What is digital scarcity? It's a question that a lot of people have been asking lately, especially with the rise of cryptocurrencies and non-fungible tokens (NFTs).
We will explain digital scarcity and how it applies to the world of crypto and NFTs. We will also discuss some of the benefits of digital scarcity and why it is so important for decentralized applications.
What is digitally scarce?
In the digital world, scarcity is determined by how easy it is to replicate digital assets. When something can be easily replicated, it has low digital scarcity. Digital assets with high digital scarcity are those that are not easily replicated and have a limited supply.
This concept of digital scarcity is important in the cryptocurrency world. Many cryptocurrencies, such as Bitcoin, are created through a process called mining. To create new Bitcoins, miners must solve complex mathematical problems. The number of Bitcoins that can ever be mined is finite, which gives them high digital scarcity.
Digital scarcity is what makes digital asset investors attribute value to cryptocurrencies.
Other cryptocurrencies may also have limited supplies, making them more scarce than traditional currencies like the US dollar. This makes some investors perceive them as more valuable, which drives up their prices on crypto exchanges.
Digital goods can also be scarce, just like physical goods.
For example, digital photos can be rare if they are NFTs because they can only be owned by one person. Digital scarcity is created by limiting the availability of digital goods or by regulating how they can be used.
The importance of scarcity in monetary systems
One of the key properties that make money useful is its scarcity. If everyone could produce their own money, it would not be very valuable and would not fulfill its function as a medium of exchange. This is why most countries have laws against counterfeiting currency.
Bitcoin is a digital asset that uses cryptography to secure its transactions and to control the creation of new units. One of the key features of cryptocurrencies is their digital scarcity. This means that there is a finite number of them and they cannot be replicated.
This property gives Bitcoin value because it ensures that they are not subject to inflation or deflation due to increased or decreased money supply. Bitcoin’s supply remains the same. Inflation happens when the money supply increases faster than the number of goods and services available for purchase, resulting in rising prices.
Deflation happens when the money supply decreases faster than the number of goods and services available for purchase, resulting in falling prices.
Cryptocurrencies like Bitcoin are not subject to either inflation or deflation because their total number is fixed. This makes them attractive as an investment vehicle since their value is likely to increase over time.
It also makes them useful as a medium of exchange, since people can be sure that the value of this digital currency will not change dramatically over time.
Most altcoins (any cryptocurrency that isn't Bitcoin) serve as a monetary system within their blockchain. There is a lot of criticism from the Bitcoin community for these systems to be a worldwide decentralized monetary system.
This is because the coin supply isn't very scarce and is largely centralized. This causes concerns about a centralized decision to control the supply and raise the total coins available.
The psychology of scarcity and value
Digital scarcity is a phenomenon where a digital asset is rare and has value because of it. The rarity can be created by limiting the number of available items, or through digital rights management which restricts access to the good.
In economics, there is a theory called the "theory of marginal utility" which explains how people assign value to goods. The basic idea is that people place more value on something when it's in short supply. This theory was first proposed by Carl Menger in 1871 and has been widely accepted by economists ever since.
The theory of marginal utility helps us understand why digital scarcity creates value. When an item is scarce, we assume that it must have some sort of special attribute or use case that other items don't have.
This makes us place a higher value on it, and we're more likely to want to own it.
This is why digital scarcity has become so important in the world of cryptocurrencies and digital assets. When a new digital asset is released, its rarity gives it an immediate value that can be traded on exchanges. And as demand for these assets increases, the value goes up even further.
This is what makes digital scarcity such an interesting concept. It's not just about limiting the number of available items, but also about creating a perception of value through rarity.
By understanding digital scarcity, we can begin to understand some of the fundamental principles behind cryptocurrencies and digital assets.
Is digital scarcity possible?
Digital scarcity is made possible with the help of blockchain technology. Digital files have been traditionally known as non-scarce because digital files can be copied infinitely. The blockchain is a digital ledger that records all transactions in a digital asset. This makes it possible to track the number of digital assets that are in circulation.
When a digital asset is tokenized, it can be stored on the blockchain and its ownership can be tracked. This makes it possible to create digital assets with high digital scarcity.
It's even possible to tokenize physical assets to be traded on the blockchain. The use of blockchain technology for digital scarcity is still in its early stages, but it is likely to play a key role in the future of both physical and digital asset ownership.
Digital scarcity (NFTs)
Non-fungible tokens (NFTs) are digital assets that are unique and cannot be interchangeable with other NFTs. They were first popularized by Cryptokitties from Dapperlabs, a digital collectibles game that allows users to buy, sell, and trade different kitties using Ethereum-based NFTs.
As the technology advanced, the Dapperlabs team has partnered with mainstream sports leagues such as the NBA, UFC, and NFL to create 'NFT Moments'. These are similar to rare sports cards except they have better qualities.
These NFTs are much easier to trade and to keep in the best condition. Their digital nature also allows them to do much more than sports cards. They can be programmed for numerous applications. Dapperlabs uses video to showcase the most exciting sports moments and allows fans to own the official clip.
It also allows for easy and fast peer-to-peer trading as the blockchain cuts out the need for human verification. Depending on the blockchain, it can also be much cheaper allowing more demand for these scarce items.
Addressing the critics
A common criticism of NFTs is that anyone can just screenshot the image making it no longer scarce. Anyone can also take a picture of the Mona Lisa, but that doesn't mean they own it. The NFT ownership attached to the user's digital wallet shows the unique ownership of the scarce item.
Many critics also fail to understand the utility attached to most NFTs. You can screenshot a VeeFriend but that doesn't mean you can attend one of Gary Vee's private events. As of February 22, 2022, Bored Apes are selling at a floor price of 52 Ethereum (approx. $210,000 USD). A screenshot will not grant you access to their private celebrity parties and creative licensing rights.
The programmed guarantee of scarcity
Non-fungible tokens are becoming increasingly popular. NFTs are digital assets that cannot be replicated and have unique properties. This makes them similar to physical collectibles, such as baseball cards or stamps.
Just like physical collectibles, NFTs can be traded and used to represent ownership of digital goods or services. This makes them a useful tool for creating digital markets where users can buy and sell digital products and services.
NFTs also provides a way to create digital scarcity, which is important for ensuring the security and integrity of digital markets. Cryptocurrencies and NFTs are both valuable because they are scarce.
This makes them perfect for use in digital markets and for technical marketers to sell. NFTs are especially helpful for products where the security and integrity of transactions are important such as luxury items. As digital markets continue to grow in popularity, the importance of digital scarcity will only increase.
Physical items and digital security
Luxury items are often counterfeited causing a flood of items onto the market. Oftentimes these can be difficult to distinguish from the real products. If the companies and brands do not control the number of counterfeits effectively, there will be a rise in the quantity of that item and a potential of lower value perception.
Tokenizing these types of items and matching them with a transparent blockchain, can help customers distinguish between the real items and the fake ones. There may be a large quantity of identical-looking products, but only a few real ones.
Types of digital scarcity
The three types of digital scarcity are:
- Finite Quantity
- Limited Time Offers
- Limited Usage
Digital scarcity is created by a limited number of items: There are only a certain number of digital items available, and when they are gone, they are gone forever. This type of digital scarcity is often seen with digital collectibles, such as digital art or in-game items.
Digital scarcity created by a limited time: The digital item is only available for a certain period. After that, it is gone forever. This type of digital scarcity is often seen with digital coupons, tickets, or other time-sensitive items.
Digital scarcity is created by a limited ability to copy or use the digital item: This is commonly seen with NFTs that come with utilities such as event tickets or meet and greets.
Are NFTs scarce?
This depends on the NFTs themselves. It's possible to program an NFT to have millions of additions. This will not make the NFT itself scarce. However, most people that are creating NFTs will observe the potential demand for their digital items and create the quantity based on that data.
If a famous artist has a new art piece that is in high demand, they can program the NFT attached to the artwork as a limited edition piece with only a few available. In this case, the NFT would be very scarce because there is enough demand to support the value.
Digital scarcity (bitcoin)
There are only 21 million Bitcoins. That is the number of Bitcoins in existence and there will never be more. It is estimated that 20% of that supply has been lost through forgetting seed phrases or sending bitcoins to unspendable addresses. More bitcoins will most likely be lost as time goes on making the digital asset even more scarce.
Nearly 19 million bitcoins have already been mined, so the digital scarcity of this cryptocurrency is quite high. The limited supply means that as the demand for bitcoins increases, the price will also continue to rise.
This digital scarcity is what makes bitcoin so valuable and has helped it become the most popular cryptocurrency in the world. It is also a great store of value as it is inflation-resistant, uncensorable by government seizures, easily transferable, divisible, and private.
Scarcity can help create value, but for bitcoin, it is also paired with demand as more and more people and even nation-states are adopting this digital currency. The digital scarcity of bitcoin is a key reason why it has been so successful and will continue to be in the future.
Another reason why bitcoin is scarce is that there hasn't been another asset class with the same benefits. Gold is scarce, but it doesn't have the digital properties that make bitcoin so valuable. It is also difficult to transport and can be stolen when moving across borders.
If you are looking to get your scarce SATs (denomination of bitcoin) make sure to store them securely in cold-storage wallets.
This is because exchange hacks and government seizures have been known to happen on centralized platforms. Always remember your seed phrase and don't let anyone know it or your scarce asset may be stolen.
The new age of digital scarcity
We are living in the digital age and with that comes digital scarcity. It's important to understand digital scarcity because it can create value for digital assets. NFTs are a great example of this and will only become more popular in the future.
Scarcity creates value even in the digital form. This has been seen with bitcoin, which is the most popular cryptocurrency in the world due to its digital scarcity.
Each cryptocurrency and NFT has unique features that make them valuable, but digital scarcity is one of the main reasons why they have been able to gain mainstream adoption. Be sure to keep an eye on digital scarcity as it continues to evolve and create value in the digital world.
