Four Fundamental Reasons There Is More To Crypto Than Its Price: Part 2 — Digital Scarcity
In part two of this series I am going to cover Digital Scarcity. If you would like to read the other three parts you can do so here, here and here.
The physical realm has many examples of scarcity. Gold is relatively scarce compared to most other metals. Collectibles are valuable because they are rare or one of a kind. Real Estate is mostly limited by land that already exists and the inability to create new land.
However, that has not been historically true in the digital realm. If I send you a photo, it’s pretty trivial for you to download it as many times as you like or send an infinite number copies of that photo to whoever you want. The fact that Satoshi was able to solve the double-spend problem means that if I send a blockchain based asset to someone, I can only send it once and only to that one person. For the first time ever, we can have scarcity on the internet.
This is most obvious when applied to money. Today, if I were to send you a fiat currency for a payment, we are forced to rely on third parties to ensure that I actually have the funds, the funds make it to you and the funds are deducted from my account so that I cannot “spend” that same dollar on something else. This is essential but it does add friction, time and cost to the movement of money. However, Bitcoin and other blockchain based assets allow me to interact directly with you, without the need for any middlemen, and still ensure that all those same criteria are met. And I can do this cross border which eliminates even more complexity, cost, and time compared to the current fiat system.
Bitcoin is especially scarce because not only does the Bitcoin Blockchain ensure that no Bitcoin can ever be double spent, but there is also a hard cap of 21 million Bitcoin that will ever be created. Thus, Bitcoin is arguably the scarcest liquid asset in the world because we know with absolute certainty, there will never be more than 21 million Bitcoin. Even rare and precious metals can’t make this claim. We may have a limited supply of any given asset based on our knowledge today, but there always exists a possibility of discovering a previously unknown pool of any resource.
Yet money isn’t the only reason digital scarcity matters. Digital scarcity enables trading of any digital asset. It could be money, but it could also be art, media, real estate, digital goods for gaming, digital collectibles, and more. The fact that we now have digital scarcity for the first time ever will allow brand new marketplaces and economies to be created around these Non-Fungible Tokens (NFTs).
Anything that can be digitally owned can be supported with an NFT. This includes new ways for artists and collectors to buy, trade and sell digital art. Not only does this prevent infinite digital duplicates (the buyer receives a token that cannot be copied or owned by anyone else), its also better for creators because no matter how many times a piece of art is bought and sold, the creator can track those sales and continue to receive royalties on all those future transactions.
One critique that often arises is that someone could simply screenshot a digital piece of art and spread that photo around. Sure, but that’s akin to someone taking a photo of the Mona Lisa with a physical camera. That person can share that photograph of the Mona Lisa all they want but the person who took the photo doesn’t own the original painting. Same holds true in the digital realm.
This new method allows artists to bypass gatekeepers, sell directly to their fans, and keep a greater percentage of the proceeds for their work. And this isn’t fiction. Just recently, a digital artist named Beeple sold 20 pieces of digital artwork for $3.5m. Even more inspiring, one of the winning bidders was quoted after, “My winning bid was not for him and myself only. I hope we were able to take a stand for the future of creativity, open collaboration, and self-sovereignty through digital signature.” This potentially can have huge ramifications for digital rights in the music and entertainment industry as well.
The NFT idea extends beyond digital art and into social media. What if instead of just posting pictures and videos on Instagram, social media influencers could post an NFT. These could be pictures or any other form of content that is limited in supply (maybe only 100 are available) and their followers could bid or purchase that digital content knowing the supply is limited.
The NFT concept will also have huge ramifications for the gaming industry in the future. The gaming market continues to grow and as any parent with a young child will tell you, is quickly becoming the new way the younger generation hangs out and interacts. Whereas, older generations might signal status by buying fancy clothes or watches, younger generations signal status with virtual skins and digital goods. The problem today is that these digital goods are dependent on the platform and the user doesn’t actually “own” the digital good. If the game gets shuts down, all that value simply vanishes with the game. If the publisher decides to lower the price or create more of those same digital goods, the digital goods the user had gets devalued. However, with NFTs, the gamer actually owns the digital good and could theoretically take that skin or avatar with them into another game. If this happens, the creating, buying and selling of these digital goods will unleash a whole new digital economy. I predict that in the near future, there will be people who make a very good living creating, buying, selling and trading digital video game goods.
These are just a couple of examples that are starting to happen already. I’m sure there are many more use cases that will be created in the coming decades that we can’t even begin to imagine now.
