Published
May 13, 2022

NFTs as the logical next step for the decentralization

NFTs have taken the world by storm in 2021 and have been a polarizing phenomenon. A common argument of the critiques is that the lack of proven utility behind NFTs makes them a speculative and gambling material. On the other hand, the defendants of NFTs argue that it has proven valuable utility in fields like gaming, art, music and the metaverse as a whole. More than that, the defendants of NFTs state that it can become the technology allowing for the decentralization of many of the world’s leading forces, an important step for the well-being and prosperity of our society.

One of the defendants is “Punk 6529”, he/she is a whale in the crypto-community sphere and is known to have one of the widest collections of NFTs. Some time ago he wrote a famous twitter thread on the bull case for NFTs as a mean for decentralization. The article below aims to decipher and elaborate on Punk 6529’s twitter thread and explain why NFTs can serve as the logical next step for the decentralization of many institutions in today’s world:

  1. What are Trusted Third Parties (TTPs)?
  2. The problem with centralization and TTPs
  3. NFTs as the mean for decentralization

What are Trusted Third Parties (TTPs)?

Humans being for the most part very individualist species, it is naturally very difficult to trust a person or an entity that one has never heard of in the past. More broadly, trust is a fragile expression that takes a lot of time to earn. However, trust is crucial for the inter-connectedness and evolution of human society. Therefore, humans created new trusting systems and relied on them as the foundation of our society.

TTPs (Trusted Third Party) are entities that facilitate the interactions between two parties who both trust the third party or TTPs. They are the principal mean of trust in today’s world. Databases run by TTPs are collectively omnipresent and omnipotent in modern society. They range from a local government to the banking system or social media around us. They are currently needed for society to function and for individuals to transact with one another.

Punk 6529 Explaining the role of TTPs

These TTPs have grown to become very centralized authorities with the ability to shape the distribution of power and financial incentives in our society. For example, in a typical e-commerce transaction, PayPal adds financial security and Amazon provides property exchange security. Despite TTPs being very important in our society, their centralized nature does present a lot of risks ranging from ethical and moral risks to economical ones.

The problems with centralization and TTPs

Punk 6529 argues that modern TTPs have 2 main problems. A micro and a macro problem.

  • Micro problem: The micro problem is that modern TTPs are anti-competitive. This means that their presence and current ways of operating prevents any potential competition from challenging them. Anti-competition institutions are both illegal and unhealthy for society. The first signs of anti-competition laws trace back to the roman empire when heavy fines were imposed to anyone stopping supply ships.

While technology driven TTPS (i.e., FAANG companies) have been accused by the public of charging high fees or using “killer acquisitions” to hobble rivals — Punk 6529 argues that it is TTPs data infrastructure that makes them anti-competitive. In fact, TTPs have collected a very large amount of data and are leveraging that as a barrier to entry against any potential competitor. Regulators do realize that TTPs present an anti-trust risk and hence have been investigating them.

“The majority staff accurately portrays how Apple, Amazon, Google, and Facebook have used their monopoly power to act as gatekeepers to the marketplace, undermine potential competition, and pick winners and losers”

A report by US House Judiciary Committee

However, since technology driven TTPs are relatively new in the course of history, regulators still have a hard time assessing their risk. This is because data was never as important as it is nowadays. Punk 6529 argues that the path to regulate TTPs is to force companies to provide access to their data thereby removing barriers to enter.

  • Macro problem: The macro problem is that TTPs have an easy access to “hijack the whole of society”. This is because many TTPs have now a degree of power and responsibilities that are greater than the states or the regulators themselves. One example here is the fact that Twitter banned Donald Trump from its platform thereby preventing Trump from accessing and voicing his words to the public. Despite Donald Trump status as a former president of the United States, nothing can be done to revert Twitter’s decision. The natural question one must ask him/herself is not whether Twitter made the right decision to ban Donald Trump — rather, it is should Twitter have the power to ban Donald Trump and who here is the most powerful, the TTP Twitter or the United State government?

Another example of the power of TTPs in a less obvious scenario is within the taxi industry. Uber/Lyft quickly became ones of the major players in the taxi industry. They are a prime example of TTPs that emerged and grown into a centralize authority with a reasonable power. One of the reasons why it the few ride hailing platforms are used by their consumer is because they remove the barriers of trust between a driver and a passenger. By doing so, ride hailing platforms have granted themselves the freedom to prevent anyone from using their services. Now, if Uber and Lyft continue to take market share at this growth rate, they will soon have the power to ban anyone they’d like from using taxi transportation.

Though the micro and macro problems were the only ones mentioned by Punk 6529 in this twitter thread, there exists other type of problems with TTPs and centralization that derive from the micro and macro problems previously mentioned:

  • Risk of fraud: TTPs remain susceptible to fraud and abuse of their power. More often than none, TTPs face the principal agent dilemma –This occurs when the agent of an organization (here TTPs) has the power to make decisions on behalf of, or impacting, the principal, another person or entity in the organization –This can at times be very harmful for the rest of society. A prime example that perhaps contributed to the creation of bitcoin is the 2008 financial crisis. Centralized authorities (here mortgage companies) made loans to borrowers while presumably knowing that the loans had a high risk of default and sold those loans to unsuspecting investors. This has led to a dramatic financial crisis that is still felt to this day among millions of unfortunate people.
  • Security and operational risk: Centralized authorities often unwillingly present an important security risk. This is because they can serve as a single point of failure to cybersecurity criminals. An example of that is the recent data breach of the streaming service Twitch. Hackers leaked the source code and revenue generated by streamers.

On the other hand, decentralization too presents many problems and has been the cause of the spread of many flaws in societies like drugs, crime and money laundering. However, Punk 6529 believes that these are only day-to-day risks and aren’t existential to the survival of states. Meanwhile, TTPs and centralized authorities are existential risks and can create dictators that are bigger and more powerful than states.

Punk 6529 Explaining the existential risk behind TTPs

NFTs as the mean for decentralization

Now that we established why the decentralization of some TTPs is important, we would like to assess the current means of decentralization and explain why NFTs stand out as the most promising ones.

Ever since the creation of bitcoin in 2009, the notion of decentralization started to emerge. This has been further enhanced by the creation of Ethereum and its popular smart contract technology in 2015. While Ethereum represents one of the most important blockchain technologies, it is also allowing for the launch of “tokens” that people can buy, sell and trade.

Up until the launch of NFTs, most of the tokens and cryptocurrencies that had emerged where fungible tokens. This not only made them a common investable product but also led to the centralization of some of their functionality. In fact, the infrastructure behind fungible tokens became very centralized — for instance, most exchanges that raised before 2020 were centralized exchanges. Moreover, their fungibility characteristic combined with the investment vehicle that they represent makes them often scrutinized by regulators as potential securities.

On the other hand, ERC-721 tokens and NFTs overall are non-fungible. This has many implications on their use case as a mean of decentralization:

First and foremost, despite NFTs being an investable product, their non-fungible attribute makes them very difficult to be thought of as securities and therefore face less regulatory risk. Moreover, NFTs are protected by the first amendment of the United States: free speech protections. This not only further reduces the risk of NFTs being thought of as securities but also means that the risk of the United States banning NFTs is minimum.

Second, NFTs are less likely to be held by a centralized authority that does not have a strong understanding or positive intentions. In fact, because each NFT is unique, it is difficult for a central authority to obtain a majority of the NFTs of a given collection. In another twitter thread, punk 6529 gives the example of the investor Anthony Scaramucci that was able to amass a large quantity of bitcoin in 2020. Punk 6529 points to the fact that because of Scaramucci’s network and the non-fungibility of bitcoin, Scaramucci was able to become one of the largest holders of bitcoin. However, it would be difficult for one that enters the NFT mania as late to be in such a position because of the non-fungibility attribute of NFTs.

Punk 6529 Explaining the why the non-fungibility attribute of NFT prevents centralization

NFTs are not only at a low risk of being extinct by regulators or centralized by institution, but they can also represent the nuances of the world which is non-fungible and can be used to build decentralized organizations.

It is a common misconception that NFTs can be resumed to the art market. However, all the above characteristics of NFTs make them an important phenomenon that can change the foundation of how society functions — NFTs are a lot bigger than the art market.

Punk 6529 gives the example of Bored Ape Yacht Club (BAYC) that can be thought by many as a simple digital art project. However, BAYC has already been creating a paradigm shift on how consumers think of cultural assets. BAYC are a decentralized competitor of brands like Supreme. In fact, no entity can control how the BAYC community can behave. Moreover, no “dictator” can stop the movement of BAYC since they run on Ethereum.

Punk 6529 Explaining the implications of BAYC being an NFT project

Conclusion

The human society is in constant need and research of progress. A major catalyst to progress was the creation of trusted third parties (TTPs) and particularly technological driven ones. However, these have quickly emerged into centralized authorities with a considerable amount of power, a phenomenon that can be dangerous for society if put in the hands of the wrong people. Decentralized systems and NFTs have shown a willingness to spread responsibilities more equally and NFTs (in part thanks to their non-fungible nature) can become the main technology of decentralization.

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