NFTY #58: What happens to digital goods on a scalable blockchain?

Breaking down digital goods on higher throughput and lower throughput blockchains

NFTY tracks the ever-evolving narrative of how mainstream will enter crypto through user-facing applications.

If you've ever asked someone what makes NFTs valuable, most people would say scarcity. Tony Sheng wrote a great post on focusing on demand instead of supply, so I won't go much into it.

As blockchains start to scale and higher throughput is used, many have questioned what makes digital goods valuable. Is it their demand as utility? Or is it their scarcity? There’s been two interesting developments last week that are relevant to this topic.

  1. Last week at Dapper Labs, we announced Flow - a new blockchain that is fully scalable while not making tradeoffs with decentralization, made possible through a multi-node architecture.

  2. While non-fungible tokens are still framed largely as collectibles, there’s a new standard trying to move away from collectibility to utility: The ERC1155 standard, implemented by OpenSea last week.

The ERC1155 standard is the first step to making digital goods less about scarcity and more about utility/liquidity. By having one smart contract manage a list of both fungible and non-fungible assets, users can trade digital goods in bulk as opposed to a single item (like ERC721). OpenSea just implemented ERC1155 this week, and many more games on Ethereum have been looking to implement the standard because it "brings for more interesting possibilities in economies." as Enjin puts it.

On a lower throughput blockchain like Ethereum, there is many digital goods but no clear leaders because the benefit to create a new market rather than participate in an existing market is much higher. This ultimately leads to spreading liquidity thin, making it difficult to find if a market is worth participating in.

On a more scalable platform, the value of digital goods is no longer about scarcity because the cost to create a market (digital goods) is low. This leads to a longer tail of NFTs compared to a less scalable blockchain. Not only is there more digital good, but more transactions occur because fees are cheaper, leading to more trade automation. More transactions and more users means there is more trade data, leading to more liquidity compared to a less scalable platform. With more liquidity, there is more benefit to participate in an existing market than there is in a new market, even though the cost to create a new market is cheaper and easier on a more scalable platform.

My theory is that 1) Ethereum may end up be the platform for collectibles, while more scalable blockchains use digital goods for more utility. 2) ERC1155 will be specifically used for sidechains on Ethereum since they require heavier transaction usage than ERC721s.

While there isn't enough data to support this yet, it's interesting to think about what types of applications should be built for more scalable platforms. Should they focus on collectibles, taking upon what was learned in lower throughput blockchains? Or should they focus on creating games that are unique to crypto?

Time will tell to see how these applications change over the next year.


Disclaimer: I work on helping create a world of infinite possibility at Dapper Labs. All opinions and words written in NFTY are my own.