The Standard of Uniqueness

– an interview with William Entriken

William Entriken is the lead author of the ERC-721 standard for non-fungible tokens. In this interview, he explains why developing a token standard was crucial for the NFT space. Also, he talks about exciting use cases for NFTs, including digital art, product authenticity, in-game assets, and customer engagement.

By Jonas Kasper Jensen & Michael Juul Rugaard

You were the lead author of the ERC-721 standard for NFTs that was implemented on Ethereum in 2018. How did you get involved in this work? 

I started the same way everybody else did by forking the existing draft ERC-721, which did not have recent progress into my own document (ERC-841). From this point, I connected with everybody interested in the topic via chat, conferences, and phone calls until I could understand all the use cases for the next ten years and what it would take for us to work together. The result was a document, written in one voice, which merged into replacing the existing draft with support from the original author Dieter Shirley. Since then, I’ve never stopped my role of advocacy, teaching and implementation around non-fungible tokens.

What problem did NFTs solve back in 2018, and why was the standard made in the first place?

There is a slightly different answer for NFTs and the standard.

The problem with digital collectables is permanence. If you own football cards and did your part by protecting them in sleeves, they are probably as good as new, maybe with some fading and dust. You can easily find baseball cards 100 years old at auction right now. This is important to a collector. But digital things? Anyone old enough to have kids has probably lost access to more email accounts than they have kept. 

We expect the computer to lose important things; unless they are embarrassing, then those seem to be kept forever. This is the starting point, and now we are asking people to pay money for a digital collectable. Big money. Life-changing money. For artists that are brand new. And who probably won’t be focused on in a few years. How do you make that sale? Easy! You set up a global network of redundant, fault-tolerant computer servers, programmed to respect simple and transparent rules for your collectables, and then as a community, you pay the operators USD 1B per month to respect these rules. That is what non-fungible tokens on a distributed ledger like Ethereum are.

The problem with an NFT standard is slightly different. In 2018, there were five different standards for NFTs at some level of publication and plenty more that were kept private. For an individual author, there are many compelling reasons to write a standard. 

As a community, we have only two goals for writing any standard — promote the cause and stop fragmentation. If you have seen the source code for OpenSea, Flow, or other NFT trading platforms & wallets (I am not claiming special knowledge here), you will see a manually written, one-off code to support every NFT from 2017 and before. This means that everybody else needed to update their code to support it every time you released a product. 

If you were a new indie artist and everyone else was very busy in the NFT space, this made it impossible to launch a product. After the standardization, OpenSea, Flow, and others can simply support ERC-721, and all new compliant projects will become compatible. Also, we have avoided competing standards from emerging, which means that all these products will continue to work into the foreseeable future.

One of the early use-cases of NFTs was tracking the provenance of physical artworks, but to my knowledge, this use-case is still not very widespread. On the contrary, the digital art community has absorbed the technology and made it a global phenomenon. Did you expect the digital art community to embrace NFTs to the extent it has done?

Digital artwork is a great use case for NFTs. The guarantee of authenticity and provenance is very valuable, and great tooling makes it easy to adopt. This really took off. Other physical products where authentication is important is another good use case. If you buy a Breitling watch today, your certificate of authenticity is an NFT. This destroys the market for fake certificates of authenticity and is another no-brainer use case. Bringing Breitling online takes time; plenty of other important brands are in this pipeline. But physical artworks require a different model. If the artist is not alive, there is no one specific entity that can authenticate the artwork. 

Why do you think that NFTs have become so popular among digital artists and collectors of digital art?

Well, collectors buy collectable things for three reasons:

1) To have them, utility (“I bought the Mona Lisa to cover a hole on my wall that I didn’t feel like spackling”)

2) To flex (“I set my avatar to a CryptoPunk so you know I have at least USD 250,000 in liquid assets”)

3) To support the creator (“I bought a Su Square so William can travel promoting NFTs and the future :-)”)

There are also investors and speculators that might not be collectors.

NFTs support these specific use cases in special ways. For utility, you can be guaranteed permanent access to your collectable, unlike any old video games you might own that stopped working because the game company server is offline. Flex is guaranteed because it is easy for anybody to verify your ownership of an asset. Supporting the creator is also possible because you can be confident the creator gets full payment without middlemen if you know their account.

Now that blockchain NFTs have made so much progress on these value propositions, expect to see similar products that don’t use blockchain and work in a similar way.

In an interview we did together in June 2019, you mentioned that NFTs could be used in industries beyond the art market, such as the insurance market. Are there any of these use cases that you see unfolding right now, and if so, are there some of them that you find particularly promising? 

There are plenty!

– The Mexican state Quintana Roo endorsed a project which now tokenizes COVID-19 lab tests to prevent fraud.

– Microsoft is using NFTs to track royalty payments for games sales and in-game purchases.

– National and supranational governments have released NFT stamps that have cash value in their legal currency: Austria Post, Croatian Post, United Nations Postal Administration, Royal Gibraltar Post Office, and coming soon, Swiss Post.

I’ve also seen supply chain transparency, pharmaceutical tracking, and non-artwork collectables in the pipeline.

Regulation is an essential element of the token economy, whether we like it or not. Have you given the regulatory side of NFT any thoughts recently? The thing is that some issuers and some trading platforms seem to forget or perhaps ignore the risk that some types of NFTs could eventually be deemed securities? 

Because I created an NFT project for sale, this is super important to me. Creating a token or any product for sale requires careful consideration of your product and how people perceive your product. For example, Su Squares are simple 10×10 pixel advertising blocks that I sell on my website. I am extremely careful to articulate the value proposition—it is an advertising block. On our Discord, we ban any discussion of secondary market price speculation, price appreciation, or coordinated buying/selling tactics to influence the secondary market price.

I have reviewed multiple peer projects that are very similar to mine. One of them was afraid to do any advertising because a lawyer advised that they may be acting as a security. As for my own project, I go to bed at night (if kids allow!) entirely unconcerned that anybody will think Su Squares are securities.

In the United States, the Howey test is very clear and is the gold standard for evaluating if you have a security. In Switzerland, FINMA also has very clear rules. These are typically the preferred jurisdictions, but even other countries are now making things clearer. It may surprise most people, but in general, governments are very approachable. You can call the regulator on the phone, share specific details about your project, and they will give you an opinion, in writing.

It seems that as long as a 1-to-1 relationship between an asset and the NFT representing the asset exists, the risk of getting into a regulatory problem with the securities law – for instance, in the US – is low. But if you start fractionalizing an NFT and create what has been called F-NFTs (fractionalized NFTs), then you are probably entering a more dangerous path in terms of regulation because your tokens might be deemed security tokens. Do you have any views and comments on these regulatory aspects?

In the United States, we have the Howey test. I won’t quote it here, but it is 17 words, comprising four criteria. All fungible tokens, semi-fungible tokens, fractionalized tokens, and fractionalized baskets probably count as securities by default. So it is the projects’ job to explain why they are not securities.

Remember that the government is made of people and care very much about your bona fide intent. So you want to make this clear from the beginning.

More and more, I think of NFTs as a kind of foundation for tokenization. Every tokenization process begins with creating a non-fungible, digital, and blockchain-based deed in the form of a piece of computer code called a token. And perhaps what we mean with the phrase ‘tokenization of everything’ is that every non-fungible asset in the world – digital or physical – eventually could and perhaps will be registered as such a digital, blockchain-based deed – by an NFT. And if this is correct, then NFTs are maybe the most critical types of tokens for the future of the token economy. Is this just slightly correct, or is it far out?

What you are describing is a decentralized, officially-recognized system for digitally tracking assets. This system has been in place for about 500 years generating NFTs.

What?

Yes, it’s called notarization. Great Britain codified this in Common Law, and it allows licensed private actors to record the ownership of goods into numbered notary ledgers. This is such an important concept that I start all my blockchain classes with this topic. But yes, as record keeping and fraud prevention get cheaper (e.g., blockchain NFT and other systems), they will get more popular. And also, as the government starts accepting these records as official, you can expect more legal protections, and taxes, based on them.

William Entriken’s Disclaimers:

  • Breitling is the customer of Arianee, a client I advise.
  • Su Squares is a project I founded.
  • Quintana Roo is cooperating with GenoBank.io, a previous client I advised.
  • I may own NFT stamps in one or more of the above projects, and I have no intention of using them in 2021.
  • Microsoft is a client of EY, a previous client of mine.

Read More: What is a Non-Fungible Token (NFT)?

Standards surrounding NFTs

Leave a Reply

Your email address will not be published. Required fields are marked *