NFTs (non-fungible tokens) are one of the hottest applications for blockchain at the moment. The initial craze has died down, and indeed there has been a backlash against the multimillion dollar cartoon monkeys. So what was THAT about? If putting graphics on the blockchain was some kinda of proof of concept, what is the concept exactly?

Enterprise applications for NFTs are emerging, and many see the technology as foundational in the Web 3 or metaverse to come. 

In this blog I am going to compare the purpose and functions of NFTs with Bitcoin and Decentralised Identifiers (DIDs).  I think it’s important to see the common patterns in these three blockchain applications. They share the same techno-libertarian roots, and they all pull off a very similar trick.

They all prove the uniqueness, or equivalently, the originality, of certain digital events, without relying on any official or central authority.

What sort of problem are we solving?

Understanding how these decentralized technologies are all similarly specialized, sheds light on their limitations. Let’s heed and learn from the fact that the early promise of blockchain has not led to matching benefits realisation. I find it especially sobering that two of the best thought through third generation blockchain – IBM-Mersk Tradelens and the ASX-Digital Asset stock market settlement system – projects have recently folded.

So let’s be more careful as we head into the metaverse with high expectations of NFTs.

The key is to understand precisely where decentralization surfaces with these technologies.

Decentralization is part of the digital zeitgeist but historically it’s unusual in business and society. The vast majority of us live and work within myriad authority structures. We deal on a daily basis with intermediaries and institutions that have evolved over decades (or even centuries) as the most efficient ways of organising complex communities. It is rare that these structures can be decentralized, and ever rarer that the benefit of decentralization is worth the cost.

Bitcoin, NFTs and DIDs all do something that is truly unique, but it is very specialised.

What’s the big deal with NFTs? 

I am not going to comment on the vagaries of the art market, where NFTs are getting perhaps the most attention. As a technology analyst, I don’t have a professional opinion about whether JPEGs of monkeys count as art at all.

Instead, I will focus on really special technical property of NFTs: their ability to prove originality of digital artifacts.

The token in a Non-Fungible Token is a compact and unique numerical proxy for something like an image. This is the same basic type of “token” used to mask credit card numbersAn NFT is a digitally signed token which is registered, usually on a blockchain, so it can be transferred as a unit but never divided or duplicated without detection.

Decentralised digital currency

Let’s revisit cryptocurrency. This was the exemplary and original use case for public blockchain , from which all contemporary decentralization has emerged.

Remember that to prevent double spending, Bitcoin uses the blockchain algorithm to monitor all BTC movements.  The community determines by consensus the order of every attempted BTC transfer, and the blockchain data structure memorializes the agreement.

This is really a matter of originality. The essence of the Bitcoin blockchain is to decide, without any official, which BTC transfer came first; that is, which transfer is considered to be original.

Decentralised Identifiers

When I first met Decentralized Identifiers (DIDs) the problem being solved was how to self-publish an identifier that is assured to be unique on a large name space. Some communities wish to allow their members to manage their own lifelong identifiers without being beholder to governments or banks. How can people “bring their own” ID and be sure they’re not going to clash with someone else’s choice of ID?  The task of proving uniqueness of an ID on a given domain generally requires an authoritative register and a trusted registrar.

It dawned on some people that a pubic blockchain could provide the means for a community to have self-published identifiers that are provably unique on the community’s domain, without any central registration. This led to the foundational blockchain DID method, in which a user creates an identifier (essentially a long, largely random and hard-to-guess string) in an agreed format, signs the DID using their private key, and publishes it to be ratified.

The community votes on whether that DID has ever been seen before, and if not, deems it to be unique and memorialises it. Thence the DID is attributed to (owned by) the holder of the private key that signed the first appearance. As with Bitcoin, no one need know the identity of the key holder; there is no central trusted registrar or naming authority of the actors, their key pairs and IDs.

A common pattern

I have come to the view that the real mission of public permissionless blockchains is proof of originality in settings where you have the option to reject authority. This is what they do that is special.

At some level, NFTs, BTC and blockchain DIDs are really the same thing.

They each rest on decentralised consensus that a certain event took place for the first time, whether it be that

  • Alice sent some number of coins to Bob, or
  • Alice generated and self-published a never-seen-before DID, or
  • Alice authored a given digital object.

Each event is verifiably signed by Alice using a key pair which she owns and everyone in a community is satisfied she owns, without any central registrar or administrator.

The blockchain creates order out of the chaos  where no one knows which key pair goes with which account, and no one cares.

But this is a self-imposed chaos!

Now, where does it matter?

BTC, NFTs and DIDs all have very similar motivations: to make certain actions “official” without central administration. BTC, NFTs and DIDs each bind a certain event to a key pair; the owner of that key pair is deemed by consensus to be the one and only sender of the BTC, or the subject of the DID, or the creator of the tokenised digital work.

So that’s the special technical trick they all share, but whether proving originality in this way is sensible or worth the cost, is another question. The benefits matter most to communities that reject central authority.  By the same token (no pun intended) the benefits are diluted or entirely academic in settings where a central authority is necessary for other reasons.

There actually aren’t many things that can be accomplished without a central authority.  We must take great care with use case selection. The really good use cases for BTC, DIDs and NFTs are rarefied and fragile.

Hybrid use cases in which the decentralized log of events import critical facts established by external sources of truth render the hybrid architecture pretty vacant. If Sotheby’s for example vouches for an artwork and then mints an NFT to that effect, or a winemaker attaches an RFID tag to a special vintage bottle, or a government agency tokenizes a land title deed, then what’s the point of crowdsourcing the order of subsequent events and transfers?