safe,” a smart contract can automatically lower your insurance payment.
One key application of those platforms is the ability to create non-fungible tokens (NFTs). NFTs first achieved fame in the art and collectibles worlds, but actually they are part of the general trend toward distributed or decentralized computing that includes blockchains, cryptocurrency and edge-computing. These computing phenomena overlap and compound each other, and are an excellent example of what Harbor calls “combinatorial technologies.” NFTs turn social networks into places where people can trade and store items of value, and this alone will make decentralized finance (DeFi) a reality for everyone living anywhere on earth.
source: Harbor Research
NFTs and Digital Twins
Anything with a unique identity can be represented digitally and secured by an NFT. To date, the most publicized use of these special tokens has been for the purchase of rare possessions like artwork, trading cards and the like. This upper-crust application has led the general public to believe that NFTs will have no bearing on ordinary business. In fact, the truth is precisely the opposite.
NFTs are digital representations of real-world items of value, and they also authenticate verifiable transactions on the underlying data that can be exchanged for real-world value (money). This makes blockchains capable of automating the daily operations of business. To give a simple example of a massive developer opportunity that will streamline one of the most important industries in the world: Software licenses are practically begging to be handled by NFTs.
NFTs provide provable control over any type of digital asset, including the “digital twins” of any object or process in the physical world. Because cryptography makes the reliability of blockchains provable, NFT holders can be confident that their ownership of the underlying non-fungible asset is secure. Further, smart contracts enable an NFT seller to place conditions on a token-holder’s rights—including, for example, royalty payments to the NFT creator for the software licenses mentioned above.
A Real-World Example: Optimizing the Supply Chain
Automobiles are made of fungible components—roughly 30,000 of them per vehicle. Have you ever wondered about the cost of recalling a car? One study estimated the cost of recalling just one item at $8M. In 2018 alone, recalls cost the automotive industry $22.1B. But what if you could trace the origins of a specific fungible piece that contained the flaw?
New blockchain standards allow manufacturers of physically interchangeable components to tag their products with digitally non-fungible signatures that take the form of simple stickers like QR codes or barcodes. Using this solution in an automotive supply chain would let you single out specific car doors or fenders that were made from a specific roll of sheet metal that was found to be flawed. Tracing the provenance of components in this way would allow you to recall only the cars with the flawed part, literally saving the industry billions of dollars each year.
Warehousing is another very large expense for a manufacturing company, and inaccurate inventory can have a big impact on profitability. Conventional databases are well-known for user-entry errors, but inventory recorded as a blockchain entry can only exist in one place, and its digital identity moves with the physical item. Databases frequently have a single point of failure—like reliance on one vendor or one cloud provider—and a single unexpected event can cause a cascade of supply chain disruptions.
Blockchain and NFT Ecosystem
source: Harbor Research
Blockchains using smart contracts give real-time visibility and the opportunity to intervene earlier into operations gone astray. Blockchains also increase resiliency and lower costs because smart contracts are structured, auditable documents that can take the place of expensive trusted intermediators and enforcement costs.
And conventional databases have a much higher attack surface than blockchains where recorded data is continuously encrypted with ever-increasing difficulty. The risk of systemic catastrophe goes down significantly when data is distributed through block hashes, and hacking a single user only gives the hacker access to that individual’s data.
For all these reasons, manufacturers are seizing on NFTs to optimize supply chains, particularly organizations with high-end products or a reputation to preserve. Luxury fashion brand, Louis Vuitton, unveiled plans in 2019 to launch a blockchain platform that would use non-fungible tokens to authenticate the origin of high-priced goods. The tokens identify and trace the entire supply chain journey of every product, proving to customers of their uniqueness and quality.
In another instance, the Italian beer brand Birra Peroni has announced that they will use the EY OpsChain Traceability hosted on the public Ethereum blockchain to monitor supply chain traceability. The solution mints nonfungible tokens (NFTs) which are unique to each batch of beer.
An Endless Revolution
In truth, the future use cases for NFTs beggar the imagination. An NFT could use real-world “trackers” to prove to a smart contract that you were at a specific place in the real world at a specific time. The smart contract could then trigger something to happen in the digital world, including minting a new NFT that uses real-world data, owned exclusively by the device holder, as proof.
This “proof of presence” scenario is one proposed by IoTex, a company working to secure the IoT. Their Pebble Tracker device is able to capture and cryptographically sign real-world data such as location, climate, motion and light using a built-in secure element similar to the ones used in smartphones for FaceID and in cryptocurrency hardware wallets for private keys.
The “proof of presence” concept quickly becomes “proof of anything,” which can include secure, provable health data from wearables or automotive data from vehicles, all tied to insurance-related smart contracts.
Another company in the news of late, Aleo, uses zero-knowledge proofs (ZKPs) to verify information with another party without sharing the underlying data related to this information. ZKPs are based on a cryptographic technique that obviates the need to surrender personal data in exchange for services from providers, and thus a major milestone in personal privacy. Aleo recently received a $28 million fundraising round led by venture-capital firm Andreessen Horowitz.
We have breezed past many large topics here at warp-speed, but we think this review begins to convey the scope of the business and social revolution that blockchain, smart contracts and NFTs represent.
Stay tuned for more from Harbor Research! ◆
This essay is supported by our Technology Opportunity Overview “Blockchains, NFTs and the Internet of Things.”
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