You’ve probably read something about the latest crypto-craze. My good friend Lawrence Wintermeyer wrote a great piece about it here, describing how an anonymous guild of “art digitalists” bought an original Bansky and then set fire to it after digitizing the piece into a non-fungible token (NFT) they sold for $400,000.
NFTs really hit the headlines when the artist Mike Winkelmann (“Beeple”) sold an NFT of a JPEG he had created for $69m at Christies. It’s a lot to pay for nothing since, as my good friend David Gerard eloquently notes, Christie’s 33 page conditions of sale make it clear that the buyer did not obtain copyright or indeed any other rights to the file. The $69m is for nothing more than an albeit uncloneable receipt for the artwork. Not that the buyer minded, because he runs a crypto fund that invests in NFTs and issues tokens that are shares in the portfolio. Beeple owned 2% of these tokens, which went up in value from $0.36 per token to $23 after the Christie’s sale. Nice.
Now, you may think (as I did) that this is more interesting as a piece of performance art about the manipulation of cryptomarkets than a window into a new world that decentralises auction houses out of existence, but it is undeniably interesting. That’s because, trivially-copyable artworks to one side, NFTs could deliver radically more efficient markets.
To see why, let’s first remind ourselves of what tokens are. Tokens are a cryptographically-secured digital asset (that is, they cannot be counterfeited or duplicated). As I explained in my book Before Babylon, Beyond Bitcoin a few years ago, although tokens are not specific to Ethereum they took off with the development of the ERC-20 standard back in 2015. ERC-20 defined a way to create a standard form of token using consensus applications on the Ethereum blockchain. Such tokens are a simply structured data exchanged between these applications, a practical implementation of digital bearer claims on assets with no clearing or settlement involved in their exchange (and hence a more efficient marketplace for their trading), thus creating a means to make the transfer of fungible value secure without a central authority.
I have written before that fungibility is a critical defining characteristic of money and one of the reasons why Bitcoin isn’t. All of the dollars in the world are the same, and any dollar can substitute for any other dollar. But all of the Bitcoins in the world are not the same. Similarly, my excellent stalls ticket to see the mighty Hawkwind play at the London Palladium on 1st May is unique. So… how do you know that that ticket belongs to me? Right now there are event promoters, and ticketing agencies and credit card acquirers and databases and barcodes to try to figure that out. However, if I am a bad boy and sell a ticket that is nothing more than an e-mailed barcode to two other people and they both show up to watch a band, neither the venue nor the band nor other fans nor anyone else can tell which barcode is authentic and which is a copy. But what if the ticket isn’t a barcode, but a non-fungible digital asset stored in my digital wallet? An NFT?
Now, non-fungible digital assets are fun and markets for them existed before Bitcoin, the blockchain and Enterprise Shared Ledgers (ESLs). Consider the obvious example of people playing massively-multiplayer games (MMGs) such as World of Warcraft and the like. People buy sell digital assets all the time (one of the first blog posts that I ever wrote was about the mining of digital gold in these games, and that was back in 2006!). If I want a magic sword or a laser cannon or a nicer hat for my avatar, I can buy it with real money. If you could copy magic swords to infinity, then they would have no value. So the number of magic swords is limited, and thus a market arises. So who says who the magic sword belongs to? If I pay you some real dollars for a non-existent virtual sword, who transfers title? Well, in the case of the games, it is obvious: it’s Blizzard or CCP Games or whoever else is in the middle, running the game.
New technology means that I can sell you the magic sword without having anyone in the middle. On Ethereum, for example, there are now a number of different ERC token standards, most notably ERC-721 that defines non-fungible digital assets. ERC-721 hit the headlines (well, for people like me anyway) back in 2017 when CryptoKitties took off. This is game on Ethereum that allows players to purchase, collect, breed and sell virtual cats and it became so popular that caused such congestion on the Ethereum network that is slowed in down significantly. The point is though that we can now exchange unique digital assets in a fully decentralised manner.
I remain unconvinced that buying digital receipts for trivially-cloneable artworks is a sound long-term investment strategy, although I am given to understand that much of the art market is more about money-laundering than Monet (Monet laundering! Why didn’t I think of this headline before!). However, that is not to say that there is no future for NFTs. On the contrary, some of these art market experiments are breaking ground for a new way of working that I think will indeed transform some markets.
These digital assets will very often be a means to control of things in the real world without having anyone in the middle either. Some years ago I asked if shared ledgers and such like might be a way to tackle the issue of “ID for the Internet of Things” (#IDIoT). I said at the time that I had a suspicion that there might be something there. My reason for thinking that was that there is a relationship between digital assets and things, because blockchains and tokens deliver a virtual representations of things in the mundane that, as with their physical counterparts, cannot be duplicated. If we can link the digital asset of a Rolex watch to a physical Rolex watch, we can do some very interesting things.
(As it happens, I am the non-executive Chairman of Digiseq, a UK startup that does this using tamper-resistant microchips).
What all of this means is that we can use the new technologies of cryptoasset trading (the world of decentralised finance, or “defi”) to develop efficient markets in scarce resources, markets that will hinge on the ability to maintain and prove the provenance of real-world objects, whether these are magic swords or designer handbags.
The opportunities for new and disruptive businesses here are real and substantial. Here’s an example, continuing the music theme. A band is going to play a concert. There are 10,000 seats in the venue and 100,000 members of their fan club. So the band randomly distribute the tickets to the members of the fan club who pay $50 each for them (this is all managed through smart contracts). And that’s it. Now, the members of the fan club can decide whether to go to the concert, whether to buy some more tickets for friends, whether to give their ticket to charity or whatever. They can put their tickets onto eBay and the market will clear itself. The tickets cannot be counterfeited or copied for the same reason that a Bitcoin cannot be counterfeited or copies: each of these cryptographic assets belongs to only one cryptographic key (“wallet”) at one time, and whoever has control of that key has control of the ticket.
Not your keys, not your Kings of Leon, as the kids might say.
(An edited version of this piece was first posted on Forbes, 7th March 2021.)