The NFT Craze
Within the last year or so, the internet has discovered Non-Fungible Tokens. So called digital objects that have descended from the immutable magic of the Ethereum Blockchain. They have graced our world with the power of digital property rights, the future vision of Web3, and finally, the promise of the Metaverse. An indisputable way for me to prove to others, “Yes, I do indeed own that JPEG”.
But as I browse the internet lately, I can’t help but notice the current trends of the internet memes bashing NFTs. If I were to try and quote them, they might say something the along the lines of, “I’m going to screenshot your JPEG.”, or better yet call it a “Ponzi Scheme” in your daily Crypto bashing thread on Hacker News.
CryptoKitties were among some of the first NFTs that used the ERC-721 standard on the Ethereum Network
While I do understand the criticisms that NFTs right now are just glorified JPEGs and I find the memes funny, I have to say that I think it’s a bit short-sighted. This is not surprising though since most users discussing these types of topics on Social Media only tend to dwell on the surface level without knowing the specifics of the tech, or considering the deeper implications of that technology.
So, with the knowledge that I’ve gathered over the past few years participating in the Cryptocurrency ecosystem, I want to try and explain, in layman’s terms, what NFTs are and why they may be important to the future of our society. That being said, while NFTs in their current iterations might seem ridiculous to someone who doesn’t consider themselves a blockchain/Web3 enthusiast, I believe what is actually important about NFTs is their representation of potential future property management systems that we are likely to adopt in the next 10–15 years. To understand why I believe this to be the case, we first need to talk about how our current property management systems work.
Our Current Property Management System
A car is something that most people in the world are aware of, and is an asset that a majority of the time requires a document as Proof of Ownership. In the United States, we manage this ownership system via Vehicle Titles and the DMV. For all of us, the DMV is our central coordinating agency that helps keep track of who owns which cars, whether they’re registered, what state they’re in, and if you own a car, you’re likely to have a Vehicle Title that says that you are the owner of the car you possess.
Vehicle Title that acts as a legal “Proof of Ownership”
It is crucial for society to keep track of this information in the system of Capitalism because acquiring an asset like a car is a big deal for the majority of citizens. Most of us take out loans to be able to acquire a car, and if that car were to get stolen, we need to be able to prove that we were the owner of the stolen car.
In this current system, The DMV and Vehicle Titles are our only tools for recourse if a car gets stolen. In the event that your vehicle is stolen you can use the Vehicle Title, take it to the Police Department and they will then be able to confirm with the DMV (the central authority) that you do indeed own the car. This is because their internal ledgers at the DMV reflect the ownership stated on your vehicle title. So, by the right of law you are able to take the car back; assuming it hasn’t been destroyed.
If you didn’t make your reservation beforehand, you’re probably waiting hours to get through this line.
For the most part this system works fine. But when you take the time to actually think about the how it’s designed, the relative tech we use to manage the car titles, you start to realize that it’s extremely inefficient. The thought of how much time we spend keeping track of paperwork that could be completely automated is ludicrous. The state of California had a proposed budget of 1.4 Billion dollars for the year 2021–2022 and while 95% of that budget was paid for by registration and drivers license fees, there is still an incredible amount of unnecessary work being done that is essentially just shuffling around ownership and registration information.
Outside of the DMVs capabilities there is also a problem called curbstoning. The short of it being, I could buy a car from someone else, they sign the title off to me, but I don’t ever register it in my name and then I proceed to resell it at a later date. Because the DMV has no record of my ownership of the car, it will never show up on any record. On top of that, I don’t pay tax on the sale and what happened with the car while I owned it is a mystery. The biggest takeaway is that the record of ownership is flawed and can never be completely fixed, just due to the nature of the antiquated paper system.
How NFTs fix this
To understand how NFTs fix this, we must first understand the blockchain. For the uninformed, a blockchain is basically an online ledger that keeps track of who has what, with its most distinguishing factor being that no single person holds the power over this ledger (*cough* the DMV). This idea of control being decentralized means that Corporations and Governments are no longer required to manage the ledger. The systems are constructed in a way that doesn’t require a top down approach and essentially eliminates accidental ledger changes, or worse, corrupt entities from altering it.
The easiest way to imagine a centralized system vs. a decentralized system. Instead of one book at the center to keep up to date, you have multiple copies of the same book all staying up to date and in sync.
The most famous use case for Blockchains previously has been for Cryptocurrencies and the Fungible Tokens they help enable like Bitcoin. But through advances on the Ethereum blockchain, new types of tokens became possible on blockchains including Non-Fungible Tokens.
The difference between Fungible Tokens and Non-Fungible Tokens might sound confusing, but it’s actually quite simple. Anything that is “Fungible” is basically interchangeable with another token that is similar. You can trade a singular $20 bill for any other $20 bill that someone else has and you’ll still have $20. But, if you have a mint condition first edition Charizard Pokemon card, that is not interchangeable with a third edition Charizard card that is beat up and poorly cared for. This idea of uniqueness is something that that didn’t previously exist for cryptocurrencies, but that all changed with an update was applied to the Ethereum blockchain in 2018.
This digital uniqueness and non-fungibility via an impossible to manipulate digital ledger is something that presents a real world opportunity for property management. For the first time in history, we do not have to have trust in an entity like a Government or a Corporation. The management of Proof of Ownership could be delegated to the Blockchain and in essence become a “Trustless” process, or put more simply, a system that is so effective and unbreakable that we no longer need to trust the system to do its job.
The 20 dollar bill is interchangeable with other bills (fungible), but the Charizard card is not.
If California were to use NFTs for car titles, almost all of the processes for Titles that the DMV helps manage would be completely automated (Transfers/Sales/Registrations/etc), and if you look into developing distributed ledger technologies, the same thing can even be said for identification tools. Though in the case of a drivers license, you would probably just be given an NFT that represents you are authorized to drive. This is essentially because the Ethereum Blockchain would be replacing the DMV as the trusted source to verify that you own a car.
Even now, we are starting to see experimentation and discussion of NFTs in the automotive world. If the idea catches on with manufacturers and the Government, they may see the potential that NFTs themselves could be tied to the software of a car, cryptographically secured, and used for Proof of Ownership. This means that the NFT would be impossible to remove in the way you might cut out a VIN Number, because with the proper implementation, NFTs wallets are impossible to hack. It’s easy to imagine this becoming the case as we already see the markets trending towards EV dominance over time.
Projected Electric Vehicle Market Trends
It’s also worth mentioning that all management of these NFTs would happen using a digital wallet of your choosing and any concerns of losing your wallet/NFT will start to fade as smart wallets are developed. A few smart wallets that exist already include the Loopring Wallet, and the Argent Wallet powered by zkSync.
Further Benefits of NFTs
Car Titles are not the only potential use case for representing real world objects though. NFTs could be used to represent House and Property Deeds, Stocks and Securities, Concert and Event Tickets, and one of the coolest I think being Music NFTs which would help with royalty distribution to artists.
Musicians stand to benefit from NFTs substantially because they enable an artist to circumnavigate the need for Record Labels and Digital Distribution platforms. Combining the rise of digital streaming with the prospect of NFTs gives musicians all of the leverage in dictating how they manage their catalog.
The Rise of Music Streaming.
I imagine future web3 browsing applications that allows users to surf a web of NFTs in the same way you browse the internet now. Rooting out your favorite songs from this distributed internet and playing them for you on demand. Each time you play a song or album, you make a micro-transaction that pays the artist directly for the song. Some projects that are already playing with these type of experimental ideas in the music realm include Nina, Audius, Royal, Catalog, and more.
Among some of these potential future revenue models, one of the most interesting includes one where listeners can become fractional owners of music NFTs that the musicians are creating. This would allow general users to pitch in an extremely small amount of capital to artists that they love as a way to support them and in return they could earn a fractional percentage of the streaming and licensing revenues via their fractional ownership. This further democratizes the ownership of art and allows fans to get paid retroactively for helping fund projects. See the image below for a mockup of what this type of system would look like.
This is an extremely simplified version of of how music NFTs could get musicians and fans paid, and one of the MANY ways in which collective ownership is incentivized.
The Democratization and decentralization of power
The importance of the fractionalization demonstrated above for the Music NFT is something that I don’t think can’t be overstated. That is because this concept of fractional ownership is not exclusive to NFTs representing music, they can apply to any NFT that exists.
This notion that fans and consumers can be the direct beneficiary of ideas and projects they believe in, projects that the fans helped bring to life means that we no longer have to rely on the traditional methods of funding. The self interested individuals with capital (such as VCs), that have historically been looking to extract value are no longer needed to get a project off the ground. This is because the thing that cryptocurrencies allow that no other tool has allowed, is an emergent way for communities to pool capital in a decentralized way as a means to create and improve something in the world.
Before this, the two ways of raising capital to start a business or social movement involved crowd funding via a system like Patreon or Kickstarter (extractive web systems), or finding a seed investor to help fund the project (extractive investor).
Even when there is a crowd funded project, as it currently stands, the only thing that community could actually stand to gain from these projects is the end product. They typically do not benefit financially from these products, and even if they wanted to it is prohibited by the SEC via the accredited investors classification.
Alex Bloomberg from Gimlet talks about accredited investor classifications when trying to raise funds from his audience on this episode of Startup.
Private investors on the other hand need to be woo’d and convinced of a projects value if you want to unlock their capital. Those investors are making a bet that the general consumers (the people who might be your typical crowd fund contributor), will buy the product that the start up is helping produce. They do this in hopes of extracting a portion of the value from the end product. This is problematic though, because a good portion of the time, the people investing in these startups are not aligned with the general consumer and miss the mark. Films that bomb at the box office are a great example of this phenomenon. Disney thought we wanted John Carter, but we most definitely did not.
What the hell is Mortal Engines? Apparently a Peter Jackson film?
Skin in the Game
Another factor changed by fractionalized NFT ownership is a communities increased sense of “Skin in the Game”. Since some users will have chipped into a project they believe in, they will be incentivized to participate in being the reason why a project is successful. Alongside of that, as these collectively owned NFTs and communities will need to be managed, new organizational structures and tools will need to be constructed. New methods and techniques that allow users to spring up in order to fulfill the goals of the collective will arise. If the community or project becomes successful, the users who helped build the community end up reaping the largest benefit.
Already, we’re starting to see these organizations pop up through Decentralized Autonomous Organizations, also known as DAOs. These DAOs are organized and managed in the same decentralized way that NFTs are managed. This means that no one person or small group of people has control over the funds or treasury of the organization. They utilize these decentralized tools and govern themselves democratically through a multitude of governance techniques. ConstitutionDAO, a group who had the goal of buying a privately held copy of the Constitution to return ownership back to the Public are early examples of this phenomenon (in a social context), or KlimaDAO which is pooling capital to raise the price of carbon credits in an attempt to fight climate change. These are not the only examples of DAOs either, further searches of DAOs online should reveal plenty of experimental projects that currently exist or are just getting started.
The potential power of DAOs though is in their ability to concentrate the strength of the internet in a decentralized way. We’ve all seen this “strength” of the internet through virality; hence the idea “you should never underestimate the internet because there no cause too large for the hivemind” and a great and easy example of this is the Youtuber Mr. Beast starting an initiative to plant 20 million trees, a project that enabled him to raise 23 million dollars for environmental purposes.
When the proper tools are developed, a cause like the one Mr. Beast championed could be organized via a DAO and allow fans of Mr. Beast to be direct participators in the cause. There is even the potential for people to work as DAO-Lancers who help support and run these organizations. With this expansive idea, you can imagine a world where DAOs become a common method of organization and allow workers to have self sovereignty over what they do and how they work. The freedom to put as much or little effort in the causes they believe in.
Experimental Models of Governance
With the idea of proof of ownership being tied to the blockchain and collective ownership being managed by DAOs, you may slowly start to realize that DAOs are just another form of Governance. There’s a 2017 article by Fred Ehrsam of Paradigm and Coinbase where he wrote about how Governance is the most important issue in the cryptocurrency space right now. He relates the evolution of governance in crypto to evolution in biology, and when you look at our society with that sort of perspective, the past thousand years or so of our governmental evolution has been slow. Even in the United States, we’ve had a capitalist system (with many flavors) for the last 245 years, which may seem like a long time, but it is a short period when compared to the the many empires of the old world.
Now, with Blockchains and DAOs, we finally have a tool where we can quickly iterate on how to effectively govern systems by which we manifest collective action. I believe if a DAO is structured properly, the incentives should align so that people will not be able to make gains at the expense of others. This is because DAOs are network based systems, and if social media proves anything, it’s that a network is only as powerful as the users that are participating. People flock to the networks where the benefits are the highest, in this case, they will flock to the DAOs that are the most beneficial and share equity with users.
A timeline of all of the different versions of linux. Each line in this system represents altered versions of the same original code. This type of iteration could be applied to governance and DAO policies. The systems with the best collective policies would prosper
For networks like Facebook to survive, they will need to be become minimally extractive platforms. This is because the platforms that offer their users collective Governance will be owned and managed by the users, and as users flock to the networks that are rewarding them with equity in the distributed systems, the overhead for a network like Facebook will become unsustainable and collapse. Especially as these collective groups band together and start entering the market sell their own data via Data Co-Ops using distributed market place systems like Ocean Protocol and Swash. For the uninformed, Facebook runs its business model on selling our data, but soon we will be able to sell our own data.
Keep in mind, while the exact processes and tools for running DAOs and collective digital ownership are still in their infant stages, the future looks promising.
Experimental Models of Society with Tokens
With all of that being said, if any of the ideas in this piece actually become fully fledged and make a real impact in the world, this potentially implies an entire recontextualization of what ownership entails. At first, the individualized ownership of Fungible and Non fungible tokens alike will begin to mirror the current system and slowly begin to suffer from a form of digital sprawl.
This digital sprawl is apparent when you look at early social DAOs like Friends with Benefits which determines a users membership level and individual value with the number of tokens they hold. They propose a tiered access system where you are required to hold 70 FWB tokens ($4,600 at the time of writing) to enter the chat rooms, or 5 FWB to go to IRL community events. The problem with this is that the 5 FWB required for those IRL events is essentially the equivalent to a digital neighborhood outside of the digital city. Users buy 5 FWB tokens in hopes of accessing opportunities which will enrich them enough to enter the digital city, there is no guarantee that they find those opportunities. And as long as we continue to equate an individuals value with their “level of ownership” in fungible or non fungible tokens alone, we will fail to reach the true potential of collectivized societies.
You’re telling me I need to permission to enter the “Permissionless” web? No thanks.
How do we get around this problem though? In the book Radical Markets, Glen Weyl and Eric Posner propose the Georgist inspired ideology that property management in and of itself is sort of like a small Monopoly on a piece of land. In one of their examples, they propose the following thought experiment — If a large collective like California wanted to fund a high speed rail from Los Angeles to San Francisco, they would have to buy up all of the land they required spanning from Los Angeles to San Francisco. The problem arises when they get all the plots, but on the very last plot of land, the owner refuses to sell the land until the state pays 15 billion dollars. This property hold out is the exact reason why it is difficult to get any sort of Public Works/Large Private Projects off the ground. Eminent domain is always a bad time. Individuals are incentivized to block any sort of technical progress, even if the potential economic effects of the project improve the lives for everyone in the vicinity.
To keep it brief, new systems like a Harberger Tax could be implemented with the underlying land/DAO memberships being represented by an NFT that is always on sale. A few prototype projects that are experimenting with this sort of Taxation system include GeoWeb.network (an augmented reality Land Registry system for overlaying VR to the real world), Wildcards.world (a constant NFT auction for art that helps fund environmental non-profits), and lastly, This Artwork is Always on Sale. While it may not be immediately clear, the main theoretical benefit of something like a Harberger Tax is that it improves our ability to allocate assets (NFTs) to their best purposes (users) as opposed to what is the most lucrative. In essence, it would no longer be profitable to accumulate goods or tokens, since the tax paid would rise with every good you hold. Simultaneously, it keeps this barrier to entry extremely low allowing anyone to easily enter/exit the network at their time of choosing. If this works, it would revolutionize how we organize real world and digital cities alike so that they are more accessible and livable.
For a Deeper dive on Harberger taxes, definitely check out this page.
Conclusion
Tying all of these disparate elements together and manifesting them into one cohesive tapestry may seem outlandish, but this is the sort of thinking that is happening every day inside of the crypto/web3/dweb sphere. There are many thousands of squads/guilds/DAOs working together everyday to think up some new way in which we can overcome our collective human coordination failures and conquer the major problems of our generation.
I sometimes believe that the valuation of Cryptoassets and NFTs are confusing because of the relationship we all share with the current capitalist system. We do not understand these new digital coins and their massive valuations because they exist in a system that is entirely separate from the reality we currently inhabit. The new reality that these coins bring is a world in which Public Goods and the Collectivist Networks that create those public goods are highly valuable.
As these systems begin to enable the Crypto-protocols and organizations of tomorrow, their tokens will dangle like bait on a hook and pull each and every one of us into the hyper-interdependent world which we have all been unknowingly constructing together. The biggest change is that rather then being ruled by the few, we will rule it together.
The collective hivemind are the new bulls.
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