A New Twist to Cryptocurrencies: Digital Ownership Tokens
Will non-fungible tokens change the value of digital assets?
By Irving Wladawsky-Berger
The blockchain first came to light in 2008 as the digital ledger for bitcoin transactions. The creator’s original vision was limited to enabling peer-to-peer bitcoin transactions with no need for a bank or government agency to certify the validity of the transactions. But, like the Internet, electricity and other transformative technologies, blockchain soon transcended its original objectives.
Over the years, blockchain technologies have evolved along two major lines. One continues to focus on blockchain as the underlying platform for bitcoin, as well as a wide variety of cryptoassets, such as digital tokens and cryptocurrencies. The other focuses on the use of blockchain in the business world- a kind of Internet 2.0. The cryptocurrency camp is based mostly on public permissionless blockchains, which anyone can join and require some kind of proof-of-work or proof-of-stake systems. The business camp — best characterized by Hyperledger — is based on private or public permissioned blockchain networks to support transactions among institutions that need not know nor trust each other.
I’ve been almost exclusively focused on the business camp for two major reasons: First, blockchain technologies can help enhance the security of Internet transactions and data by developing a layer with the required standard services and their open source implementations for secure communication, storage, and data access. Second, blockchain technologies can significantly improve the efficiency, resilience, and management of supply chains, financial services, and other complex global applications involving multiple institutions across multiple countries.
I have not paid much attention to bitcoin or other cryptoassets until recently, I’ve become quite intrigued by non-fungible tokens (NFTs). To me, NFTs are further evidence that, as with the Internet of Things (IoT), we’re increasingly living in a hybrid physical-digital world. Let me explain.
Bitcoin and cryptocurrencies in general are fungible, that is, they’re all equivalent and interchangeable with each other. So are fiat currencies, e.g., $, £, €, ¥, ₩. But, beyond commodities like crude oil, soybeans, or gold, most items in the physical world are non-fungible. They’re not interchangeable because they each have unique characteristics that distinguish them from each other, e.g., a car, house, or painting.
Blockchain-based NFTs were developed to represent the properties of a unique digital item, such as a specific work of art or collectibles like Cryptokitties.
To become an NFT, a unique cryptographic token is minted or created, mapped to the digital file associated with the NFT, and recorded in a blockchain along with additional information like current ownership, commercial licensing fees, legal agreements, and other attributes similar to those we would generally associate with a non-fungible physical asset.
NFTs Go to Auction
NFTs were first created in the mid-2010s, but they’ve recently become quite prominent because of the high prices that some NFTs have commanded at auction. A few weeks ago, for example, Twitter CEO Jack Dorsey auctioned for almost $3 million an NFT of his first-ever public tweet sent on March 21, 2006 and which simply said “just setting up my twitter.”
But, what caught everyone’s attention was the recent $69.3 million auction at Christies of Everydays: the First 5000 Days, a digital work of art created by Mike Winkelmann, aka Beeple — making it the third-most expensive work sold at auction by a living artist. A month earlier, another piece by Winkelmann, Crossroad, sold for $6.6 million.
It raises many questions. Why would anyone pay $69.3 million to own a digital file that anyone can view online? Are NFTs a way of owning valuable assets like digital art and first-of-a-kind collectibles, a scam, or both? Are we seeing the kind of inflated prices that usually accompany anything new and novel, like the dutch tulip mania in the 17th century or the 1990s dot-com bubble? Will NFTs survive the inevitable bursting of their bubble?
Digital artist Winkelmann offered answers to these questions in an interesting recent podcast interview with technology journalist Kara Swisher. “Very simply … a non-fungible token is really just, at its core, a proof of ownership,” he said. “It’s just proving you own something, and it can be attached to anything. It sort of points to a digital file and says ‘this is the thing you own.’ ” He explained that owning a digital asset is somewhat similar to owning a master recording. A lot of people can have the MP3 and listen to the recording. “Everybody’s hearing the exact same thing. But one person owns the master recording of it. And that person can prove, O.K., I own it. And if you have a copy of the MP3, you don’t think you own it. You’re not going to convince anybody you own it just because you have access to it.”
Sharing vs. Scheming
Winkelmann added that on the Internet, exerting ownership over a digital asset has generally implied restricting access behind a paywall. But, with NFT-based proof of ownership, you have the option of sharing an asset you own with a wide audience.
Pictures of the Mona Lisa, for example, are widely available online. If you go to the Louvre, you can see the actual physical painting, take a picture of it, and share it over the Internet. But nobody would think that you therefore own the Mona Lisa, or that making it widely available through pictures has diminished its value. In fact, Winkelmann points out, the more something is widely shared, the more valuable it will likely become.
Swisher asked Winkelmann if he was worried that NFTs would turn out to be a kind of pyramid scheme. “I don’t think it’s a pyramid scheme because I think it’s really just sort of buying into ownership of artwork,” he replied. “It’s kind of like, if you think that artwork is going to be more valuable in the long-term well, then, buy it. If you don’t, don’t buy it. That’s it. It is extremely speculative. And the entire NFT market is extremely speculative right now. This is for people who are looking to take some risks, because a lot of this stuff will absolutely go to zero…That’s just how it is. I believe NFTs will be no different. And I believe it’s absolutely already in an irrational exuberance bubble.”
A few weeks after the Christies’ auction of The First 5000 Days, author and New York Times columnist Kevin Roose conducted an NFT experiment. He wrote a column about NFTs titled Buy This Column on the Blockchain!. He then turned his original digital file of the column into an NFT and put it up for auction to see what would happen. The net proceeds of the sale would be donated to the NY Times Neediest Cases Fund.
The buyer of an NFT owns only the specific digital file the NFT is mapped to, and has no rights to the copyright or any other intellectual property associated with the work represented in the file; those rights are generally held by the creators of the work or their employers. “The biggest perk of all, of course, is owning a piece of history,” noted Roose. “This is the first article in the almost 170-year history of The Times to be distributed as an NFT, and if this technology proves to be as transformational as its fans predict, owning it might be tantamount to owning NBC’s first TV broadcast or AOL’s first email address.” The following day, Roose wrote that after a heated auction that brought it more than 30 bids, the column was sold for $560,000.
According to Roose, “By making it possible for artists and musicians — and, yes, journalists — to turn individual works into one-of-a-kind digital collectible items, NFTs could erode the economic dominance of social media middlemen and give more power back to the people who are producing creative and interesting things.”
“The proliferation of NFTs will probably not be the world-changing revolution that its proponents claim,” wrote NY Times reporter Shira Ovide in a related article. “And it’s probably not an entirely absurd bubble, either. As with other emerging technologies, there is a good idea in there somewhere if we slow down and resist the hype. … There is promise in letting creators rely less on middlemen including social media companies, art dealers and streaming music companies. Will any of this work? I don’t know. Run screaming from anyone who has a definitive answer either way.”
originally published at https://blog.irvingwb.com.
