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Digital Scarcity: What is Scarcity and Does Digital Ownership Matter?
While digital scarcity is a relatively new concept, regular old scarcity has been around forever.
To put it simply, the meaning of scarcity is the exact opposite of that of abundance. Where abundance indicates that there is more than enough to go around, scarcity means there is a limited supply. Without scarcity, the monetary system as we know it would collapse; the value of something is derived from its availability and its usefulness.
What is scarcity in economics?
A fundamental term in economics, “scarcity describes how the availability of supplies, raw materials or employees is crucial to producing goods and services and setting their price.”
Scarcity is generally demonstrated when demand for services, products, or natural resources exceeds the supply. This usually indicates that the said service, product, or resource is unsustainable. This is particularly true of non-renewable energy sources such as oil or coal, but it can also refer to renewable energy that isn’t restored quickly enough to provide for market demand.
Why is scarcity important in economics?
Scarcity is critical to free market supply and demand. Scarce assets are naturally more valuable because there is a high demand and low supply. This increases the price, sometimes dramatically.
Moving onto digital scarcity, let’s use Bitcoin as an example.
Approximately every four years, there is something hard-coded to take place in the Bitcoin network known as the halving.
What is a Bitcoin halving?
When the Bitcoin halving occurs, miners on the Bitcoin network receive half the rewards for the same amount of computational power. Halvings take effect at a predetermined block height, and with immediacy.
Halvings make Bitcoin disinflationary; the inflation rate diminishes over time, and by 2140, it will be utterly impossible to create more. While Gold is often considered the king of scarcity, it’s entirely possible to find huge gold reserves in nature. Bitcoin is on a ticking timeline with a known maximum supply that can never be altered. It is immutable.
Is Bitcoin inflationary or deflationary?
The value of Bitcoin tends to increase over time as it becomes more difficult to create new Bitcoins. This is what makes Bitcoin deflationary.
However, due to the difference between the current circulating supply of Bitcoin and the maximum supply, new bitcoins are still created. This means that Bitcoin is still inflationary, but disinflationary is the correct term as Bitcoin’s inflation rate diminishes over time.
Some people prefer to look only at the maximum supply, in which case the newly mined bitcoins aren’t necessarily new – just freshly entered into circulation. The maximum limit is set in stone for all to see.
How does scarcity differ from shortage?
There’s a fine line between scarcity and shortage. Generally speaking, scarcity refers to an item’s finite nature whereas shortage is a market phenomenon where products and services are unavailable in desired quantities.
An asset can have a shortage and be scarce simultaneously, but the two terms maintain a slight difference.
Generally speaking, there’s a shortage of scarce assets, but not all shortages are caused by scarcity. In the physical world, there may be a bread shortage at your local grocery store, but that doesn’t make bread a scarce asset. Anybody can make bread with a few simple (and widely available) ingredients.
However, stepping back into the digital realm, certain digital resources (like BTC) are in short supply and cannot be produced very easily. This makes Bitcoin a scarce asset. A shortage would take place if the majority of holders withdrew their Bitcoins to a cryptocurrency wallet – like Elastos Essentials – leaving an insufficient supply for the demand on exchanges.
What is digital scarcity?
Okay, so you understand basic scarcity – but what is digital scarcity? How on earth can something be scarce online? Welcome to web3.
One of the fundamental purposes of blockchain technology is to track and trace transactions so that it’s possible to locate every single token on a network. There are a limited number of tokens and they are all publicly visible on the blockchain.
This eliminates the double-spend problem in which the same transaction is processed multiple times, resulting in double the charge for the same product or service. The double-spend problem can only occur with digital currencies that are easily reproduced. Blockchain technology solves this issue and allows all transactions to be tracked and verified.
While digital scarcity is essential for a digital currency, it’s also necessary for a digital economy to replicate the real-world economy. Take eBooks for example – they are inflated to match demand. A copy of the book’s file is created every time somebody purchases one. There is no limit to how many books can be created. This is obviously different in real life where only a certain amount are physically produced.
You buy an eBook. You can read it, and then what? Do you really have ownership over the book if you can’t choose what to do with it afterwards? The answer is no. Your eBook provider owns the book and you access it via your account.
In web3, you own your digital assets. Instead of copying the file, you are transferring ownership of the file. You can access any digital asset you own via a decentralized identifier and it will be stored on your decentralized storage system. When you’ve read your eBook, you can choose to keep it, pass it on to a friend, or sell it to recoup some of the cost – just like you can in the physical world with paperbacks or hardbacks.
This is just one of the many crucial and innovative ways in which NFTs will shape our digital future. They are far more than cartoon profile pictures.
How does digital scarcity work?
Digital scarcity works by utilizing blockchain technology to track the movement of digital assets using non-fungible tokens (NFTs). For a deeper dive into NFTs, check out our comprehensive guide.
In straightforward terms, the digital world (or metaverse) will be composed of tokenized assets known as NFTs. These items – eBooks, tickets, in-game digital objects, or any other virtual assets – will be traceable via blockchain technology. There will be a set supply or a hard-coded inflation schedule that cannot be adjusted at the whims of authoritarian bodies. This completely strips the need for greedy middlemen as our decentralized internet can be entirely entrusted to code.
Using blockchain networks to track your digital information and crypto assets alike allows you to have true digital ownership over your virtual belongings. This is one of the primary reasons why digital real estate exploded in popularity over the past year. People can now own parts of the new digital world. Why buy virtual real estate, you ask? Check out our guide to metaverse land to find out if it’s worth it.
While the current NFT hype is about overpriced images that have no utility, the digital world of the future will offer NFTs that have genuine use cases at ordinary prices. Just like when you used to buy a DVD that you could then trade in at certain shops, you will be able to do that with your digital assets – but in a peer-to-peer decentralized marketplace, rather than through a third party. It will become a normal and natural means of interaction with the digital world, replicating the scarcity of real life to create an inclusive virtual economy.
How does digital scarcity affect price?
Digital scarcity affects the price of an asset in the same way that non-digital scarcity does. If the demand outstrips supply, the price will increase.
Digital scarcity refers to the limited supply of a digital asset. If an asset is desired by many people simultaneously, then the free market forces the price to rise, as there are more people wanting to buy than there are wanting to sell.
This can also lead to FOMO (Fear Of Missing Out) in which people see a trend in the market and fear that if they don’t jump on the bandwagon like everybody else then they will “miss the boat”. This is an emotional reaction that can drive prices unreasonably high, as in the volatile peaks of the crypto market.
If, however, the digital asset has more supply than demand, the price will fall. This is because there are more people wanting to sell the asset than there are wanting to buy it. The price is pushed down by suppliers competing to sell their assets sooner than others.
How does digital scarcity affect the market cap of crypto assets?
The market cap of a crypto token can be calculated by using the following formula: circulating supply x token price = market cap. This is how digital scarcity affects price, and it’s why some of the top crypto assets by market cap are still priced at mere cents. They are simply less scarce than others.
Let’s take Ripple (XRP) as an example; at the time of writing, it’s the 7th largest cryptocurrency by market cap, yet the token price is only $0.33. This is because the circulating supply is more than 48 billion. Compare that to Solana (SOL), which is of a similar market cap: its token price is $36 while its circulating supply is approximately 345 million.
SOL is more scarce than XRP, and thus its token holds roughly 109x more value, despite SOL’s overall market cap standing below that of XRP.
Why is digital scarcity integral to web3 and the metaverse?
In the next generation of the internet, digital scarcity will be necessary to create a truly decentralized digital economy that enables genuine data ownership. You can’t take part in a free decentralized internet without owning your own goods. This includes the digital assets we’ve already discussed like eBooks and in-game items, but also your actual data: what you like and dislike on social media, for example. Most people are unaware that their data is usually sold to marketing companies in order to make social media profitable – in fact, it’s one of the most profitable business models in the history of business.
The next generation of the internet intends to disrupt that by returning power to the people and giving you control over your own data and digital assets.
In 2020, video game audiences spent $54 billion on in-game items. Why should big gaming companies be able to restrict what you can do with the items you’ve bought with your own hard-earned cash? I’ll give you a hint: it begins with M and rhymes with honey. If you were able to resell your digital items then they would make less money.
Currently, these gaming companies have a monopoly. You want in-game items? You have to go to the game developers. Full stop. End of story. It’s possible to buy other accounts which have already unlocked various in-game items, but this is frowned upon or downright illegal in many cases, and therefore it’s awkward to do and not advised. Plus, you may not want to change your whole account. It also requires you to trust a stranger on the internet to send you the account details once they’ve received the money, making it prime territory for scammers and the like.
With non-fungible tokens, producers of in-game items can take advantage of digital scarcity. Currently, the rarest in-game items are rare because they are expensive. With digital scarcity, the rarest video game items will be rare because of their limited supply. That’s what gives them intrinsic value.
In addition, digital scarcity will empower players to resell their video game items, while still giving game developers a royalty fee from each resale. There are no losers. This model enables players to recoup some of the money they spent on the game once they’re finished playing, or perhaps even a profit in some cases. Yet it still gives game developers a way to earn money continuously from the game’s economy.
So why don’t gamers like NFTs?
At the moment, one of the problems is that video game audiences are rejecting NFTs because of their association with negative environmental impact, extortionate digital art, and frustrating micro-transactions. This, and the fact that the vast majority of NFT-based games are cash grabs with their own tokens, intended to create digital scarcity to artificially pump the price. It’s no wonder gamers haven’t caught on yet.
Non-fungible assets will continue to be rejected for as long as they are used purely for capturing elements of hype in place of intrinsic utility. Not all in-game items should be selling for thousands or millions of dollars, as that divides communities. For NFTs to be affordable, they need to be properly integrated, and they should not be leveraging digital scarcity solely as a means to create extortionate (and potentially game-busting) items.
Why else should digital scarcity be embraced?
It’s increasingly apparent that your data and your digital assets are not safe unless you own them yourself. Data breaches are happening all the time because you don’t own your data, you don’t own your virtual assets, and you don’t own anything online.
By tokenizing your data, you can own it directly and completely. Your digital ownership will be visible on the blockchain and only you will decide what happens to your digital information. This will dramatically reduce the chances of large data breaches too, as there will be a shift from storing data on huge centralized databases to individual wallets and decentralized servers.
With Elastos Hive, you can store your digital items in your own decentralized Vault. Nobody can access it but you. Imagine it as a cryptocurrency wallet, but for your data and virtual goods.
How does digital scarcity impact non-fungible tokens?
Isn’t the point of a non-fungible asset that it is completely unique?
While this is not your usual type of scarcity, a unique asset is technically more scarce than any other. With NFTs, each one is one-of-a-kind. While you can get similar NFTs, no two are the same. This means that if two people or more want one NFT, then they will have to outbid each other. This is why NFT marketplaces and auction houses like Elacity exist.
There is no such thing as digital abundance when it comes to NFTs. There is just the individual NFT and any demand that it creates. This is one of the reasons that in-demand artists like Beeple regularly sell NFTs for astronomical prices.
However, there are other non-fungible tokens that are identical in utility and only different to distinguish ownership. To revert to the eBook example, if there are 1 million eBook NFTs made available, each one would contain the exact same text. They would only differ in their identification numbers such that each could belong to a unique wallet as a unique asset.
There may be price differences, as each individual may value the book differently, but as the actual content of the eBook will be the same, the most likely outcome would be the free market finding a price in the same way that it does for other crypto assets. Collectors may prefer to have the first mints in the same way that first editions are more valuable in the physical world, but this will depend on many factors, and will vary from item to item.
How does Elastos intend to leverage digital scarcity?
Firstly, Elastos has similar tokenomics to Bitcoin. It operates on a disinflationary model where ELA will reach its maximum supply in almost one hundred years. The network is secured by a hybrid consensus mechanism of merge-mining with Bitcoin (AuxPoW) and also Delegated Proof-of-Stake (DPoS), which is currently going through a major upgrade.
In addition to ELA’s tokenomics, Elastos is in a prime position to take advantage of digital scarcity in the web3 era. The technology behind Elastos enables developers to build dApps and other tools with integrated decentralized storage. This means that Elastos is being built in preparation for the tokenization of digital world goods – and more importantly, for their ownership. It provides both security and the necessary infrastructure for genuine digital asset ownership.
Elastos is ready to tackle big problems like Digital Rights Management (DRM), as well as smaller issues like how to verify ownership over virtual avatars and other non-physical art.
Governed by a Decentralized Autonomous Organization (DAO), Elastos is the decentralized and democratic backbone of the new internet. Its entire aim is to return value to the user – to give rather than to take.
Does digital ownership really matter?
Do you care that social media companies are making billions of dollars off of your data? Did you even know? What if a cut of that could be returned to you? Now you might be interested.
By owning your digital information, you can choose to keep it private – as is your undeniable right – or you can sell it to marketers. You don’t give the data away as such; rather, you issue access to it.
Marketers buy your data right now without your knowledge or consent: what you like and dislike on social media, which pages you follow, what you type into Google or YouTube, what you say when you’re in the privacy of your own home (but your phone is still listening…). This is how Big Data companies make their money. Without knowledge of your data, marketers are unable to create targeted advertisements. They need your data.
But what if social media companies and other Big Data companies didn’t own your data like they do now? What if you owned all your data? It is yours, after all.
Data is arguably the most valuable asset on the planet. By utilizing blockchain technology and leveraging digital scarcity, we can securely store our own data and sell it as a tokenized asset to marketers for a price that we feel comfortable with.
Or, as mentioned earlier, you can tell them to stuff it and keep your data for yourself.
With Elastos, the choice is yours.