In our previous post, we mentioned that NFT stands for non-fungible token and described fungibility. Non-fungibility is essential to create scarcity and we will touch upon that subject in this post.

Scarcity

While we were heading towards a digital world, one of the key obstacles was the ability to hold value. Why?

In the physical world, the goods or money that we own have a physical presence - meaning they each are unique. When you and I both buy the same model of a car on the same date they are both identical. However, after using it for a certain period of time, let’s say, one year, these two cars are not identical at all. I am usually a bad driver so most probably I would hit my car to a wall while parking and even though it is repaired or parts are replaced, it is not the same car anymore.

cars
Image by Franck Barske) from Pixabay

The digital world on the other hand has no depreciation. Any digital asset, be it a picture in jpeg format or an audio file is made up of 1’s and 0’s… They stay intact forever. One more thing; they can be easily copied. This copy feature is extremely important. One of the key attributes of something to be valuable is scarcity. When you have something in abundance people do not attach any value to it. Go to a beach and try to sell sand to people - they will laugh at you. However, try to sell an ice-cold soda at a deserted place and I am pretty sure you will be able to get multiple times of what you bought it for.

So how did we manage to make things scarce in the digital world then? In the beginning, we trusted an authority. For money we trusted banks. Banks told us that the other party has the ability to pay us for the good that we sell. When we send the good to our counter-party the bank increased our balance.

This was all good and booming activity in the digital world has resulted in banks fully exploiting this and massively improving their profit. However, those profits came from people, and they started questioning these charges from the banks. So there was a need to actually get rid of an intermediary and start having transactions on a peer-to-peer basis? But how? The answer was blockchain.

One of the key benefits of blockchain was its ability to create digital scarcity without a trusted third party. This allowed us to hold a scarce digital asset, attach value to it, full control it and transfer it to another party at our own will without the need for an intermediary.

This is how NFTs are actually born. NFTs in digital life are what physical goods are in physical world (or IRL - in real life as they say it).

In our next post, we will be talking about the benefits of NFTs.

This piece is first published in BlockchainIST Center on July 16th, 2022.

None of the views expressed in this article should be considered as investment advice