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PA OPINION

Digital identity, cats and why fungibility is key to blockchain’s future

Fungibility is a word that rather trips off the tongue. If something is fungible it can easily be replaced by something that fulfils an identical function. It can be exchanged and interchanged with ease. Money is a good example of fungibility. If I lend someone £10, it really doesn’t matter if they pay me back with a different ten-pound note from the one I handed over – any ten-pound note will do.

On the other hand, if I buy a plane ticket, I can’t just pass it on to someone else as it contains information that makes it unique to me and hard to exchange like-for-like, such as my name, the destination and departure time. The plane ticket is, therefore, an example of a non-fungible asset.

Another key aspect of fungibility is divisibility. As with cash, cryptocurrencies like Bitcoin are divisible into smaller fractional amounts – you can receive fractions of a Bitcoin back after making a purchase in the same way you get change from cash (although being digital, cryptocurrency coins can be divided into far smaller amounts).

From exchanging value with fungible cryptocurrencies…

It’s important to understand the concept of fungibility because it plays a vital role in the way blockchains work.

Bitcoin and other cryptocurrencies are the most prominent uses of blockchain technology, and they’re examples of fungible tokens. If you send somebody a Bitcoin and they send you one back, it doesn’t have to be the same Bitcoin, just as with the ten-pound note.

...to information with non-fungible tokens

Where things start to get interesting is when you use blockchains to store non-fungible tokens. These can store or point to information, are indivisible, have unique properties and aren’t interchangeable. Non-fungible tokens first achieved prominence through the blockchain-based CryptoKitties game, where players collect and breed digital cats.

These cats possess unique appearances, personalities and ‘digital genetic’ characteristics. They can be bought and traded on the Ethereum platform, and 2017 sales reached US$12million with a single CryptoKitty reportedly sold for US$120,000.

Much of the value in such non-fungible tokens derives from the ability to include rich metadata about an asset, such as historical ownership details that incontrovertibly show provenance. Despite its trivial nature and some difficulties with transactional throughput, CryptoKitties demonstrated the viability of seamless trading and exchanging of digital assets on a blockchain.

A cheap way to experiment with distributed applications

Underpinning the CryptoKitties craze was a nascent standard for non-fungible tokens on the Ethereum platform – Ethereum Implementation Proposal 721. In early 2018, this was confirmed as an official and fully-supported Ethereum Standard ERC-721.

This standard is now driving further innovation to create a framework of rules, libraries and conventions for digital certificates on blockchain. This will make it easier for businesses to harness its tamper-proof and transparent qualities and create new kinds of distributed applications (dapps). And as the standard is on the Ethereum public blockchain, it’s easy for businesses to create their own experimental dapps.

These emerging standards and the evolving ecosystem of supporting technical resources on the Ethereum blockchain mean businesses can experiment with dapps and exchanging information cheaply.

Creating new opportunities for managing digital identity

So, what can we build with these new tools and standards? Because non-fungible tokens are unique and store information rather than value, they let us build proofs of identity or unique digital certificates on blockchain, with the option to store sensitive data on- or off-chain. This has the potential to hold secure and tamperproof records of births, property deeds, academic qualifications and more with no central authority needed to control or mediate access.

Beyond currency and stored value – unlocking blockchain’s potential

It’s the characteristic of non-fungibility that’s key to enabling some of the most revolutionary and disruptive applications of blockchain. Non-fungible tokens could be used in voting and elections to eliminate fraud and transform democracy. They can help organisations better know their customers through improved loyalty programmes. And customers can use them for improved warranty and licensing experiences, and directly manage the exchange of their personal data for products and services.   

For many businesses, it will be blockchain’s ability to process non-fungible tokens that will spur innovation rather than its use as a cryptocurrency.

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