In Search of Digital Value
Towards a universal digital asset system
In the physical world, value is easily evident, albeit often subjective. It just makes sense. We understand, as a society, and as human beings, how physical objects can possess value, and through the related concept of ownership, how this value can be transferred between individuals and groups.
The development of the internet has, however, given rise to a world that is entirely digital in nature. Our long-held understanding of what can and cannot be assigned value is being challenged, and may be in dire need of updating. The latest paradigm to emerge from the internet-enabled machinery of communication — blockchain — is redefining and potentially introducing the concept of digital value, whether it be digital gold (Bitcoin), money (cryptocurrencies in general, to varying degrees of success), financial products (DeFi), digital goods (NFTs), or digital real estate (the metaverse).
The pursuit of value in digital systems
Attempts at assigning value from within a digital environment began around the start of the 1990s with DigiCash (Chaum, 1989), pricing via processing (Dwork & Naor, 1993), Bitgold (Szabo, 1998,), Hashcash (Back, 2002), eventually giving rise to Bitcoin (Nakamoto, 2008). Each of these technologies (of which Bitcoin has been the most successful) represents a step (sometimes a leap) toward understanding value in digital systems. But a general solution, and one that mirrors the structure of value found in the physical world, is still elusive.
When we look at economics within the physical world, we see why. Economic value is largely a function of supply and demand; however, in the digital world, these fundamental mechanics are not preserved because digital goods can be created, duplicated, and manipulated at virtually zero cost. Fundamentally, there are two properties that a thing must possess in order to have economic value:
Rivalry (consumption by one party prevents consumption by others)
Excludability (consumption of a thing can be prevented for certain parties)
When we consider legal systems, the discrepancies are even clearer, and this is due to the underlying concept of ownership. Only rival and excludable assets are ownable, while non-rival and non-excludable assets, such as air or water, are public goods available to everyone. Air is everywhere, accessible to all, and in effectively infinite supply, but a tank of compressed air is finite, restricted, containerized, and can be physically transferred in a way that removes it from the ownership of the transferring party.
The reason why blockchains actually work — the reason why Bitcoin was the first of the digital currencies to develop into a global phenomenon — is that everything in a blockchain is just an entry on a ledger (a distributed ledger). There are no actual bitcoins — no piece of code that someone can point to and say “that’s my bitcoin” that exists — but instead an accounting system that is (i) purely digital (ii) requires no central controller (iii) is secured by cryptography and an ongoing commitment of a scarce computational resource and (iv) creates ownership through a digital, cryptographic identity that is uniquely associated with each ledger entry. It is this ledger-based approach that allows a blockchain to solve the long-standing double spend problem, and the even longer-standing Byzantine Generals‘ Problem, and to enable digital money.
This concept of a pure ledger-based currency is not new. In fact, one of the oldest forms of money shares this feature. On the island of Yap, nestled in the Pacific Ocean north of Papua New Guinea, huge stone slabs are dotted around the thatched houses that make up the traditional parts of the villages.
‘Stone money’ on the island of Yap. Figure credit: tropical.pete/Flickr
These stone monoliths are not the equivalent of modern art sculptures, but rather the island’s monetary system. However — being large and unwieldy — rather than changing hands, the stones necessarily changed ownership while remaining in place.
Typically, a single stone was only traded for a large amount, like a dowry, but ownership was inferred through an oral ledger — everyone knew who owned which stone, and so it didn’t matter where they were placed. One stone was even lost to the waves on a voyage, and the villagers decided that this stone was ‘still good’ to be used as money, even from its position at the bottom of the ocean.
There is a certain poetry to one of the oldest forms of money sharing this fundamental principle — being ledger-based — with the newest form. Ultimately, money as a form of societal memory can be used as a medium of exchange even when there is no physical medium.
Files under blockchain governance
The newest form of money — blockchain-based distributed ledger entries — imparts the ownership to this digital money via asymmetric cryptography. This public/private cryptographic key pair creates a digital identity that mirrors an identity in the real world. But the real source of digital value is data; specifically, the file. The file contains the knowledge or the fruits of labour, and its uniqueness that means that if we lost it, without a backup, we would feel a real sense of loss. Applications, on the other hand, act as containers for logic, and can usually be easily swapped out or replaced. Extending the paradigm of ownership of digital money to the ‘thing of value’ in the digital space means applying the same framework to files.
Unfortunately, while digital coins or tokens can ‘live’ on a blockchain, files need to be handled differently, and exist off-chain. Instead, you can govern files from the blockchain. You do this in a way that imparts ownership of files to digital identities, whether they correspond to individuals, or groups, or institutions, etc. Ownership of a file can be boiled down to the key elements of:
- Being able to demonstrate uniqueness
- Access & control
- Protection of the content (this is a bonus)
For real ownership, we need to satisfy at the least the first two, with the third adding a layer of privacy. In this way we can allow files, or data of any kind, to be owned through blockchain governance, via the following three pieces of technology (all of which already exist):
- Encoding — this provides the uniqueness & originality
- Cryptographic keys — providing access & control (the ability to get the file and the ability to alter the file)
- Encryption — providing the protection of content
These technologies together, used in the right way, provide a form of ownership through identity — but the identity of both the asset and the owner, since the asset has a unique identity assigned to it through the unique encoding scheme, and the owner has a unique digital identity through the standard public/private cryptographic key pair.
As containers of digital intrinsic value, ownership of files means a realisation of digital value that mirrors the physical value of assets in the real world. A completion of the evolutionary sequence that began in 2009: digital gold → digital money → digital financial products → digital goods → digital real estate → digital value. From an ancient form of money on a Micronesian island to global digital ownership of files through blockchain governance, the power of the ledger and societal memory in imparting value has come full circle.