Non-Fungible Tokens: The convergence of creator-centric ecosystems
Written by Luca Cosentino, Product Lead, Oasis
Unlike fungible assets which are interchangeable (i.e., every bitcoin, ether, or dollar is equivalent to every other bitcoin, ether, or dollar), non-fungible tokens (NFTs) are unique and contain unique identifiers, data, and metadata.
Residing on a blockchain and non-replicable, NFTs can represent digital or tangible assets including individuals’ identities, ownership, their rights concerning the underlying asset, and other attributes. As noted at Investopedia, “’Tokenizing’ these real-world tangible assets allows them to be bought, sold, and traded more efficiently while reducing the probability of fraud” (Sharma, 2021).
While tokens confer the ownership of the asset, the data dictates its value and its value-accrual logics. Hence, privacy-preserving techniques such as trusted hardware or zero-knowledge proofs will be of particular interest to data privacy advocates: especially those who advocate for the monetization of personal information. Legal arguments about personal data ownership and rights aside, it may be that NFTs can provide the required mechanism for monetizing personal information, without requiring users to lose control of the information itself.
In fact, Snickerdoodle, a startup co-founded by PayPal former head of blockchain strategy seeks to pioneer the use of NFT technology to “enable self-sovereign identity” through “a first-of-its-kind infrastructure to allow people to own and monetize their data in a secure way, no matter where it lives, how it travels, or what it’s used for” (PR.com, 2021).
NFTs are an evolution in the evolving human-centered marketplace leveraging online platforms, blockchain, and the myriad benefits of the peer-to-peer “sharing economy.” They are also the next generation of information transfer. Privacy will increasingly play a role.
There is much to consider, and I invite you to join me at the upcoming Spokes Privacy Conference where I will lead the panel discussion, NFTs: The Privacy Angle.
What is the NFT Value Proposition?
To answer this question let’s step back a bit and consider two trends that have thus far been running in parallel: 1) the digital marketplace, and 2) blockchain and cryptocurrencies
1. Digital Commerce: At the risk of oversimplification, thinking about the first wave of digital commerce, we are likely to think about the big brands that dominated online selling. This was followed by smaller brands and individual sellers and content creators joining the online marketplace. An aggregation of supply looking to attract demand based on classic market dynamics.
A significant paradigm shift occurred with the introduction and embrace of the peer-to-peer (P2P) or “sharing economy” that reduced the role of the platform and increased the value of the individual creating ever more content, product, and services for those platforms capturing the value that now millions of people all over the world we’re putting on offer.
This created the paradigm of an Airbnb or VRBO with no rooms or houses. An Uber or Lyft with no drivers. A Medium with no writers.
2. Blockchain & Crypto: While Blockchain as we know it today, has been around for 10 years or so, it is in the past three years, motivated by speculation, that we began to see the first wave of people buying and selling crypto. The challenge for investors was choosing which token to invest in. For the issuers, the challenge was differentiation.
Once tokens were sold to investors, the challenge shifted from token creation to creating products for the token holders. This is very much analogous to the traditional financial world. First, an institution created the bank account, and then, having acquired dollars, it need to create products that enabled account holders to spend, invest, and borrow. Like traditional banking, the second wave of blockchain was the creation of these financial primitives.
Just as P2P commerce reduced the role of the underlying platform in the digital marketplace, blockchain seeks to reduce the role (and friction) of the underlying platforms in the financial marketplace and decentralizing finance, just as the sharing economy decentralized commerce.
Again, until now, these two trends (decentralized commerce and decentralized finance) have occurred in parallel.
NFTs: Agent of Convergence
NFTs sit at the intersection of these two trends, and their value as a concept is the ability to converge them. The shared proposition is that platforms, rather than being run by those separate from the creators, should be operated by the content creators for the content creators’ benefit. Content creators have the highest say in that they keep the platform alive by producing content, products, and services, that satisfy customer needs.
In the traditional paradigm – the “real world” – the tension between platform owners and creators can be exacerbated by scale. An organization’s size, the pace of growth, operational requirements, regulatory constraints, and other factors, can begin to create incentives that are different, and potentially at odds, from those of the content creators. With blockchain, people began asking, why should this be the case?
We don’t need, for example, Airbnb to run the product. Rather. we need a community of people who can get together, who without physically meeting, without knowing each other, but trusting each other – not themselves as name and surname or years of friendship – but through common incentives around a particular goal.
This fundamental proposition brought NFTs to life.
The ability of NFTs to enable a creator or asset holder – whether it’s a piece of art, music, real estate, blog post, or some other thing – to tokenize it and sell, share, or grant some other rights to an individual or company interested in that asset, peer-to-peer, without a central controlling institution is compelling.
Ostensibly unassailable (by virtue of its cryptographic protocols) authentication is a crucial element of the “trust” required in a P2P economy. The encrypted identification codes, data, and metadata contained within the NFT assure the buyer of the authenticity of the asset on offer and her rights as a buyer. Without the need for an external validator.
It allows content producers all over the world to create experiences, create products, or even create new use cases for the token as well. While not fungible, NFTs are eminently scalable, extensible, and also can be fractionalized. This ability is unconstrained by who you are, where you are, or the nature of the underlying asset. There is very little friction.
Ultimately, the ownership of the NFT itself is just one piece of the equation. What matters is the data that is associated with that ownership. NFTs in this regard are the next generation of information transfer.
As a simple analogy, consider an invoice. The fact that you have the invoice is nothing more than having, say, a PDF. It is the data stated in the invoice that triggers the value. The NFT is the PDF, the information contained therein is the value.
Now imagine a situation where you want to fractionalize that invoice and sell interests in it. To do so you create ten tokens, each representing 10% of the value of the invoice to trade among folks who value that cashflow. You now have two options:
1) Either reveal all the data so everyone can see its worth – who needs to pay, what items have been bought, etc. – on the blockchain, or 2) or don’t. Of course, if you don’t reveal all the information the blockchain is rendered useless and you need an external entity to verify that invoice has the value you claim.
While an invoice is a rather innocuous example, it is not difficult to conceive of many other examples where you would not want to reveal specific details, but still communicate authenticity and value as a buyer or seller. Think of celebrities who purchase homes under assumed names. Understandably, they seek to retain their privacy and all the seller really needs to know is that the buyer has the means to purchase the home. They do not require personal details. (Imagine the impact this could have on redlining and other discriminatory practices.)
Here NFTs have the ability to converge another parallel trend: data privacy.
NFT & Privacy
The next step is the convergence between P2P commerce, NFT, and data privacy.
By introducing privacy-preserving computation to the NFT world you can have a new privacy-centric standard in which the NFT represents the ownership or fractional ownership of an asset, but the data associated with the NFT, and who has the right to decrypt that data, see its value, or grant permissions, is not revealed to the broader network.
Could “zero-knowledge” tokens replace cookies? The monetization of personal data aside, perhaps tokenization represents the ultimate opt-in/opt-out control. Controlling what data is revealed and who has permission to see it is the essence of data privacy and NFTs on blockchain seem a promising vehicle for establishing such a paradigm.
There is value for the marketers and the ad tech ecosystem here as well. While it may reduce the pool of those opting in – a trend already in full swing stimulated by Apple’s and Google’s moves on the heels of the CCPA and CPRA – the personal data willingly revealed (or sold?) will be far more valuable. All personal data in this model will be, perforce, zero-party data, as opposed to first, second, or third party.
NFTs: What’s Next?
It is interesting to speculate in this regard, but it is, at this point, only speculation. And there are so many possible scenarios it is difficult to predict where this will go.
There are also many questions. And the issuance of a token and where the token is settled are two different things. Where is the token going to be moved around? Which ecosystem will the issuers and buyers join? (Importantly, tokens have very compatible standards, so bridges can be built. And so, to some extent, it’s like creating infinite liquidity for these tokens.)
There are three key moments in the life of a token:
- the token issuance,
- the experiences that will be created for the token holders, and
- the incentives for the token holders.
The industry right now is focused on step one: how do we issue tokens? Is it one standard for everyone? Is it a native on-chain issuance? Is it an API for enterprises? And here we have differing views and proposed solutions.
NFTs are in an early experimental stage and how the possibilities play out will be settled by market dynamics. Irrespective of the specific implementation(s), however, the underlying value proposition of converging the peer-to-peer commerce of the digital marketplace, blockchain authenticity, NFTs, and privacy is profound.