Defining Digital Assets
The term ‘digital asset’ is now in widespread use, however, there is no universal definition which applies to the many different contexts where you will hear it used. Frequently, the explanations offered are presented through the prism of the commentator’s own individual interests. I contend that while those efforts are not invalid, they are not sufficiently applicable to all the scenarios where digital assets might be encountered. As I will explain in this article, deriving a more inclusive definition is more than an exercise in semantics and it has strategic implications for those who need to manage operations or make capital allocation decisions.
In deriving my definition, I am using some prior work carried out as part of articles written for Digital Asset Management News in February 2016 and also Atlas Pulse in April 2016. Both have helped formulate the definition presented here but were aimed at audiences with quite different interests and priorities in terms of how they view digital assets.
What Is A Digital Asset?
A simple definition of a digital asset is that it is a collection of binary data which is self-contained, uniquely identifiable and has a value.
To break this down a bit more, binary data differentiates the asset as being digital (i.e. held on a computer system and composed of numerical values which are either zero or one). A digital asset must be uniquely identifiable, otherwise it is not possible to transact upon it. The implication of the word ‘asset’ is that the entity has a value. How much, to whom and how that is expressed are separate considerations, the point is that all digital assets have value.
Digital assets are containers for stored value inside digital environments. The fact they are uniquely identifiable and have value attributed to them makes the model useful for commercial applications because it means they are explicit so can be counted and classified in a manner that permits them to be audited and analysed more easily. This does not mean, however, that they are only have utility for business scenarios. Any domain where value must be contained and transferred in a digital context will benefit from the concept of digital assets.
By having a core or abstract definition of a digital asset, there is a framework or basis which can be built upon and (possibly more importantly) this makes it easier to consider how different digital assets relate to each other to help identify potential opportunities for cost saving or revenue growth, not to mention operational benefits like interoperability.
Digital assets are a model or abstract design template which can be used in a lot of different scenarios, this is why the term is utilised a lot by people from many different backgrounds – they implicitly understand that it has a universal application.
There is a direct relationship between the data contained in a digital asset and its value. It would be reasonable to say that they are essentially the same, therefore, just viewed from different perspectives. The data contained in a digital asset is what gives it value and the value of a digital asset is represented by its data.
Types Of Digital Asset
Since the definition of digital assets is a broad one, the range of types that they can be classified into is equally diverse. This is the subject of another article which I plan to write, however, the following covers the more common examples:
- Digital tokens (are also referred to as cryptocurrencies)
- Content digital assets like images, video, documents etc
- Data packages (e.g. big data collections)
- Digital models (e.g. virtual reality or internet of things data collections)
- Digital commodities (e.g. storage capacity)
- Domain names and network infrastructure assets such as IP addresses
- User accounts (e.g. a social media account, email account etc)
Clearly there will be hybrid types and others which are not mentioned or even invented yet, however, they all share the same characteristics of digital assets according to the definition I have provided, i.e. they are a collection of data which can be uniquely identified and have a value.
The Intrinsic And Extrinsic Value Of Digital Assets
The value contained in digital assets can be further sub-divided into two types: intrinsic value and extrinsic value which I will define in the context of digital assets below.
Intrinsic value represents the primary or fundamental reason why someone would want to acquire the digital asset. Here are some examples using some of the types referred to above:
- For content digital assets like a company logo, photo, video or document, it is the binary data which is used to allow the visual representation (or text in the case of a document) to be viewed.
- With cryptographic tokens like Bitcoin is the immutable entry on a public ledger (i.e. blockchain)
- For a domain name it is the scarcity (because they must be unique) and the ability to direct internet traffic to a locations of the owners choice.
- For a user account it is the permission to access it and carry out transactions using it.
Extrinsic value contextualises the intrinsic value of the digital asset and is expressed through metadata (sometimes referred to as a data about data). Below are some examples:
- For content digital assets such as images, videos, documents etc, metadata such as categories, keywords and classifications increase the likelihood that the asset will be found and therefore make it more valuable. Further extrinsic value might be usage history and what was used to find a given digital asset.
- In the case of cryptographic tokens, the extrinsic value includes considerations like number of users or liquidity (i.e. being able to exchange them). Some tokens may also include metadata features that allow them to hold some of the same attributes as content digital assets or instructions that can be executed like software.
- The extrinsic value of a domain name is the significance the name has in the wider world and other factors such as hyperlinks to it, number of visitors etc.
- User accounts are containers for a vast array of potential extrinsic value, such as number of followers for social media, posts, email messages. These type of digital assets are also composites for subsidiary digital assets which have intrinsic and extrinsic value in their own right.
As with other non-digital assets, extrinsic attributes can contribute significantly to the overall value and may significantly exceed the intrinsic value. This makes complex to differentiate between them, or to be more precise to decide which is more important, however, the intrinsic element has to exist or the extrinsic value cannot exist either.
For anyone still unsure of the distinction, here are two loose analogies. Consider a piece of fruit, the seeds contained within are the intrinsic value, the flesh of the fruit is the extrinsic value and encourages consumption of it which is required for the intrinsic value to be realised. If former did not exist, neither would the latter, they have a co-dependent relationship. Those who prefer something of a less agricultural nature, may prefer to think of this in business terms. The intrinsic value of a company is composed of fundamental attributes like cash or stock etc. The extrinsic value is referred to in accounting terms as ‘intangibles’ and includes factors like brand awareness, competitive positioning or intellectual property.
Extrinsic value can add considerably to the asset and it might also be highly leveraged (i.e. produce a substantial increase in value relative to the capital employed). This also implies, however, that the value created can be lost or wiped out more easily. Taking the previous examples, the fruit might go mouldy or not ripen due to adverse weather conditions or faulty storage, the business’ brand might be the subject of a negative news story which transforms it from being an asset into a liability.
With digital assets, it is possible to create a lot of extrinsic value very easily simply by collecting operational data about their usage, however, this may not necessarily translate into cash revenues as the price charged is an independent variable that cannot be so easily predicted nor controlled. This is a point the owners of digital assets need to understand: just because you can create value does not mean anyone will be willing to pay a price for it which exceeds what it cost to produce. The type of value or context (metadata) as well as the current and predicted demand for it are also important, in addition to the intrinsic value.
Why Is A Definition Of Digital Assets Important?
By having a general definition of digital assets which underpins all of the different types that might be encountered, it is simpler process to manage them and identify correlations which might provide insight for cost saving and potentially revenue generation.
One group who will find this beneficial are operations managers who are engaged in (or considering) digital transformation initiatives. Digital asset supply chains are increasing in significance. The reason for this should be obvious: if more business is conducted in an exclusively digital environment, there is more data being created which has to be packaged so it can be distributed and its value assessed and monitored. As such, digital assets are the measure of the value that an organisation’s digital asset supply chain is creating. As discussed, how that translates into money you can spend is a different topic, but without identifying digital assets and measuring them, you can’t even begin to do this.
The needs of operations managers to have predictable, reliable and efficient digital asset supply chains are gradually being identified by those with capital to invest in longer-term initiatives. These in-turn create opportunities for those who are able to provide tools and services to support them.
There is exponential growth of digital asset volumes across all different types, however, most of the sectors who develop the currently available tools to manage them are comparable to cottage industries in terms of both numbers of employees and turnover. This applies whatever digital asset field is analysed: whether it be fintech, content-digital assets, rights management, metadata management, internet of things or virtual reality.
This implies that there is a significant opportunity for industrialisation of digital asset management (in the wider sense of the term) to better cope with the scale of digital assets being generated right now, let alone where they might go to. This has arguably already happened in some of the deeper digital infrastructure services, e.g. server hosting for websites, email services etc, where larger providers like Amazon, Google or Microsoft now dominate. The term ‘cloud’ gets used to describe these facilities, but the reality is that they are more like factories; they consume vast amounts of electrical power and require substantial up-front capital investment to set up. A reasonable expectation is that the same industrialisation process will begin to occur further up the technology stack with the application services that are employed to manage digital assets.
To significantly scale up any operation, is essential to break down what is being dealt with so you can re-build it in a more efficient and organised manner that will cope with the expected demand that was the driver for the business case to begin with. This is why it is important to have an in-depth understanding of what digital assets are at a fundamental level and the rationale for defining the term more universally than generally occurs now.
On Digital Asset News, we intend to go into some depth on the issues and debates around digital assets and will seek to provide some insight or at least thought-provoking subject matter that readers can use for their own digital asset-related initiatives.