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 indeed 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 giving value form 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 naturally 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, the fundamental mechanics of supply and demand 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. Legal systems must be able to define and protect rights and ownership for digital assets, which they cannot do without a form of ownership that creates such a containerizing concept on the machine level.
The source of digital value
In order to frame this discussion properly we need to establish a very basic ontology for describing value. On a basic level, value can be described as either intrinsic, which is a form of value inherent to the asset and its existence or instrumental, which is the utility value of an asset; its purpose, its functionality, or its usefulness as a means to an end. Both of these value types can divide into any number of sub-types, depending on the individual.
So how does this help us understand digital value? Well, the crucial task is to determine the ‘thing of value’ in the digital space that we need to harness and protect. On a practical level, digital systems consist of files, which act as containers for knowledge, and applications, which act as containers for logic. While applications can read and, if necessary, extend existing knowledge within the system, it is the file itself that contains the knowledge (here used in an abstract, general sense — a file containing images as art may not be knowledge in a strict sense of the word, but it still contains the fruits of a author’s creativity, skill, and imagination) and the effort and work that has gone into developing and recording that knowledge. This high-level ontology indicates a strong correlative relationship between files and intrinsic value, as well as between applications and instrumental value.
This makes further sense when one realizes that there can never be a coin, or a token, that accurately personifies all forms of intrinsic value. However, a file (or files) can.
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 roughly 1000 miles north of Papua New Guinea and almost the same distance east of the Philippines, huge stone slabs are dotted around the thatched houses that make up the traditional parts of the villages.
These stone monoliths, carved from limestone deposits found on an entirely different island, are not the equivalent of modern art sculptures, but rather the island’s monetary system. There being no precious metals to be found on the island (at least back then), the inhabitants turned to their unique version of “jewellry” as a medium of exchange for trade. However, these stone slabs were unwieldy, with some weighing the equivalent of a small automobile. This meant that 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 all of 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. Extending this paradigm 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 cannot — they are actual digital objects, and contain binary data, which needs to be preserved. Writing this data to the blockchain would be vastly prohibitively expensive, both in terms of block space and in terms of verification. Yet, the blockchain is still required for proper digital identity, digital ownership, security, efficiency, and of course machine readability.
So we seem to be at an impasse. How do we impart the above properties to a file, which is where the intrinsic value lies, if we cannot put files on a blockchain? The solution: you find a way to 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.
This is not as easy as it sounds (and, to be fair, it sounds pretty difficult). Getting it right is a real issue. When we consider the currently popular non-fungible tokens (NFTs) we see just how difficult it is. NFTs, despite what the millions of users and traders want to believe, are not real ownership. They have the token part right — the owner definitely has ownership of the token, but does that mean they own the JPEG (e.g.) file? Unfortunately not. Interestingly, the vast majority of people who deal in NFTs or who even have (often passionate) NFT debates make one crucial error in understanding, which is that ‘the NFT’ is the picture that they can show to their friends on their phone (or similarly portable/shiny device). This is not the case. The NFT is the token (the clue is literally in the name). The picture on their phone is the file, which is now associated with the token through some form of metadata link or pointer (and in some niche cases, a hash). But that, as they say, is it. Long story short: with NFTs there is only ownership of the token, but not of the picture (the file).
So, how do we impart ownership of the file?
First, and I realise that this might seem obtuse, but we have to ask the question, ‘what is ownership?’ This is an incredibly important question, since ultimately ownership is a prequisite for any form of legally-binding and compliant monetization and/or trade.
At Zenotta, we boil ownership down to three key elements:
- Being able to demonstrate uniqueness
- Access & control
- Protection of content (this is a bonus)
To achieve the goal of real ownership, we need to satisfy at the least the first two, with the third adding a layer of privacy. The Zenotta invention of Smart Data ensures that files can be owned, through blockchain governance, with the following three pieces of technology:
- Encoding — this provides the uniqueness & originality
- 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 provide ownership (+ privacy). This is 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).
The figure above details how this works. The file is passed through a unique encoding scheme that re-codes the DNA of the file (the binary) to impart uniqueness. Each encoding scheme is different, and so subsequent owners of the same file will have an encoded version with a different DNA from the previous owners. The encoded file is then encrypted, obfuscating the content from anyone but the owner, who has the decryption key. Finally, the original file is passed through a perceptual hash, which produces a version of the file that can be used to identify forgeries, even if they are slightly altered.
Four components from this process are passed through a hash function, and together constitute a digital rights signature (DRS). The DRS is essentially a fingerprint consisting of four key hash values:
- The hash of the file
- The hash of the encryption key
- The hash of the encrypted and encoded file
- The hash of the perceptual hash of the file (double hash; but different hash functions)
The encoded file contains all of the information required to reconstruct the original file. Therefore, once decrypted, part 3. can be decoded to return the original asset.
The DRS lives on the blockchain, and is accessed and moved/traded via the public/private key pair, similar to standard blockchain ledger entries. The DRS provides demonstrable, identity-based, and legal ownership of the file, along with the ability to decode and decrypt the content. The four hash values satisfy the three requirements outlined earlier for ownership, since they demonstrate that the owner has access and control of the file (through the public/private key pair and the encryption key) and that the file has uniqueness (through the unique encoding scheme, which is also under the control of the owner).
This technology of Smart Data creates, for the first time, ownership of digital files through blockchain governance. 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. At Zenotta, we introduce the first universal digital asset system, and 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.