Digital Scarcity in web3: types of scarcity, applications, and how the world might change
Part of my series on understanding the impact of web3 (without the jargon).
Scarcity has existed from the first time two cavemen wanted to eat the same berry.
Most of human history the main cause of suffering has been “not enough.” Not enough food, not enough shelter, not enough water, not enough time. And I guess too many tigers.
The internet and digital products enabled abundance we had never seen before. Copying and distributing something became ~costless. Digital Abundance was a huge boon, but caused some problems as well (Digital Rights Management, Piracy, Signal-to-noise ratio, Misinformation…)
Web3 and Digital Scarcity
One of the new, unique ideas which defines web3 technology is actually Digital Scarcity. Using Blockchains, computers can create scarcity in ways only humans have been able to do reliably before, but at the near-zero cost levels of other digital media.
Chris Dixon calls this “computers that can make commitments.”
It’s a bit of a paradox, but the technology to create digital scarcity is going to create a new type of abundance.
How can scarcity lead to abundance? We have scarcity everywhere in the analog world. Technology to create low-cost scarcity in the digital world unlocks opportunities to manage the analog world with digital tools.
When we apply the best attributes of the digital world to the physical world, we get cheaper transactions, faster transactions, safer transactions, more transactions, more liquidity, less paperwork, less work, less soul-sucking bureaucratic-bullshit.
We all, as a species, get more trust with less work.
On the path to applications of costless digital scarcity, let’s explore types of scarcity:
Fungible vs. Non-fungible
One attribute of scarcity is whether the individual units are fungible. Fungible means “replaceable” or “not individually distinct” units. Non-fungible means… the opposite of that.
Yea, I wish we had other words for this too. Maybe I’ll invent one someday.
Anyway, examples:
A unit can have both a fungible and non-fungible attribute. Here’s the most succinct way I can explain Fungible vs. Non-fungible attributes:
Hard cap vs. Unlimited cap
Another attribute of scarcity is the total number of units. Maybe even more important than current number of units are the rules for creating new units. Is there a hard cap set? Infinite cap? Or something in between? Under what circumstances are new units issued?
Bitcoin and Email addresses show different extremes of scarcity caps. Something like the US Dollar is somewhere in between — new ones are issued, but only sometimes, and according to policies subject to being changed by a relatively small number of experts. There is a hard cap of currency today, but that number may be higher tomorrow, and there’s no way to know where that total number will be in 100 years.
Types of digital scarcity
By combining these two attributes into a 2x2 table, we get these main four types of scarcity.
Fungible units within a ~fixed cap (currency like Bitcoin or US Dollar)
Fungible units without a cap (Digital copy of song, recipe, image, etc)
Non-fungible units within a ~fixed cap (Picasso paintings, Cryptopunks)
Non-fungible units without a cap (Social Security Numbers, Email addresses)
I’ve dubbed these quadrants “Art, Assets, Infinites, and Identifiers” Idk if that will stick. But it’s helped me see the huge variety of problems solved by managing different types of scarcity.
We could also introduce “transferrability” as a factor, which is important to control for items like Certificates or Diplomas (earned, ~fungible, managed but uncapped, and non-transferrable).
So, the Trillion-dollar question: What will we do with this new capability: costless digital scarcity?
Well, over the next 20 years, I expect to see things from all 4 of these quadrants move “on-chain.”
A few potential examples:
Art: Concert tickets will move on-chain. This will reduce risk of fake tickets being sold, and reduce the incentives for scalpers. On-chain Tickets may be programmed to be non-transferrable, or maybe 80% of the resale margin will go back to the original artist.
Assets: Property and vehicle Titles will move on-chain. We as owners may not even realize this we’re not interacting directly with the database. Blockchain technology should drastically reduce the paperwork, time, and expense of government involvement in these processes.
Identifiers: Birth Certificates will be put on-chain as a way to prevent fraudulent creation or editing in the future. If a birth certificate wasn’t on-chain in 2023, it will be impossible to fake from the year 2035.
Infinites: Video game items will be put on-chain -- not necessarily because they need to be tracked better, but because this prevents the developer from breaking promises about the exclusivity of an item in the future, or the rewards issued for achievements.
I don’t know which chains these will be built on--probably various, dependent on the trade-offs between privacy, speed, cost, security, scale, and decentralization.
As users of these systems, we may not realize we’re using a blockchain. (How often do you think about what type of database your whiny tweets are writing to, or what procotol your flirty email is being sent through?)
So don’t sweat the technical details or learning the jargon… but don’t underestimate the impact this new capability will have. We tend to underestimate the impact of software innovation. Especially when it seems as abstract as “digital scarcity.”
Answer these questions:
What changes when computers can keep promises 100x cheaper, faster, better than humans can?
What changes when we trust a blockchain database more than we trust our bank, our DMV, our lawyer, or an Art Gallery?
What will change in your job or your industry?
Comment below, I look forward to brainstorming possible impacts on your place of expertise.
Part of my series on understanding the impact of web3 technology(without the jargon). If you enjoyed this, your next web3 and blockchain read is: Costless Transactions.