NFTs Beyond the Hype
Many people may dismiss NFTs as entirely speculative. However, I believe that at the core of even the most seemingly irrational bubbles lies a deep disruptive potential. This is a statement I believe to be especially true in the blockchain space.
Flash back to 2017. At the heart of the 2017 ICO (initial coin offering) boom was a new mode for funding and governing technology projects that has the potential to remake both the venture capital and open source landscapes. Flash back less than a year, to summer 2020. The DeFi (decentralized finance) movement that started to build buzz then — a buzz sparked by tens or even hundreds of millions of dollars flooding into new blockchain-based financial instruments every day — represents a disruptive technology. DeFi is arguably the first opportunity we’ve had to redesign financial markets since the hegemony of New York City and the U.S. dollar were first established in the 1950s.
Today, we find ourselves consumed by NFTs: Everything from pieces by the British street artist Banksy to Jack Dorsey’s first tweet to Lebron James’s dunks is being minted and sold as NFTs. The last quarter of 2020 saw $93 million in NFT transactions. By the first quarter of this year, that number had rocketed past $2 billion.
Before exploring the disruptive potential of NFTs, let’s unpack what NFTs are. “NFT” stands for “non-fungible token.” NFTs are physical or digital assets registered on a blockchain (token). They are not interchangeable with other assets, making them non-fungible. For example, a unique blockchain token representing a work of digital art (like a digital photo) is an NFT because it is both a blockchain token and is not interchangeable with another piece of digital art. This is in contrast to something like Bitcoin, which, while also a blockchain token, is fungible. Two people can swap (interchange) bitcoins without either side gaining, losing, or really even being able to tell any difference.
Having defined NFT, let’s now highlight the disruptive innovation behind this latest blockchain trend. At their core, NFTs look to solve the problem of verifiable and enforceable digital ownership.
What exactly is the problem?
As our world digitizes, the mediums of intellectual and creative expression have become increasingly electronic. While paintings once lived only on canvas or paper, they can now exist as JPEGs and PNGs. Similarly, while great intellectual achievements were once written in manuscripts and bound as books, they can now be found in blogs and electronic journals. Now, suppose you wanted to purchase a digital contribution to human culture or progress. How would you do that?
If you were purchasing a canvas painting, you could participate in an auction, maybe win, and walk away with your physical work of art. So long as an expert could authenticate the painting, your claim of unique ownership would remain and could only be taken from you by theft of the physical object.
That seems simple enough, so let’s try to replicate this process with digital art. Once again, you participate in an auction and win. Here, you can’t receive the piece of digital art itself (since it isn’t physical), so instead you are provided a flash drive storing the digital art as a file. We can even say that this file has been digitally signed (using a cryptographic key) and assigned to you by the artist, allowing you to prove that you acquired the file legitimately and directly from the original artist.
A few months pass. You’re talking to a friend who tells you about a new piece of digital art they purchased. They plug in their flash drive and you see their piece is the exact same as the artwork you purchased. Every pixel is identical. You even see the artist’s digital signature assigning the artwork to your friend.
Where did your transaction go wrong?
You have experienced a “double spend.” The artist retained a digital copy of the original file. Since the artist was still able to sign the artwork as authentic, they can produce and sell limitless copies of the “original” artwork you previously purchased, all with essentially no effort required.
You may observe that the same double spend can be carried out on physical works of art provided the artist is still alive and willing to recreate an original. This is absolutely possible — although due to the effort required this problem is generally ignored, except in digital art where the cost to reproduce is effectively zero.
How can NFTs and blockchains help?
The power of blockchain-based NFTs comes from their ability to provide a universally accessible ledger to track the sort of transactions outlined in the hypothetical art sale above. If you purchased your digital art as an NFT, you would get a token signifying exclusive ownership of that work (a token that could include a reference to where that piece was digitally stored).This NFT transfer (from the artist to you) and the unique identity, or blockchain address, of the artist are universally accessible on a public blockchain. Since these two pieces of information are now publicly available, all new sales by the artist can be checked against their catalog of past interactions. Any sales of identical works would be immediately obvious and thus not carried out. A notable caveat is that a purchaser and the artist could still knowingly enter into a fraudulent transaction where an already-acquired artwork is sold again. However, anyone assessing your ownership claim could immediately validate you as the legitimate owner of the original.
Now that NFTs can enable verifiable and enforceable digital ownership, what can we do with this?
What we have now is the systemic trust to build more complex (and accessible) markets and ecosystems based around assets represented as NFTs, which can go far beyond digital art and include other digital or even physical assets. For example, there are several efforts to divide ownership of famous works of art into shares that can be owned by people interested in art but without the means to bid on a Van Gogh.
In highlighting the disruptive force behind NFTs, we’ve focused on open and verifiable tokenization as a means to build trust in an asset. In turn, this trust unlocks new market and ecosystem opportunities. Critically, this is not limited to non-fungible assets like art but can be extended to other assets with potential issues stemming from verification and enforcement of ownership. Carbon credits are one such example. There have been cases of a single batch of credits being sold to multiple unwitting buyers.
The disruptive power of tokenization can open entirely new markets and asset classes kept from emerging in the past due to a lack of verifiability. At Topl, we’re working to use this power to bring trust and transparency to all manners of social impact and environmental claims. We’re doing this through our Impact Credit framework, which we will be unveiling soon, thereby transforming impact into a new asset class.
Thanks to Chris Malloy for his contributions and edits to this piece.
