Tracer Drop Episode #13: The Frontier of NFTs

The Frontier of NFTs

Agenda

  • Introduction
  • Property Rights
  • What NFTs Have Become
  • The “Lancaster Goods”
  • Bridging The Gap Between DeFi and NFTs
  • Composable Property Rights
  • Problems in Property Rights
  • A Private Order Property Rights System
  • Property Rights with DAOs and NFTs
  • Changing Property Rights
  • DeFi’s Role in Property Rights
  • Residual vs Programmable Rights
  • The Hyper Barter Concept
  • DAO Opportunity Costs

Call Recording: Here

Introduction

  • Chris Berg asks Jason Potts his thoughts about the relationship between DeFi and NFTs.
  • DeFi provides mechanisms and technology for doing new and interesting things never been done before by financing it.
  • We ask ourselves “What are the basic technologies that make up an economy?”
  • The base layer of any economic system has always been property rights. Who owns what?

Property Rights

  • Property rights tell you who you are bargaining or negotiating with.
  • What DeFi and finance is doing is basically operations on property rights.
  • We can think of NFTs as a fundamental economic institutional relationship between financial and property rights layers in a decentralised economic system.

What NFTs Have Become

  • Most energy from the NFT space is around digital art.
  • These are evolving into the Metaverse.
  • What are their significance medium to long term?
  • NFTs are an evolutionary process where the blockchain and crypto world came from.
  • From Bitcoin as an asset into source of money and NFTs
  • The industry has been through criticisms but mostly due to the lack of building blocks.
  • However, now we have got most of the infrastructure not available to us 5 years ago available today.
  • The bits and pieces to realise the promise of the crypto world are now in place.
  • It is time to put them together to create new infrastructures that will drive future digital economies.
  • NFTs could be the next general-purpose technology on the internet.
  • NFTs are a bundle of characteristics and attributes that are wrapped together unsolved and can be fractionalized and securitised.

The “Lancaster Goods”

  • In economics a “Lancaster Good” when you think of a good or service not as a thing or object but a vector of characteristics.
  • If you think of a motor car and it’s red, it says it’s its a branded motor car. Particular engines, features.
  • You decompose a good or service into its attributes.
  • We can create new ideas, products and services from this new general-purpose technology and NFTs will become a workhorse of the digital economy.

Bridging The Gap Between DeFi and NFTs

  • NFTs basically makes the rights associated with property, composable - meaning it can be stored and traded on the same platform.
  • Same way money has allowed us to make exchange, composable.
  • Looking at assets in the world and saying we can make digital twins of those shared standards and can be put on the same set of interoperable set of ledgers.

Composable Property Rights

  • The idea that property rights aren’t just a natural part of the economic universe.
  • They evolve and they are a technology that is institutionally attached to things in the world.
  • Important to realise that some things have property rights that we attach them to.
  • Commodities, land, cars, manufactured goods and houses all have property rights attached to them.
  • People who have the same interests as you may want to own the same thing as you. Willing to fight for it.
  • In the absence of property rights, we get violence over contested and conflicted use of economic resources.
  • Property rights establish peace by attaching ownership.
  • Allows basis for bargaining and negotiating.

Problems in Property Rights

  • Economic problems can arise due to ill-defined or missing property rights.
  • Incompleteness in the property rights system is also a factor.
  • We rely on governments to provide property rights - the issue is that property rights will get attached to governments interests.
  • Citizens have little to no say in what the property rights need to be attached to.
  • Should NFTs be called Digital private order property?

A Private Order Property Rights System

  • Not attached to any government property rights system but,
  • To people just figuring out what they can attach property rights to.
  • This is useful and valuable to create market and exchanges.
  • This is what composability is, it is the idea of adjusting and resetting the dials on property rights.

Property Rights with DAOs and NFTs

  • Alkin and Harold James are two free-market economists who wrote a series of papers in the 1960s about property rights.
  • Applied the understanding of property rights to the then Theory of The Firm.
  • NFTs and Theory of the Firm mixed together shows a clear bridge between DAOs and NFTs.

Changing Property Rights

  • Clashes in history where you had divergent property rights.
  • We need to think about what leads to a change in property rights.
  • Which are changes in price or taste.
  • A whole new market opens up for these things.
  • The most important thing to change in property rights is changes in technology.
  • Satoshi led the change in technology to the industrialisation of trust.
  • We can now build a private order property rights system into our products.

DeFi’s Role in Property Rights

  • Property rights is a series of rights that are obtained by holders to a given asset.
  • You have the ability to use it, exchange it, and destroy it.
  • DeFi has given the ability to access a crypto punk for a period of time in the same way we might have financial instruments around property rentals.
  • We can point derivatives or other financial contracts to given attributes of products in a market.
  • Not individual products or categories of products.
  • We can break down the rights and start pointing financial products at those rights or attributes.

Residual vs Programmable Rights

  • There’s no such thing as economic goods being exchanged but rather only rights that are being exchanged.
  • An economic right is the ability to make decisions about a thing and that is residual control of an object.
  • This is ownership.
  • Fractionalisation of assets comes from the computable property rights or rights represented digitally.
  • Residual control can be of permanent machine perspective.
  • When we attach property rights to things we open up possibilities of economic trade action.
  • Digitising these and having them as a private order attachment.
  • They will be composable, computable, and fungible.

The Hyper Barter Concept

  • Came up around the idea of “What is money?”.
  • When humans trade with other humans about things we need to be able to simplify transactions to the unit of account that makes sense for both parties.
  • That is Hyper Barter - in a world of machines to machines trade we don’t actually need money. We just need machines to work directly with a highly described vector of characteristics.
  • NFTs are money for machines. Your robot is your wallet and your wallets can trade with other wallets.

DAO Opportunity Costs on The NFT Side of The Fence

Question: What is the opportunity cost of a Dao in the business of smart contracts? If it only plays the defy side of the fence and is not involved in NFTs.

  • Allows us to supercharge NFT space by building infrastructure allowing individuals to consume NFTs.
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