Digital Economy Dispatch #07620th February 2022

Digital Pride and Prejudice Meets the Murky World of NFTs

Our most cherished memories are ofthings that never happened.Carlos Ruiz Zafón

I have a recurring dream that’s started to bother me more and more. It begins in various ways. But it always involves the same cast of characters from my school days and ends up with me having a blazing row with everyone, then storming off vowing never to speak with them again. I have had this dream so often that it has reached the point where I now am no longer sure if these dreams are based on something that really happened or if it is just imagined. What concerns me most is that I am beginning to lose any sense of the difference.

This blending of the real and imaginary worlds does not just happen in dreams. As we have seen recently, the rush to define the Metaverse is the latest in a long line of attempts to overlay digital insights onto physical artifacts.  The broad adoption and increasing power of digital technologies have not only enabled new real-time data streams from sensers embedded in everything from your toothbrush to your fridge. They have also encouraged the creation of digital twins bringing “virtual representation of an object or system that spans its lifecycle, is updated from real-time data, and uses simulation, machine learning and reasoning to help decision-making”. The real and physical worlds in harmony.

Follow the Money

Like most things in life, to understand more about the digitization of the physical world, a good place to start is to follow the money. The move to virtual currencies and digital money is a fascinating opportunity facing the world. However, it can be quite disorienting. Nowhere more so than in the murky world of NFTs.

Non-Fungible Tokens (NFTs) are certificates of ownership that cannot be copied. They are used as digital representations of artifacts that can be created, owned, sold, and traded. To ensure they can’t be faked, they are recorded in a permanent ledger on a blockchain. These records can also contain a “smart contract”; a piece of code that executes when certain conditions are met.

So much for the details. But what does this really mean? NFTs are being used for a wide variety of reasons to represent real world artifacts such as artwork, trading cards, real estate, and even famous tweets! When you purchase an NFT you own the unique digital record that was created (“minted”) to represent it: A record on a blockchain. However, in most cases you don’t own the real artifact. You don’t own copyright of the artifact. You may not even own exclusive rights to use copies of the artifact.

That’s right. With a traditional artwork, buying an NFT does not mean you own the original artifact, and probably does not give you rights to digital copies. Just the right to say you own the digital record for that artifact. For some people, that seems to be enough.

With respect to digital art, NFTs may offer a way to recognize the rights of artists. Take the example of the thousands of cyberpunk images created by Larva Labs. NFTs allow them to establish a clear chain of ownership. Acquiring the NFT for a cyberpunk image means that you own the digital art. Others can produce copies of it, but you own the digital artwork. Even if endlessly reproduced, only you can sell it to someone else. The originator of the digital art receives a payment every time its associated NFT is re-sold.

Confused? Let’s look at an example.

A Picture Worth a Thousand Words?

The Economist’s experiment with NFTs offers very useful insight into the murky world of NFTs. To understand more about the practicalities and peculiarities of these approaches, The Economist decided to take the cover image from a previous edition and to go through the processes required to sell the image as an NFT. Their description of this process is fascinating. Reading about their experiences, I was struck by four observations on the current state of NFTs.

First, the complexity of the sale and purchasing processes make me wonder just how many people would be able to navigate their way through this digital gobbledegook. There are several steps required to set up wallets, acquire appropriate digital currency, mint the NFT, create the blockchain entry, and much more. Not for the faint hearted.

Second, the fees involved in creating and acquiring NFTs make this far from the open, equitable approach to ownership that many may have been expecting. The combination of gas fees, commissions, and on-going resale fees is eye watering. Is this what Satoshi Nakamoto intended when he/she/they kicked off the bitcoin revolution?

Third, it is revealing to read how The Economist struggled to decide whether to proceed with their NFT experiment at all. Given The Economist’s green credentials, they had to think long and hard about participating in a system that is heavily criticized for its extensive carbon footprint. Furthermore, once they went ahead, one of their biggest concerns was the uncertainty of legal and tax obligations for both the buyer and seller of the NFT. Their expensive accountants needed to make a few “guesses” and hope they got it right.

Fourth, and perhaps most illuminating, it is worth reading the small print that The Economist highlighted for those interested in making a bid for this NFT of their cover artwork:

The buyer of the NFT will have the right to use, publicly display and copy the NFT for personal, non-commercial use and the right to re-sell the NFT. The buyer of the NFT will have no right to license, commercially exploit or prepare derivative works of the NFT or the artwork therein.  All copyright and other artistic rights in the NFT and the artwork therein are otherwise reserved by The Economist.

Which leaves you with a very uncomfortable question: What is it that they are buying?

All this makes you wonder why anyone would make a bid for this NFT. But of course, I don’t need to tell you the answer. The NFT was acquired for $420,000 following a bidding war. Almost half a million dollars!

Is That it?

We’re now firmly part of a digital era where the boundaries between real and virtual are breaking down. As our perceptions of the world evolve, new mechanisms are being created to bridge between them, establish different forms of property ownership, and support digital creators to be recognized for their work. The result is a swirl of innovation in NFTs, cryptocurrencies, digital twins, and other forms of virtual reality. Undoubtedly, there is scepticism and concern. Nevertheless, don’t be fooled. While this can seem confusing and disconcerting, these are essential steps in understanding digital value, managing risk, and building new forms of trusted relationships.

Digital Economy Tidbits

How technology can help you maximise a competitive advantage — Lessons from the FT Corona Virus Tracker. Link.

A very useful review from Martin Fallon about the Financial Times’ experience building the Corona Virus Tracker. For the FT, it looks like data journalism may be the new “killer app”.

The coronavirus tracker became our most viewed article of all time, bringing millions of people to the FT for the first time. Few other publishers have the ability to take such complex subject matter as Uber’s fiendishly complex business model or the European gas market and turn it into something compelling and easy to understand. Our analytics have proven that this type of interactive content is something that promotes subscriber loyalty .

Apple’s Ambitions in Digital Health. Link.

We all know that Apple now has its eye on driving revenue from the health sector. Where else can it look to move from its current income of close to $400 Billion to get to $1 Trillion turnover in the next few years?

So I was very interested to read Scott Galloway’s latest analysis of Apple’s future strategy. Very much worth a read.

Here is what he says about what Apple might do now in health.

To date, Apple has positioned the health capabilities of the Apple Watch as a feel-good consumer benefit. Fall down, it calls 911. Have an irregular heart beat, it tells you to contact a cardiologist. But on Apple’s most recent earnings call, Tim Cook said, “we’re still in the early innings with our health work.” Apple is continuing to build an array of sensors (hardware) and data mining and analysis tools (software). The low-hanging fruit: athletic heart rate monitors. A bit further up the tree: hearing aids. But what’s likely next? Services.

“Hey Siri, does this mole look suspicious to you?”

Unless CVS starts putting devices in customers’ hands, the best decision it can make is to pay to become the default integrated health-care provider on the iPhone — the medical version of the Apple-Google search contract. Google pays about 6% of its revenue for that contract. If CVS made the same calculation, Apple would receive another $17 billion direct deposit every year.

Or, Apple could just … become CVS. There’s nothing stopping the company from turning the iPhone into a homing device for a network of Jokr-like dark stores that could deliver every consumer health-care item (plus diapers) to your doorstep. Health services and premiums aside, Apple could take out CVS’s product sales. What’s reasonable? Half? A third? Let’s say a quarter: $75 billion by 2030.