I like this line of thought.
There’s an alternative to this approach to solving compressibility, determinism, and uniqueness, which comes from embracing the idea that all tokens are non-fungible.
I have perhaps a very long post to write about semi-fungibility, but it’s summary is, “most tokens are neither fungible nor non-fungbile, they instead occupy a point on the spectrum of fungibility.”
For example, USD is perfectly fungible until you need to deposit more than 10k into a bank at one time. At that point its effective fungibility is limited because the U.S. government wants to prevent money laundering and terrorist financing.
On the other hand, even perfectly distinguishable items can have fungible properties. E.g. the famous rai stones on the island of Yap. These stones were so large they couldn’t be physically transferred to one another. Ownership was instead tracked through community consensus.
In other words, I think the emphasis on fungibility is overstated. Instead, what’s interesting is the degree of fungibility and the price inference mechanisms to make fungibility possible.
My claim is that everything becomes perfectly fungible, including NFTs, as long as you have a sufficiently subscribed price inference mechanism. I think this is non-controversial, but it doesn’t seem like what it offers has been metabolized.
To give a quick example: let’s say there’s an NFT generating canister that outputs an image with 4 pixels that are each 1 of 4 colors. The probability of a red pixel is 4/10, of a blue is 3/10, of a yellow is 2/10, and a green is 1/10. An NFT image with all green pixels would have low, 0.01%, probability of occurring, it’s the least probable image. Let’s say an all green NFT is generated. Will it be highly desired or not?
Right now, the default price inference mechanism that we reach for is scarcity. The rarer the item, the more highly we value it. But what if instead the market had a strange preference for the color blue (as it should, blue is better. HODL BLEU becomes the mantra.) A completely blue image wouldn’t be all that uncommon, still quite rare, but not as rare as the all green. However, the preference for blue would still drive up the overall price. Maybe this is what Vitalik means about memes: if each person believes that every other person values blue above all else, then blue would have more value. The value is driven (in part) by the expected fungibility of the asset once you own it. Fungibility is about subscribing to a price inference mechanism.
So, memes are a mechanism to drive prices. As people subscribe to memes, the assets that represent those memes can take on value. I know this is basic, but it seems like lots of people prefer to think about NFTs and fungible tokens as if they’re different things. In reality, fungible tokens are just a class of nfts, backed by some set of memes that make price inference easy.
E.g. a government that says your dollar can be exchanged for a new one, no matter how tattered your dollar may be, has introduced a mechanism that makes price inference easy.
Notice that one way to make an NFT more accepted as a currency is to make more of them. You can either collateralize an asset with tokens, or have many similar assets, each with one token. The reason a singular and unique nft performs worse than Bored Apes is because Bored Apes is actually a fungible token. You know that others know how to value it. This is also why Bored Apes would be less successful if it were perfectly random, perfect randomness defies parsimonious valuation.
My bet is that if more people bought this idea we’d have tokens that do more interesting things. In the next post, this claim will also allows us to unify nfts and fts into a single implementation.
See this post for another example of a non-fungible, yet still “fungible” token.