Digital Property

Originally published in Dutch on medium.com the 29th of June 2022.

The Distributed Ledger Technology (DLT) behind trendy terms like crypto coins, blockchain, the metaverse, web3 and NFT’s enables real digital property. The digital realm consists of programmable computers, interconnected through the world wide web. By introducing property in the digital world it turns programmable and instantly, globally tradable (liquid). In a first phase, we will possess pure, natively digital objects, like for example digital coins, digital art or objects from video games. In a second phase, some physical objects will receive a digital representation, so that the possession of these physical objects turns programmable and liquid too.

Purple Daze #1, NFT photography from Vaughn Meadows

Scarcity can turn property valuable

We want to possess objects for several subjective and intersubjective reasons: collecting (e.g. stamps), social signaling (e.g. a Rolex), utility (e.g. a car), investing (e.g. stocks), personal meaning (e.g. an heirloom), … On the one hand, we deem possessing an object valuable if (a group of) other people deems its possession valuable (intersubjective reason). On the other hand, we consider possessing something meaningful, because of a personal connection with an object (subjective reason). Possessing something is not by definition valuable or meaningful. If everyone has a Rolex or you possess 1000 heirlooms, than this undermines the value and meaning of one Rolex or one heirloom. Both in case of intersubjective and subjective reasons, scarcity plays a role in providing value and meaning.

The scarcity of intersubjective objects can be determined in different ways. In the non-digital realm limits in resources, like land, raw materials and labor might enforce this (e.g. real estate in cities). A limitation in resources is a sufficient, but no necessary condition for scarcity. For all sorts of cultural objects the resources were available to create more of them. Leonardo da Vinci could paint multiple Mona Lisa’s, just like Auguste Rodin sculpted multiple Thinkers. The reliability or provability of scarcity provides the value of intersubjective objects: an artist makes only one painting and Rolex manufactures a limited amount of watches a day.

Programmable scarcity in the digital world

The digital realm seems to know little scarcity until now. Digital objects consists of a series of bits, which are easy to copy and save at different locations (right-click, save as). Still we can argue that we already possess digital objects in an inferior way, like for example emails and objects from video games.

We mostly make use of an email service, but in principle anyone can set up an SMTP server to send emails (Simple Mail Transfer Protocol). After the email is sent, the sender possesses it in the outbox and the receiver possesses a copy in the inbox. We can copy and send an email endlessly, until everyone received it. Therefore the question rises, if anyone can truly possess an email or if it has value at all, because scarcity is not provable.

Possessing objects in videogames better approximates the idea of property in the non-digital world. You can for example buy or earn outfits in the popular game Fortnite. In such cases, central instances control your property, because a central database registers all players' property. These instances can arbitrarily alter the supply of digital objects: take a digital object away from or give it to all users. Also external parties like governments or hackers can affect the database and all in-game property. Therefore digital objects in central databases are not reliably scarce.

With the advent of Bitcoin in 2008 the world became acquainted with Distributed Ledger Technology (DLT). DLT contains a mechanism to register information decentrally at multiple locations or by multiple instances. As with an SMTP server anyone can set up, everyone can run a Bitcoin node. This node stores all historical transaction data and the necessary software to ensure that the same, new data is added to every node. This way every node holds the same transaction ledger and it is at all times obvious who possesses how many bitcoins (pseudonymous through wallets). Contrary to emails, you can not copy bitcoin or double spend it. If you spend one bitcoin, you lose one and someone else receives it.

A decentral ledger does not imply scarcity by definition. DLT can however eliminate central control on the amount and distribution of digital objects by programming artificial scarcity into an algorithm. With Bitcoin this happens at the protocol level: the amount of bitcoins grows decelerated (disinflation) up to 21 million bitcoins in the year 2140. Alternatively, we can provide scarcity by deploying a smart contract on a platform like Ethereum. In both cases, an algorithm determines the supply of a digital object.

The introduction of valuable digital property in the existing digital world leads to two important consequences: property becomes programmable and liquid. In addition to programming scarcity, we can in principle program all possible functionality surrounding digital property. Because DLT is built upon the infrastructure of the internet, we can send digital property instantaneously to the other side of the world, just like emails. Decentralized Finance (DeFi) is a popular, existing set of applications, illustrating the implications of digital property: a Belgian person can within seconds borrow digital money from an Australian person with a digital object as collateral. This doesn’t require trust in a third party (e.g. a bank) that facilitates and supervises the transaction. Only trust in a decentral, programmable and liquid platform suffices.

Embracing digital property will have several phases. First we will possess pure, natively digital objects. Often these objects will be a digital or internet alternative for objects from the non-digital world. Bitcoin is digital gold or cash of the internet. Non-Fungible Tokens (NFT’s) often represent art and collectibles, that we can digitally exhibit. It is important to note that these digital objects are not merely digital versions of non-digital objects. Bitcoin solves the transport issues gold and cash face and NFT’s guarantee an immutable provenance of collectibles. In a next phase, some physical objects will be digitally represented, like for example real estate, cars and all sorts of tickets. In the future, you can presumably buy within seconds a fraction of a self-driving taxi located in Bangkok and earn part of the profit after every passenger pays. In time digital and physical objects will enjoy programmability and liquidity.

Fidenza #313, generative art from Tyler Hobbs (property of punk6529)

Founder Cat #29, in-game object from Cryptokitties (property of punk6529)

Expanding web2 or embracing web3

Will we inevitably have true decentral digital property? Unfortunately not. Central instances like governments and companies have their reasons to enforce digital property through their own central databases to be in control. Governments instances will soon launch Central Bank Digital Currencies (CBDC’s). This opens new perspectives for focused monetary and budgetary policy. Governments or central banks can directly transfer money to citizens and determine on what they can spend it, for example on bread and not on beer. Companies like Meta, former Facebook, aim to create immersive digital worlds and levy high costs on digital objects that artists sell. This way central instances can acquire ultimate control of important objects in our lifes.

Probably not public government instances, but private companies would win the race to register digital property in their central databases. In such a scenario, companies will have control over our user data and digital property. This means an expansion of their current revenue model, namely offering services for free in exchange for user data (web2). Governments try to regulate data gathering from companies, but fall hopelessly behind. Instead of vain attempts controlling web2, governments can better promote decentrally enforced digital property (web3). This way users regain simultaneously the control of their data and digital property.

Tweet from pseudonymous Twitter user punk6529.

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