Cats and Fungability: How ERC Tokens Could Save The Art Market

Fungable is an economic term meaning a good or commodity in which all versions of itself are interchangeable. Every version of this good is of the same value. The most basic version of this principle comes in the form of currency. Take the American dollar for instance. No single dollar is going to be worth more than any other dollar. When the value of an American dollar appreciates or depreciates, the value of every American dollar will appreciate and depreciate at the same interval. There are also non-fungable assets, or unique goods that have independent values and cannot be exchanged for the same good. A good example of this is a house. Each house on the market is a unique entity that will appreciate and depreciate at a different rate than other houses. The notion of fungability has recently made it into the realm of cryptocurrencies, allowing users to transfer ownership of both fungable and non-fungable assets with relative ease all while keeping track of each transaction through the use of secure and immutable ledgers. The implication of this development will allow crypto based trading to easily extend to other markets.

Popular cryptocurrency, Bitcoin, started as a form of electronic cash with the first Bitcoins being worth just fractions of a cent. As demand for Bitcoin increased and users started trading the popular currency, the value began to appreciate and depreciate in tandem with the frequency of exchanges. The highest price per Bitcoin was just shy of $20,000 in December 2017. Bitcoin introduced the world to the power of Blockchain technology. Utilizing a method called mining, every transaction is monitored through a complicated system of checks and balances. Every block on the blockchain contains what is known as the hash value of the previous block. Miners work to solve complicated mathematical equations to ascertain the hash value of a new block, a highly resource intensive process. To be able to make a change to previous entries in the blockchain, you would have to change all of the subsequent blocks. Blockchain and Bitcoin had created a secure way to transfer ownership of a fungable asset in a way that almost cannot be tampered with by foreign sources. As it is with every new invention, everyone wanted a piece of the pie and soon companies were creating their own blockchains and cryptocurrencies.

Ethereum remains the closest competitor to Bitcoin with its currency called Ether. However, Ethereum has also developed some exciting tools called ERC tokens that allow companies and developers to create their own tradable assets on the Ethereum blockchain. ERC stands for Ethereum Request For Comments and allows users to make transactions in the Ethereum Network using Ethereum’s SmartContracts. The most common type of token is the ERC20 token. Like Bitcoin, Ether, Litecoin and other types of popular cryptocurrencies, the ERC20 token is a fungable asset and is primarily used for electronic cash. ERC20 works using the program language Solidity which enables users to create and allow transfers. Currently Ethereum is working on a new fungable token, ERC223, which improves on some issues encountered when using ERC20 tokens. With ERC20 tokens, tokens could be created which would not allow users to withdraw them. If this happened, the tokens would be frozen, a problem that had the potential to lose serious investors thousands of dollars in cash. ERC223 tokens will operate like ERC20 tokens and will be backwards compatible with ERC20 tokens, however, they will no longer allow tokens to be created that do not allow users to withdraw them.

Cryptokitties is a popular game run using the Ethereum blockchain that capitalized on the internet’s intense love for cats by allowing users to buy, breed, and trade digital drawings of kittens. As anyone who has ever played a trading card game such as Pokemon can tell you, rarity and uniqueness increases the value of a card both in the eyes of the collector and fiscally. Cryptokitties operates in the same fashion where perceived value and rarity hike up the price of the kittens considerably. The most valuable Cryptokitty recently sold for $170,000. As you can see the internet is somewhat insane, but also that Crypotkitties are not fungable like their cryptocurrency and ERC20 brethren. This is because Cryptokitties were the first use of a new non fungable token, ERC721. ERC721 function like ERC20 tokens but have unique names in their Solidity code as well as a signifier indicating the token’s current owner. Each ERC721 token is unique and cannot be replicated. Ownership history of an ERC721 token is seamlessly tracked and like cryptocurrencies they are nearly impossible to hack or steal.

Cryptokitties are really just scratching the surface of ERC721 tokens with their adorable cartoon claws. Other user defined non fungable assets can be sold as well. The transfer of an ERC721 token is essentially a transfer of title or ownership deed, something that is used in a variety of industries including the copywright, film, housing, and automotive. The title of an asset or property can easily be tracked or transferred using the blockchain, eliminating the middle man and easily disputing ownership claims. One industry where ERC721 tokens could really do some good is the art industry, which is plagued by manipulation and uneven standards. High profile artworks purchased by rich collectors, museums, and auction houses try to maintain the same standards of ownership transfer and tracking found in other industries. For other corners of the art market though, this is simply not the case and artwork purchased through smaller galleries, dealers, and especially online often do not abide by the same standards. This leads to an uneven market that can easily be plagued by forgery and unscrupulous sales. Transferring the title and tracking the provenance of artwork using ERC721 tokens has the potential to decrease forgery and apply equal standards to all corners of the art market.

Blockchain technology became popular by providing a secure outlet to transfer electronic cash. Popular blockchain company, Ethereum, devised a way for other developers to have their own slice of the blockchain pie through the use of ERC tokens. At first ERC tokens allowed developers to create fungible cryptocurrencies through the use of ERC20 tokens. Eventually, completely unique non fungable assets were introduced through the invention of ERC721 tokens. ERC721 tokens first made waves through the popular online collectibles game Cryptokitties which runs on the Ethereum blockchain. However, ERC721 tokens could be used to easily transfer title and track ownership. In an industry such as the art market where ownership disputes and uneven standards are all too common, non fungable tokens could be a godsend.

— Article by: Christopher Rahmeh