The Abundance of Digital Scarcity

The Abundance of Digital Scarcity

One thing I've noticed as I've fallen down the proverbial rabbit-hole into the crypto space is the obsession over scarcity. In Bitcoin, the obsession is about "only 21 million", digital gold, and sound money. In Ethereum it's the obsession over EIP-1559, a fee-burning mechanism that will have a deflationary force on what has always been an inflationary supply. In NFT's it's edition sizes. In DeFi it's tokenomics.

This isn't surprising. More than anything else, crypto solved the problem of digital scarcity - which from an economics POV is groundbreaking. Everything else such as "trustless", "decentralized", "anonymous", etc is secondary and a means to solve that problem. Scarcity drives all economic activity and in the digital economy it was a much needed innovation. Without true scarcity of digital content and assets you don't have the concept of ownership. It's something that is difficult to even comprehend because the physical space is scarce and finite. The best thing I can think of is garbage - the quintessential example of an "economic bad". It's something that is always increasing in supply and everyone literally can't wait to not own.

This doesn't mean that we can't enjoy the abundancy of access to information that we have today such as Netflix, Spotify, or podcasts. It merely means that it will be harder for those who own large pools of non-digital scarcity to "let" us to dump all our "trash" in their landfills and then charge us to mine through it for the "treasure".

Yet, from people both inside and out of crypto, nobody seems to understand the implications of such an innovation. This like all technological innovations and revolutions it is going to lead towards an abundancy of the thing it created - in this case digital scarcity. We are entering the golden age of scarce digital content assets in which individual digital content and assets are scarce unto themselves but digital scarcity will become much less rare.

Outside of crypto people look at Bitcoin and get hung up on the "sound money" meme and ignore the "sound digital economics" truth lying underneath it all. Many inside of crypto anchor to their scarcity - ignoring everyone else's precious scarcity.

In both cases, people are ignoring the demand side of the equation - importance. Importance can mean many things from utility to aestetics to cultural significance to just plain cool. Importance is inflationary with time but not everything can be important. Importance doesn't necessarily have to be scarce within itself - it just has to be scarce within the attention space of other important things. Importance is not a "winner-take-all" or even a "winner-take-most" market. At periods of time it may seem so as importance needs attention. Bitcoin is important, but Bitcoin isn't going to be the only important thing. Cryptopunks are important but they are not going to be the only thing.

The transition from thinking about valuing assets based on scarcity to valuing assets based on importance will be a tough one with many opportunities along the way. This is also why I'm bullish on NFT's, as that is the trade.