NFTs in their simplest form are pure provenance devices.

What do I mean by that?

NFTs can be thought of as digital records of an object’s origins, rather than as digital equivalents of paintings. A NFT encodes information about an object (usually in the form of a cryptographic hash), its creator (their wallet address), and the timestamped history of owners (transactions etched into the public blockchain). This encoding of origin can be described as provenance, and NFTs can be seen as devices that capture provenance.

This critique misunderstands the relationship between NFTs and the physical world. The most common critique of NFTs is that they can be easily copied and therefore are not worth anything. This critique misunderstands the relationship between NFTs and the physical world.

While it is possible to copy the image file of an art object, someone else owning the digital encoding of the image’s origin means they own the proof of the object coming from its rightful creator. This is what gets owned when on owns an NFT, not just the object itself.

NFTs are not like traditional art in that they do not bundle the art object and the provenance together.

Although it may seem pointless to some, the simple act of verifying the origins of digital products is valuable. People are tempted to add extra features to digital products that imitate analog products, but this view does not take into account the new possibilities offered by digital technologies. Recognizing that digital products can be verified in ways that analog products cannot, we can ask what new products are worth verifying.

One possible option is to use objects that are already freely available to the public.

NFTs can capture the provenance of public goods.

Consider the NFT sale of the famous Doge meme. The auction page from the original sale back in June 2021 says the following:

This is the original image that started the Doge meme. It is a photo of the Shiba Inu “Kabosu” taken by her owner Atsuko Sato on February 13th, 2010. This photo was shared on her personal blog alongside other famous images under the title “Taking a walk with Kabosu-chan.” These photos went on to start the Doge meme and have circulated the web ever since. This is the most iconic image from the series.

Atsuko Sato created the NFT herself and it sold for $4 million.

We can be amazed at what has happened here, as it highlights the power of NFTs. There is an image that is used very often that is in the public domain, and anyone can use it however they want. There are no restrictions or fees added to it. Atsuko Sato wasn’t selling the rights to the image, she was just selling the history of the image.

Some might question why anyone would want to buy this NFT, given that it doesn’t generate cash flow and is therefore a speculative investment. However, this misses the point. The reason there’s a buyer is because there are fans of the image who appreciate owning the provenance of the image that they love. Price isn’t the only criteria for determining value.

If you can’t exclude people from looking at your funny cat video and the number of people viewing the video does not reduce your enjoyment of the video, than that meme is a public good. A public good is an object that is non-excludable (used freely) and non-rivalrous (used without depletion). An example of a public good is free public radio like NPR. While memes (images) are not often talked about as public goods, they definitionally are. If you can’t exclude people from looking at your funny cat video and the number of people viewing the video does not reduce your enjoyment of the video, then that meme is a public good.

The recognition that an NFT can be sold in order to monetize a creation without compromising access or utility gives more meaning to the magic witnessed above.

Public goods are systematically underfunded and underproduced (including in the crypto economy).

One problem with market economics is that public goods are often underfunded. This is because the benefits of public goods are shared by everyone, but the costs of funding and creating them are privatized to a small group with little to no potential to capture any of the value that is created.

Although there are many underfunded public goods in the crypto economy, the most notable example is protocol research and development in mature (sufficiently decentralized) public blockchains such as Ethereum. For example, Prysm, the most widely used Ethereum Proof of Stake (PoS) client, was only funded by a $500k grant from the Ethereum Foundation (EF) in 2018. This was barely enough funding to cover the costs of labor, with effectively no access to the upside of the massive value created. Considering that the transition from PoW to PoS is the most eagerly awaited protocol milestone for the Ethereum community as a whole, this lack of funding is crazy.

What the Ethereum Foundation lacks in funding compared to traditional governments, it makes up for in decentralized production of public goods. The lack of a central entity funding public goods results in more competition, which is ultimately a good thing for the ecosystem.

A future without solving this coordination failure could be very bad: A dystopian world where we keep using new public blockchains because the old decentralized networks can’t compete with new centralized networks in creating new public goods (including improvements of the protocol itself). This would be a big problem for the crypto economy, as we’d lose the network effects and efficiencies that come with established decentralized networks.

In general, I believe that the reason progress is not happening faster in cryptocurrency is because there is a lack of coordination (for example, how much progress was made in the last market cycle outside of creating new tokens from existing discoveries?).

NFTs provide a solution to the problem of digital scarcity.

Continuous auction of NFTs is the ideal structure to monetize public goods.

Last week, MAPS (a non-profit organization that funds psychedelic research) auctioned off a collection of NFTs called “Cartography of the Mind” in order to fund their ongoing research. This highlights the funding of public goods via the sale of NFTs. Similarly, a group called Stateful Works created and sold an NFT collection last year commemorating the development of the Ethereum protocol change EIP-1559, with the proceeds going to its primary researchers and developers. This demonstrates the monetization of public goods through the sale of NFTs.

Even though we have made some progress, we still have some issues that need to be addressed. The first problem is that both sales were made at a single point in time, rather than being ongoing sales. MAPS will probably need more funding in the future, and the people who created EIP-1559 may feel that they sold their NFT too early, before people realized the full impact of their work.

Both groups can alleviated this problem by issuing more NFTs at a later date, but this creates another problem. The value of these NFTs is unknowable because the issuance is arbitrary. This lack of commitment to a defined issuance schedule makes these sales feel more like a donation drive or a memorabilia sale than a sale of provenance of public work, which limits the value that can be captured.

The solution to the set of problems is to hold a continuous auction of NFTs at a defined rate, with a strong social commitment to the issuance rate. This will provide clarity around the provenance weight of each NFT for the buyer, while also providing an ongoing source of funding and monetization for the seller.

This all sounds great but can it actually work?

Nouns is the first NFT project to experiment with the continuous auction mechanism. It is most widely known as a leading CC0 experiment (Creative Commons Zero; “no rights reserved” license). It open sources everything, including all forms of intellectual property, the artwork, the smart contract codebase, auction website codebase, etc. The only object sold is an NFT each day. The proceeds of the sale are put into a collective treasury and the NFT holders vote on how the treasury is spent. That’s the setup. In other words, everything that went into the creation of Nouns and (mostly) everything that it funds is given out for free as a public good, while the only object sold to fund and monetize the public goods produced is provenance (the NFTs).

This project has been going on for a year and has managed to raise 32,000 ETH. Even though prices for NFTs have been going down lately, both the primary market (daily auction) and the secondary market (NFT sales on places like OpenSea) have been doing well. The project has also led to the creation of some ambitious public goods, like Prop House, which is a new way to fund projects by auctioning off ETH to the proposal with the best bid. It’s too early to tell for sure, but there’s definitely a chance that this system could be used to produce a lot of public goods in the future.

I hope that by writing this essay, I will encourage others to build upon the potential that is seen here, and to use the continuous auction mechanism to fund and generate income from a much broader array of public goods, beyond just NFT artwork and NFT infrastructure. There is no reason why this mechanism shouldn’t be applied to Ethereum protocol development or the development of any new DeFi protocol that aspires to create free, immutable public infrastructure (i.e. hyperstructures). An accelerating positive-sum future, in which crypto uses its own new capabilities to solve a significant coordination failure prevalent in traditional market economies, would be an exciting future to work towards.

Patents and intellectual property assets as non-fungible tokens; key technologies and challenges

The emergence of blockchain technology is posing a threat to traditional business models that rely on centralized authority. Blockchain was introduced in the Bitcoin white paper in 2008, which allows users to generate transactions and spend their money without the intervention of banks. Ethereum, which is a second generation of blockchain, was introduced in 2014, allowing developers to run smart contracts on a distributed ledger.Recent advances in distributed ledger technology have resulted in concepts that could lead to cost reduction and simplification of value exchange. By taking advantage of blockchain technology and considering governance issues, digital assets could be represented as tokens that exist on a blockchain network. This would increase transparency and security of the assets while also making them easier to trace and transmit.

There are two types of tokens in the blockchain technology landscape: fungible tokens, in which all the tokens have equal value, and non-fungible tokens (NFTs), which feature unique characteristics and are not interchangeable. NFTs are digital assets with a unique identifier that is stored on a blockchain. They became one of the most widespread applications of blockchain technology that reached worldwide attention in early 2021.

Fungibility is the ability to exchange one with another of the same kind as an essential currency feature. The non-fungible token is unique and therefore cannot be substituted. Recently, blockchain enthusiasts have indicated significant interest in various types of NFTs. They enthusiastically participate in NFT-related games or trades. CryptoPunks, as one of the first NFTs on Ethereum, has developed almost 10,000 collectible punks and helped popularize the ERC-721 Standard. With the gamification of the breeding mechanics, CryptoKitties officially placed NFTs at the forefront of the market in 2017. CryptoKitties is an early blockchain game that enables users to buy, sell, collect, and digital breed cats. Another example is NBA Top Shot, an NFT trading platform for digital short films buying and selling NBA events.

NFTs are a new concept that have provided many applications such as artist royalties, in-game assets, educational certificates, etc. However, many areas of application need to be explored. Intellectual Property, including patent, trademark, and copyright, is an important area where NFTs can be applied usefully and solve existing problems.

Colored Coins could be considered the first steps toward NFTs designed on the top of the Bitcoin network. Bitcoins are fungible, but it is possible to mark them to be distinguishable from the other bitcoins. These marked coins have special properties representing real-world assets like cars and stocks, and owners can prove their ownership of physical assets through the colored coins. By utilizing Colored Coins, users can transfer their marked coins’ ownership like a usual transaction and benefit from Bitcoin’s decentralized network. Colored Coins had limited functionality due to the Bitcoin script limitations. Pepe is a green frog meme originated by Matt Furie that; users define tokens for Pepes and trade them through the Counterparty platform. Then, the tokens that were created by the picture of Pepes are decided if they are rare enough.

Non-fungible standards

Ethereum was the first to implement NFTs with their ERC-721 token. Since then, the popularity of NFTs has grown, and developers have started to create and improve NFT standards on other blockchains like EOS, Algorand, and Tezos. This section will provide an overview of the different NFT standards that have been implemented on these blockchains.

Ethereum

ERC-721 is a standard for NFTs developed in Ethereum. ERC-721 is an interface that a smart contract should implement in order to manage and transfer NFTs. Each ERC-721 token has unique properties and is identified by a different Token Id. Important functions of an ERC-721 token include the owner’s information, a list of approved addresses, and a transfer function that allows for the transfer of tokens from owner to buyer.

Smart contracts written in the ERC-721 standard can group together tokens with the same configuration, but each token has different properties, so ERC-721 does not support fungible tokens. However, ERC-1155 is another standard on Ethereum developed by Enjin that has richer functionalities than ERC-721 and supports fungible, non-fungible, and semi-fungible tokens. In ERC-1155, IDs define the class of assets, so different IDs have a different class of assets, and each ID may contain different assets of the same class. Using ERC-1155, a user can transfer different types of tokens in a single transaction and mix multiple fungible and non-fungible types of tokens in a single smart contract. ERC-721 and ERC-1155 both support operators in which the owner can let the operator originate transferring of the token.

EOSIO

EOSIO is an open-source blockchain platform released in 2018 that eliminates transaction fees and increases transaction throughput. EOSIO differs from Ethereum in the wallet creation algorithm and procedure of handling transactions. dGood is a free standard developed in the EOS blockchain for assets that focuses on large-scale use cases. It supports a hierarchical naming structure in smart contracts. Each contract has a unique symbol and a list of categories, and each category contains a list of token names. Therefore, a single contract in dGoods could contain many tokens, which causes efficiency in transferring a group of tokens. Using this hierarchy, dGoods supports fungible, non-fungible, and semi-fungible tokens. It also supports batch transferring, where the owner can transfer many tokens in one operation.

Algorand

Redefining how assets are managed and moved, Algorand is a new high-performance public blockchain launched in 2019. Supporting smart contracts and tokens to represent assets, Algorand Standard Assets (ASA) allows users to create and manage fungible and non-fungible tokens without writing smart contracts, running just a single transaction on the Algorand blockchain. Each transaction contains some mutable and immutable properties.

An account on Algorand can create up to 1,000 assets. For every asset an account creates or receives, the account’s minimum balance increases by 0.1 Algos. Also, Algorand supports fractional NFTs by splitting an NFT into a group of divided FTs or NFTs. Each part can be exchanged independently. Algorand uses a Clawback Address that operates like an operator in ERC-1155. The Clawback Address is allowed to transfer tokens of an owner who has permitted the operator.

Tezos

Tezos is a decentralized open-source blockchain that supports the meta-consensus concept. In addition to using a consensus protocol on the ledger’s state like Bitcoin and Ethereum, It also attempts to reach a consensus about how nodes and the protocol should change or upgrade22. FA2 (TZIP-12) is a standard for a unified token contract interface in the Tezos blockchain. FA2 supports different token types like fungible, non-fungible, and fractionalized NFT contracts. In Tezos, tokens are identified with a token contract address and token ID pair. Also, Tezos supports batch token transferring, which reduces the cost of transferring multiple tokens.

Flow

Dapper Labs developed Flow to remove the scalability limitation of the Ethereum blockchain. Flow is a fast and decentralized blockchain that focuses on games and digital collectibles. Flow improves throughput and scalability without sharding due to its architecture. Flow supports smart contracts using Cadence, which is a resource-oriented programming language. NFTs can be described as a resource with a unique id in Cadence. Resources have important rules for ownership management; that is, resources have just one owner and cannot be copied or lost. These features assure the NFT owner. NFTs’ metadata, including images and documents, can be stored off-chain or on-chain in Flow. In addition, Flow defines a Collection concept, in which each collection is an NFT resource that can include a list of resources.

Flow uses a collection concept to batch transfer NFTs. In addition, users can define an NFT to be associated with an FT. For example, in CryptoKitties, a unique NFT cat can own a unique NFT hat. Flow uses Cadence’s second layer of access control to allow some operators to access some fields of the NFT.23 Table 1 provides a comparison of the standards explained in this section in terms of support for fungible tokens, non-fungible tokens, batch transfer (where the owner can transform multiple tokens in one operation), operator support (where the owner can approve an operator to originate a token transfer), and fractionalized NFTs (where an NFT can be divided into different tokens, each of which can be traded independently).