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How NFTs have changed the price of information

October 11, 2021

This blog was authored by: Alisa DiCaprio, Head of Trade and Supply Chain, R3.

 

TL;DR Tokens that track digital objects remind us that objects, even digital ones, hold real value.


Non-fungible tokens (NFTs) have made headlines twice in the past three years. Both CryptoKitties and Beeple use digital tokens to certify that your asset is unique. You own the only version of Cat #127 that exists. This has changed something very basic about our lives already – how willing we are to pay for information. 

As consumers, we demand a lot of details about the origin of the things we own. Is that coffee fair trade? Is this antique jewelry real? But products often lead complex lives and trade hands many times. This makes tracking their full history expensive. Plus,  there’s only so much I’m willing to pay for that banged up necklace.

There is no way to track a good as it changes hands over time, unless you have a central registry. NFTs solve this problem. This short essay explains how. 

What’s the problem with ownership? 

The 2020 Port of Beirut explosion was caused by a warehouse full of chemicals of opaque ownership. The cargo had originally been on a ship that was abandoned six years earlier at port after a diplomatic dispute. Because the chain of custody was broken, no one knew what to do with the cargo, and so it sat and then exploded.

Authenticating the chain of custody of an object over long periods of time is a tricky process. As a result, it is also an often expensive process, which is why there is an entire industry dedicated to tracking the history of works of art. 

In response to these problems, tracking technologies have improved dramatically in the past five years. However the process still gets stuck when you transfer your product to someone else. Luckily, this is where NFTs come in. They show us two key things: 

  • the solution does not to have be a central registry, which is a great target for hackers and 
  • consumers are willing to pay for clarity of information, maybe more than we expected.

 

How CryptoKitties solved the authentication problem

In 2018, CryptoKitties launched as a popular blockchain-based game where you could collect and breed limited-edition digital cats. CryptoKitties are digital but otherwise similar to physical collectables like Beanie Babies or Squishmallows. For any collectable, value is tightly tied to the ability to authenticate its origin. 

The technological twist is how they’re authenticated. Your CryptoKittie has a unique digital ID (or token). No matter what generation of Kittie you own, its provenance is fully traceable back to two of the 50,000 “Gen 0” Kitties. It’s a unique digital asset that cannot be replicated or broken into smaller pieces (this is the non-fungible part).

Non-fungible digital identities turn out to be pretty valuable. An average price for a Kittie is about $8, though a 9th generation Kittie once sold for $172,000.

Christie’s auction changes how ownership is transferred 

The next time intrinsic provenance made the news was in 2021 when Christie’s auction house sold an NFT for $69.3 million. The NFT represented a digital file called “Everydays – The First 5000 Days” by artist Beeple. While NFTs had been gaining momentum in the gaming, music, and art world, this was the first time a major auction house had sold what it called a “purely digital artwork.” 

Previous digital works at auction had been accompanied by certificates of authenticity or hard drives to transfer the files.

What this has changed in your life

NFTs solve two outstanding problems with long-lived digital assets: what is the chain of ownership from inception to now; and how to properly price this information. 

This means three things for your life:

  • Ownership is highly valued even where access is free. Anyone can freely view the “Everydays” work on the artist’s website, and yet Metapurse (the collective that won the auction) valued ownership enough to pay tens of millions of dollars for it. 
  • We can expect the future of ownership will be one where, at least for high value items, provenance will be intrinsic, or part of the object itself. NFTs do this today for digitally-native objects,
  • With NFTs, creators (of a product or art) can share and sell freely knowing that 1) They can remain owners of the master copy even as duplicates are shared online, and 2) If they sell their work they can then be paid a cut each subsequent time it’s sold.

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