A Universal Digital Asset System
Ascribing digital value in digital systems
In the physical world, value is easily evident, albeit often subjective. As a society, and as human beings, we are eminently comfortable with the notion that 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, and our long-held understanding of what can and cannot be assigned value is 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), financial products (DeFi), digital goods (NFTs), or digital real estate (the metaverse).
The digital world does not preserve the “structure of value” in the same way that the physical world does. This introduces unnecessary costs and risk into digital systems, affecting the physical world a myriad of ways – causing procedural headaches and inefficiencies for automation in industry, government, and the private sector alike, as well as interfering with international trade and logistics. Identifying a reliable methodology for ascribing value within digital systems would alleviate the substantial hurdles currently faced by content creators, organisations, and industries in regards to compliance, capital raises, client engagement, cybersecurity, data rights management, and more.
Notable attempts at creating substantive value in digital systems include pricing via processing (Dwork & Naor, 1993), Bitgold (Szabo, 1998), Hashcash (Back, 2002), and Bitcoin (Nakamoto, 2008). Each of these technologies 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 consider physical world economics, 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, the economic value of things in the physical world should be framed in the context of rivalry (consumption by one party prevents simultaneous consumption by others) and excludability (consumption of a thing can be prevented for certain parties), two properties which a thing must satisfy in order to possess economic value.
When we consider legal systems, the discrepancies are even clearer. This is due to the fundamental 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.
Equally important is the requirement for digital value to represent all value types, whether intrinsic, which is a form of value inherent to the asset and its existence – of which one can classify certain primitive sub-types such as ethical value, aesthetical value, and even metaphysical value (the value associated with self-identity and the relationship between the asset and the owner) or instrumental, which is the utility value of an asset; its purpose, its functionality, or its usefulness as a means to an end.
The starting point for fixing all of this is to understand 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 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. Unfortunately, while digital coins or tokens can ‘live’ on a blockchain, files cannot – block space is expensive and files contain far too much data.
The initial development of the internet revolved around the dissemination of information. The first incarnation (web1) largely consisted of one-way access to a repository of information for the average user (read). Later this developed into a two-way platform for sharing and creating content (read-write).
Since then, the internet has evolved into a social realm where individuals interact, share personal data, and engage in economic activity. This goes far beyond mere social media, and is a fundamental shift towards a digital societal identity, with all of the accompanying societal value and structure, such as rights and privacy.
While many definitions of web3 differ, it is probably described best in this ontology as read-write-own. This is not only two-way but also peer-to-peer, with individuals conducting business and personal relationships and transacting, just like in the physical world. The problem is that the infrastructure and base layer protocols of the internet are not capable of defining or ascribing value – there is no concept of native ownership or transaction security (in short, no solution to the double spend problem). This is where blockchains come in. Solving the double spend problem (the problem of how to determine whether a given digital asset was spent more than once) and more generally, the Byzantine Generals’ Problem (fundamentally, a problem describing the difficulty of trusted information transfer without requiring all participants to be trustworthy) in order to achieve trustless, immutable, distributed group consensus means defining and transacting ownership for the coins or tokens under blockchain management.
Fundamentally, web3 is about getting machines to understand value. Transacting assets in the digital world is largely pointless if vast amounts of human legal man-power has to be brought to bear to resolve disputes constantly. The semantics around value and the relationships they create cannot be interpreted by machines, because machines cannot process the ownership and transaction of files.
So what is the solution? While files cannot live on a blockchain, they can be put under blockchain governance. Thanks to developments in blockchain and cryptographic protocols, files (and more generally, data) can be managed from the blockchain ledger through a decentralized file format known as Smart Data. Zenotta has developed this technology as part of a Layer 1 solution to the double spend problem for data – how to ensure that a file can be traded peer-to-peer in the way that coins and tokens can.
The metaverse concept is the latest to emerge in the blockchain and cryptocurrency space, but in many ways it is one of the most fundamental to recreating the structure of value that exists in the physical world. Communities of identities, with sovereign rights and real estate, exchanging digital goods within a digital economy – whether through trade or ‘play-to-earn’ gaming, the concept provides a means to extract economic, legal, and even social value, at least in theory.
The problem is that without an underlying Layer 1 solution to digital value, all of the pseudo-value exchanged within the metaverse is (to a certain extent) smoke and mirrors. The main concept is built around non-fungible tokens (NFTs) which are the first experiment in creating digital value and embedding it into digital assets. Although rather pleasingly poetic, this means that the sole mechanism by which value in the metaverse is assigned is metadata – the ‘thing’ that you own is the token, whose metadata field points you to ‘that file over there’, normally held by a third-party website you have to trust.
While a valuable (and hugely popular) experiment, this form of ownership does not fix the problem of digital value, because it does not interface the file – the thing of value – with the blockchain. At Zenotta we believe that this initial, valuable NFT concept should be built on and developed into what it has to become in order to impart real value to digital systems – the non-fungible asset (NFA). Once a blockchain transfer defines a file transfer, in addition to the transfer of coins or tokens, then we are dealing with the holy grail of digital value. Fully completing the asset side of the transaction (for which not only a new Layer 1 blockchain is required but also a entirely new, dual double entry form of ledger) instead of just the token side, means that society can create and trade digital goods, and of course digital services, for the first time.