The Architecture of an NFT Auction Platform for Real-World Assets

In my previous article, I presented the benefits of NFT within the numismatic, rare coin market. The currently existing projects do not have all the features needed for smooth trading and asset exchange of the real asset.

This creates room for new platforms covering all stages of physical good trading and exchange. This article will present the architecture of such a solution with a continued focus on the rare coin market.

A one-pixel show

If you look carefully between the paragraph header and this sentence there is a red pixel. A similar one, but grey has been sold last month for almost 1.4 million US dollars at https://niftygateway.com/.

If I tokenized my red pixel above and sold it to you, I could still enjoy it on the screen of my laptop.

With digital goods, we transfer the ownership represented by an NFT. Still, not only the owner can display the image, video or any other file represented by the token. With the transaction, the image does not disappear from the previous owner screen.

With physical goods, the change of an NFT owner must be followed by the transfer of physical good. Enabling safe handover of the good should be one of the key features of the designed platform.

The platform base requirements

• A blockchain NFT smart contract to create tokens representing goods. On Ethereum and other compatible smart-contract blockchain platforms, the ERC-1155 Multi Token Standard will be a perfect fit.
  It will allow creating the NFT representing physical goods and even splitting them so fractional sale is possible. The owner will be able to sell a full coin, but also a fraction of it. Using the same smart contract a platform will be able also to issue additional tokens: governance tokens or reputation tokens if needed. While it is possible to have rare coins being located in many smart contracts, I am sure valuable assets will be kept in a small number of places not to allow impersonation or fraud. Imagine a situation a coin is created in some random smart contract and stolen. The robber could create additional NFT representing the same coin and try to sell it on the auction platform. While it will be possible for the rightful owner to claim its rights, if the coins are stored in multiple smart contracts it will be very hard to keep track of all of them. If only a handful of reputable smart contracts are considered a source of market truth it is easier to verify the ownership. However, it is important to handle an additional situation, namely marking some NFT as fraudulent. It may happen someone adds an NFT representing a coin before the rightful owner. The platform needs to handle the disputes between two parties claiming rights to the same physical good and having two different tokens representing the same good.
• An auction smart contract. While the name is self-explanatory putting a coin on the auction needs certain features to exist within the smart contract. First of all an option to choose the auction base currency. While currently in most platforms the payment in ETH is taken for granted, its highly volatile nature may not be a perfect choice for coin collectors that will prefer a predictable FIAT auction outcome. The stable coins representing USD or EUR like DAI or USDT should be chosen as a default or at least an optional base for bidding. The platform should receive a commission for successful sales. Currently, I would think about 0.3% that would equal the amount charged by Defi Automatic Market Makers like Uniswap. In case the platform token is introduced part of the income could go to the people staking (locking) their tokens. Staked tokens would represent the voting power in disputes between NFT token holders as described in the previous point or governance decisions. One of the key auction attributes will be the country where the coin is located. Rare coins may be subject to country-specific regulation. It is vital to know up front whether the deal can be done.
• A communication channel between the (prospective) buyer and the seller. This may be a simple off-chain service to exchange messages: questions about the state of the good, all the details needed for the buyer to verify the seller’s credibility etc.
• Reputation system to score the participants. The option to evaluate the seller (and/or the buyer) should be enabled after the transaction. People with high reputation will be more trusted and the prospective buyers will gain confidence about their credibility.
• Seller’s “about me” page visible to the buyer. While digital good trading allows both seller and buyer to stay anonymous it is not the case for physical goods as presented in the previous paragraph. It does not mean necessarily a full KYC, but rather giving the parties all the tools needed to build mutual trust. Some people may decide to share their details, while others will rely on the reputation built on top of previous deals.
• Storage of multiple images and videos to represent both obverse and reverse of the coin. The current platforms allow storing only one file as the file is the sold asset. In the case of a physical good, the picture only presents the asset. It is important to underline smart contracts are not capable right now to keep a set of images representing the coin. They are condensed only to a fingerprint representing them and only this fingerprint is stored on the blockchain. This means storing the off-chain data will be one of the key platform responsibilities.

A diagram (finally)!

Ok. So how everything should work? Let’s see the diagram!

While the big picture is clear, with the diagram still a couple of questions remain open:

1. Where to store seller reputation data? Off-chain? On-chain? In which smart contract? Auction or a third smart contract is needed?
2. Is the platform token needed? Can a platform start without separate governance or profit harvesting token? How complex it is to introduce a token at a later stage?

Summary

In this article, I tried to draft key features of the NFT auction platform to handle rare coin trading and physical good exchange. While due to extra requirements more complex than current NFT solutions it is definitely something feasible, a fruit to pick.

Bibliography

• Michael McWatters. You bought a pixel for $1.4 million, 2014 Apr 14, Available from https://uxdesign.cc/you-bought-a-pixel-for-1-4-million-94c430cc5140
• Kyle Tut. Who Is Responsible for NFT Data?, 2020, Apr 6, Available from https://medium.com/pinata/who-is-responsible-for-nft-data-99fb4e8147e4