“When bankers get together for dinner, they discuss Art. When artists get together for dinner, they discuss Money” -Oscar Wilde.
You’ve probably read something about the latest crypto-craze to obsess the robinhoodies of the world. My good friend Lawrence Wintermeyer wrote a great piece about it here, describing how an anonymous guild of “art digitalists” bought an original Banksy and then set fire to it after digitizing the piece into a non-fungible token (NFT). Now, you may think (as I did) that this is more of a piece of performance art itself than a window into a new world that decentralises Sotheby’s out of existence, but it is undeniably interesting. That’s because, trivially-copyable artworks to one side, NFTs will indeed mean 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. ERC-20 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 explained last week why fungibility is a critical defining characteristic of money, which is 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 are 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 my ticket to two other people and they both show up to watch the 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?
If you’re not sure whether there is an actual market, consider the obvious example of people playing massively-multiplayer games (MMGs) such as World of Warcraft and the like. People buy and sell digital assets in these games 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. But who says who the magic sword belongs to? If I pay you some real dollars for a 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.
Cryptocurrency technology means that I can sell you the magic sword without having anyone in the middle by turning it into a token. 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 a game on Ethereum that allows players to purchase, collect, breed and sell virtual cats and it became so popular that it caused such congestion on the Ethereum network that it slowed down significantly. The point is though, that we can now exchange unique digital assets in a fully decentralised manner.
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” (which I cannot resist labelling #IDIoT). I said at the time that I had a suspicion that there might be an interesting connection. My reason for thinking so was that there is a relationship between digital assets and things, because blockchains and tokens deliver a virtual representation of things in the mundane that, as with their physical counterparts, cannot be duplicated. If we can link the digital asset of a (for example) watch, handbag or aircraft part to a physical watch, handbag or aircraft part then we can do some very interesting things (full disclosure: I am the non-executive Chairman of a company that does this using tamper-resistant microchips).
What all of this means is that we can have efficient markets in physical resources without a middleman.
The opportunities for disruptive business models 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. Neither the band, nor the venue, nor anyone else has to do anything more.
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 copied: 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.
The news that the American rock band Kings of Leon have decided to launch their new album does, I think, flag up that there are new business models forming through the combination of fintech and fungibility. As Rolling Stone explained, the band is actually selling three different kinds of tokens: one is a special album package, a second type offers front-row seats for life at the band’s concerts and a third is for exclusive audiovisual art (the smart contracts were developed by a company called YellowHeart). I can see why fans might buy these, but I can also see why speculators might buy them too: I might be tempted to part with some considerable sum of money for a lifetime front row seat for my favourite band, especially if I could simply and safely lend or trade it away at any time.
It’s a really interesting experiment and if you think that tokens (fungible or not) are going to be the basis of new financial markets, as I do, you should take a look at what’s going on in the creative sector right now. They are bringing art and money together in a way that Oscar Wilde could never have imagined.
PUBLISHED BY– Forbes