This Intertrust leadership blog features Grammy Award-winning record producer Albhy Galuten, our Senior Fellow of Technology Initiatives. We discuss NFTs and what’s possible with today’s fast-evolving digital marketplaces.
What is the difference between Fungible and Non-fungible goods?
Fungibility came about with trading. If I have a one-pound bag of rice, it is the same as your one-pound bag of rice. That is true for pork bellies, ounces of gold, dollar bills, or barrels of oil.
Once we invented the printing press, it entered the media. My printed version of the Gutenberg Bible in 1455 was the same as yours. My DVD of Pulp Fiction is the same as yours. They are fungible.
Individual items that are unique are not fungible. My drivers license, car registration, marriage certificate, or home deed are not fungible. The digital representations of these certificates are Non-Fungible Tokens (NFTs). My grandchildren will not remember a time when these certificates and proofs of ownership were not digital.
Why are NFTs getting such a bad rap? Are they dead?
In 2013 or 2014, NFTs became very fashionable and began fetching unreasonably high prices for items of arguably minimal value. Many evolutions in business go through boom cycles when they first become popular. In 1634 the tulip market in the Dutch Republic, which had recently exploded, crashed.
There was the 19th century gold rush that blew up for a while. When these markets return to normal, they deflate but don’t disappear. There was the dot-com bubble and then crash at the beginning of the 21st century. The internet did not go away and Amazon, though their stock lost more than 90% of its value, did not go out of business. The underlying ideas evolve and continue. This is true for NFTs.
What are the current problems with NFTs?
There are a number of problems with most NFTs and NFT marketplaces today.
Widespread Copyright Infringement
For most NFTs, the proof of purchase lives on a robust immutable ledger or blockchain. That is good. However, the asset – the digital artwork, the video, or the audio, is typically stored in the cloud in unprotected form. One only needs to look at the data on the public blockchain to find the address of the asset and they can download it for themselves and keep it. They can then sell the asset on a different marketplace.
Lack of interoperability
Imagine if you could only use “Target Dollars” to buy goods at Target or when you sold your car you could only get “Ford Dollars” and couldn’t use them to buy a Chevy. Because NFTs began in the crypto world, it is often assumed that you have to buy NFTs with crypto. Some marketplaces allow you to buy goods using credit cards and fiat currencies but typically they convert them to one form or another of crypto and charge heavy conversion fees.
There was a time when copy-protected media like movies and recordings weren’t interoperable. Every platform had its own DRM. Then services began using the Common Encryption Scheme (CENC) and now you can watch your movie or listen to your music seamlessly on Sony TVs, Android phones and Apple laptops. The same thing needs to happen on NFT marketplaces.
Limited flexibility in business modeling and contractual arrangements
ERC contract standards are fantastic but they are limited. In the real world, there are many kinds of contractual arrangements. Smart contracts should be able to represent and enforce any sort of executable arrangement from paying people fractions of revenue streams only when they meet certain criteria to limiting the viewing of media by time of day, resolution, and/or territory. The nuts and bolts are there in the ERC standards, but we are a long way from being able to build an airplane.
Minimal integration with physical product
As mentioned, NFCs are basically proofs of purchase. These receipts can be bound not only to digital products but also to physical products. This can be done using QR codes, but they are easy to copy and not secure. Some companies are using NFC (Near Field Communication) tags – the same technology used for Contactless Payment from your phone or credit card. These chips can be very flexible, cheap, and robust.
For example, they can be used in clothing where they retain functionality after 100 washings, in whiskey bottles where they signal the network if the bottle has been opened, in running shoes where they withstand the impact of 100s of thousands of steps and in train tickets where they are so inexpensive and flexible, they are printed into the paper.
This technology when combined with NFTs can add provenance, robustness, and accountability to all manner of physical goods and be used to track them and apply new business models to the resale market. I can buy a used Gucci bag and know not only that it is a real Gucci but also the name of the celebrity who owned it before me (or they could be anonymous if they prefer). I can buy fair trade items and know the complete history of the manufacturing chain.
Poor user experience for average users
Today, people buy goods and services in very convenient ways. They do not need a digital wallet, they do not need to use a specific currency – they simply use their phone, laptop, credit, or debit card and make the purchase. Digital goods and Phygital goods (products that bridge the digital and physical worlds) should be just as easy to buy, rent, and sell. Until this happens, this will not be a robust mass market.
How does Intertrust solve these problems?
Taking them one at a time:
Intertrust encrypts the digital asset. The block chain address is just the same, but the media object can only be consumed by someone who has the rights. It cannot be resold without the proper permissions. This is seamless to the user as Common Encryption assures that it can be watched or listened to on any of the consumer’s devices.
Intertrust has always provided interoperability for media files across platforms and devices. Now we have the technology to provide it across blockchains. I can own an asset on one blockchain and sell half of that asset (say a music copyright) to someone who uses a different blockchain. Intertrust can update the original block chain reflecting the new partial ownership and also write to the new blockchain asserting the new ownership share. Both of these blockchains point to an encrypted digital contract that is signed and hashed and written to both blockchains for immutability, provenance, and accountability.
Flexibility in business modeling and contractual arrangements
Because of Intertrust’s deep expertise in rights management, we can express almost any contractual relationship between and among parties. For example, we could say that a certain movie is only available in France in standard definition on Tuesdays between 7:00 and 11:00 PM but it is available in high definition in Amsterdam any time before June 13, 2023, if you are a member of the Bertelsmann film club.
We could also say that I have sold 50% of my music royalties in my new album but for the first 500 investors, they get paid immediately but the next 500 investors only get paid after the studio costs have been paid out of the revenues.
The possibilities are endless.
Integration with physical product
Intertrust are working with partners in many different markets to provide digital flexibility to the ownership of physical objects – assuring provenance, accountability, and flexibility for buying, selling, re-selling, fractional ownership, renting, and lending of all kinds of physical objects.
Poor user experience for average users
Though Intertrust can support crypto currencies, most of our partners prefer using fiat currencies in their local territory. It should be as easy to buy an NFT as it is to buy any other physical or digital goods and now it is.
Though apocryphal, the William Gibson attributed statement, “The future has arrived—it’s just not evenly distributed yet.” Is certainly true of NFTs. We will soon take them for granted and they will be part of the background fabric of our life. Welcome to the future.