Joe Andrieu (ixo and the Interchain Earth Program Team)
Non-fungible tokens (NFTs) are the hottest development in cryptocurrency circles right now and likely the least understood –despite the hype and growing cultural phenomenon.
Famously, the artist Beeple sold an NFT as a piece of art "Everydays - The First 5000 Days" for $69 million in March, 2021, igniting a firestorm of activity that had long been brewing. Cryptokitties and Cryptopunks are famous Ethereum-based NFT families, with the latter still generating weekly sales in the tens of millions USD. Even the collectible sports card industry has leapt into the fray with NBA Top Shot selling collectible NFTs with market prices for the rarest averaging tens of thousands of USD.
Others promote the idea of destroying art while simultaneously creating a tradeable NFT that somehow represents the value of the art, presumably more valuable now that the original has been destroyed. As professor Paul Dylan-Ennis puts: "the implication is [that] NFT artworks are scarce and therefore valuable." But are they? Are NFTs simply a form of conspicuous consumption, a collectors game to be played by the wealthy? Or is there something behind the technology itself that creates value beyond the fad-driven arts and collectibles markets?
Working with ICF, the ixo team has been exploring the real-world use-cases, deep technological design choices, and purpose of NFTs, as we work to bring these new digital assets into Interchain mainstream adoption.
Here's what we've learned.
First, what is a real NFT?
A close cousin to cryptocurrencies such as Bitcoin and Ether, NFTs use distributed ledger technology (or an equivalent) to ensure the authentic transfer of scarce digital resources. These technologies allow us to transfer digital value with strangers without dependence on a centrally trusted authority.
Previous approaches needed some form of clearinghouse, which inevitably creates a powerful middleman, leading to any number of problems, from centralisation –such as monopolistic rent-seeking, to institutional exposure to external coercion.
While cryptocurrencies are considered "fungible" or interchangeable, NFTs are "non-fungible" or unique. Although any bitcoin is just as useful as any other bitcoin, each NFT is its own unique digital object. Both are tradeable and manageable using similar technologies of wallets, blockchains and cryptography. Unlike a simple image file that can be copied and sent to a hundred recipients, NFTs are transferred with protections against "double spending". Any attempt to transfer a single NFT to multiple recipients will fail. In economic terms, NFTs are unique, transferable, rivalrous digital goods.
An NFT is simply a unique digital object that can be securely transferred over the Internet.
It's not surprising that the art and collectibles market is one of the first to exploit this new technology. But this is by no means the only (or most important) use.
Blockchains as proof-of-control registries
Many projects seek to use this secure transferability to keep track of various data assets by explicitly managing who gets to control a particular on-chain asset. Only the current owner can prove they own it and they can do so, without deference to a trusted authority.
The decentralised identity world, as exemplified by Decentralised Identifiers (DIDs) from the World Wide Web Consortium and multiple projects at the Decentralised Identity foundation, use ledgers (and other means) as registries to keep track of cryptographic material for securely interacting with given subjects. What's tracked on-chain are updates to that cryptographic material and the service endpoints available for interacting with the identified subject. No matter the current state of that information, the underlying registry can be used to find the latest, canonical version anywhere in the world (at least for globally resolvable DID methods).
Since DIDs were not created to be transferable, they aren't NFTs as such, but they do illustrate some of the key ideas that make NFTs valuable.
Many DID-use cases rely on the ledger just for proof of control. Establishing a reliable identity depends on additional attestations, such as those provided by Verifiable Credentials (VC). For example: a driver’s license, vaccination record or diploma. By checking proof of control for the identifier before a digital credential issued and upon presentation of a VCs, DIDs enable a concrete, provable form of identity assurance for correlating third-party statements with a current user. For example, a VC of a driver's license allows the holder of that driver's license to cryptographically prove they control the same identifier as when the license was issued. Since it is inappropriate to transfer that driver's license to someone else simply because the underlying identifier registry would allow it, DIDs are clearly something different from NFTs, despite using many of the same technological tools. That difference helps us understand the sweet spot for NFTs.
Digital titles and real-world goods "on-chain"
The pattern we found most resonant with a wide variety of NFT use cases is that of "title and property".
There is a notion in many blockchain projects that we can "put in on-chain" and magically get an international, non-jurisdictional registry of anything.
- Real property – aka real estate – aka land
- Intellectual property rights
- Birth records
- Supply chain activity
- ...or anything else we care about.
This often confuses people who interpret this list as madness: You can't literally put real estate or people "on-chain", and putting personal data on-chain is frowned upon due to privacy regulations such as GDPR. The physical and digital worlds are distinct and, in mathematical terms, orthogonal. What is processed informationally is only ever a model of the physical world. No matter how accurate the representation, whatever is in the digital realm will never be the physical object. Fortunately, that's an easy misinterpretation to fix, using the pattern of titles and property.
While the physical land can't go on-chain, the title, which is used to formally record the owner of record for that property, can. We've been using bureaucratic registries to track real-world goods for centuries. Land tiles; Automotive titles; Firearms registration; ...
When you apply this pattern to NFTs, you can create on-chain, securely transferable records which can be interpreted as definitive provenance of ownership. Therefore, while the physical goods tracked through a supply chain aren't literally "on-chain", the legal title transfers and physical movements as goods move from producer to ultimate buyer can be.
As unique digital objects can be securely transferred over the Internet, the title and property pattern for NFTs allows us to securely transfer the records of ownership for real-world goods to anyone anywhere, as long as these records can be accessed through the Internet and we can do the cryptography to take control of the transferred title (using cyrptographic keys).
Digital titles for abstract goods
Once we see NFTs as representing transferable titles for real-world goods, it's straightforward to extend this model to other off-chain resources, including abstractions that have no physical existence, such as tickets, vouchers and certificates.
Whoever owns the NFT, gains the property rights associated with that title.
Want to sell your ticket to the World Cup? If it's an NFT, you could trivially do so, securely, on any NFT market in the world, without risk and without a middleman. The buyer authenticates at the event as the owner of the NFT and gets seated with all the same privileges accorded to the original ticket purchaser. No waiting at will-call. No scalpers. No scammers promising a ticket that never arrives in the mail.
Authentication for NFT-specific privileges, on-chain and off
Since NFTs are anchored to an underlying ledger using asymmetric cryptography, the same cryptography can be used to authenticate the current owner for any variety of interactions or services. For example, your NFT opera ticket can gain you free access to valet parking. Or your automotive title NFT could gain you access to DMV or auto insurance services directly associated with that vehicle. In advanced blockchains, you can even use NFT proof-of-ownership for access to services based on that NFT, such as authenticating as a CryptoKitty NFT owner to enter a virtual cat show! Any system that can leverage the on-chain proof-of-ownership mechanism can extend privileges to NFT owners. Now we have a really powerful framework for executable rights!
Attestations and Verifiable Credentials
As NFTs have a formal representation of ownership, these can also provide globally unique identifiers that can, themselves, be used to make statements about the NFT, or about the associated resources or privileges.
For example, in traditional real property systems, land registries associate a Lot or Parcel# with a geographically bound region and a current owner. Given that Parcel#, any number of services can be provided for or associated with that property. For example, tax assessments, building permits or inspection records can all be issued for that lot #. In the same way, NFTs with unique identifiers can readily be the subject of verifiable credentials, such as attestations about either the NFT itself or those resources defined by the NFT.
An extended example we've been working through is the use of NFTs for realising UN-specified goals for renewable energy. This begins with the UN (or any other credible agency) defining a set of criteria for projects to be certified for issuing Renewable Energy Certificates (RECs) based on their electricity production, with rules for credentialing the projects and verifying their rights of production, which provides the foundation for evidence of sustainable energy production.
The UN then establishes a cohort of certifiers and verifiers who are trained and trusted to apply the criteria and rules for certification and verification, and for which they can and will be held accountable. These certifiers and verifiers are given cryptographic authorisations that allow them to issue certifications and verifications on behalf of the UN. From there, the UN establishes a new class of NFTs for a generation of RECs (the rules could vary year-to-year, so a REC2022 standard is a likely approach). The registrar issues that specific class of NFTs on a compatible blockchain. Included in the rules for the NFT class is the requirement that all newly minted RECs must be created by producers for projects that are both certified and verified, along with direct evidence of production. That's all the UN as the trusted agency needs to do.
Any sustainable electricity producer can apply to a certifier to get their project approved for REC2022 NFTs. The project is issued with a unique cryptographic identifier by the producer, who manages the hosting and storage of any data assets associated with the production of electricity, including the original project proposal, its certifications and verifications, and any evidence of production (they can host these assets themselves or use a service provider).
After completing the evaluation for certification, the certifier issues a digital certification credential which attests to their findings, and is cryptographically signed by the UN (thanks to the authorisations already delegated to the certifier). This certification is retained by the producer and published for later use.
Once in production, the electricity producer consistently and reliably issues signed attestations about the amount of electricity produced, according to UN rules. These calims are typically in the form of Verifiable Credentials, which are automatically produced by smat meters on the power generators. These credentials form the foundation of the evidentiary requirement, as defined by the UN.
After a period of time, a verifier performs a site visit to evaluate the actual production relative to the project, as proposed and certified. They evaluate the hardware and software, to determine how these 'agents' have been used to create sustainable electricity, comparing the claim record with the actual capacity of the system on that day, together with opther data-points. This results in the issuance of a verified credential, which is effectively signed by the UN agency –again, under the verifier's delegated authority as a certified UN verification service-provider. We have a second point of reality-check by real humans observing the actual system in use.
Now the producer pulls together the supporting evidence: the certification, the verification and the attestations of production, to submits as VCs for an automatically generated REC2022 NFT, which will contain anchored provenance to all of the supporting verifiable evidence. The NFT can then be sold on the market. Buyers will know, definitively, that the electricity they are paying for was produced in a specific location, by an identified producer, in a specific manner.
Verifiable Outcome States
Using this pattern of NFT creation, ixo and users of the Interchain Earth Program technologies we are developing, can potentially massively scale decentralised financing of large-scale, dynamic, cost-effective, world-changing, verifiable outcomes.
Funders (or regulators) establish the ground rules for participation (the rules for qualifying projects, including evidence) and the mechanism for demonstrating proper participation (certification and verification). Trusted agencies structure the monetisation architecture however they best see fit, perhaps using Automated Market Makers with bonding curves, such as the ixo Alphabond mechanism, or even just a simple equal distribution to all qualified participants. Once structured, the blockchain takes care of provenance and issuing the NFTs.
When good programs have clear, actionable, achievable goals that provide real value, the market of participants makes the change with real impact in the world.
This system of Verifiable Outcome States leverages the unique features of blockchains and NFTs to help realise nearly any desirable outcome that can change the state of the world, such as:
- Literacy outcomes that provide measurable achievements in education and for life-long learning credentials.
- Health outcomes, which achieve target immunisation coverage
- Biodiversity regeneration, which increases the populations of endangered species and protects critical habitat zones.
- Or any other verified outcome state which people care about, are willing to pay for, invest in, or work towards – or even represent in a digital artwork ;-)
The work being progressed through the Interchain Earth Program has enormous potential to scale sustainable and regenerative decentralised finance, using Decentralised Identifiers and Verifiable Credentials to create and manage NFTs which driving Earth-changing global impact.