NFTs and Engineering Property Rights | Kate Sills, Agoric
Kate Sills is a software engineer with an interest in economics and law. She has been a columnist for the Cato Institute and was previously a board member of the Tezos Commons Foundation. She graduated from the University of California at Berkeley with a degree in Computer Science.
How can we create a blockchain based system for property rights?
Today we’re talking about something Im paticlary worrid about
In the US legal system, a distinction is made between contract law and property law.
Contract law is extremely permissive: parties can make contracts about pretty much anything that concerns just those parties.
Example: Michael Jordan notably had a “Love of the Game” clause in his NBA contract that allowed him to play basketball outside of the NBA in the off-season, something usually prohibited in player contracts for fear of injury.
Property law is much more limited, in large part due to the fact that property law affects large undefined swaths of people, often everyone not specifically mentioned in the contract.
Example: If I made a deal with Michael Jordan that he can play basketball on my property even after I sell it, that’s not enforceable in court because the contract doesn’t survive the transfer of ownership.
New forms of property or new ways of dealing with property create costs for people who didn’t sign that contract.
Adding weird side agreements (called fancies) makes the search costs go up because buyers need more information to make informed decisions.
Say there is a market for trading cards and Alice is selling Bob a card. Normally, Bob learns the price and pays or not. This doesn’t affect any other buyers looking at any other cards.
If Alice decides to get fancy, she may try and sell just the rights to use the card on Monday to Bob.
Bob may agree to this, but now if Susan is looking at other cards she must ensure she’s buying the card itself and not just its use, raising her search costs.
In a blockchain context, new possibilities for property appear.
One such possibility:
Bob owns a token representing a trading card. He sends this token to a smart contract that holds the token for a period of time and then sends it back.
During this time, the contract itself is in possession of the property, not Bob, and Bob is the only party involved. In current property law this sort of arrangement would not be enforcable, but with smart contracts it becomes commonplace.
Another such possibility:
Alice wants to sell the “Monday” rights to a card, so she sends the token to a contract.
The contract keeps the card and sends back 7 new tokens representing each day of the week.
This makes the day rights to a card and the card itself totally different tokens that can be told apart easily, so there are no extra search costs!
This interesting development introduces a problem though: The Tragedy of the Anti-commons
Alice wants to reassemble the pieces of her card to sell the whole card outright.
To do this, she needs to get all the day rights tokens and send them to contract. Those pieces are burnt and the contract returns the card.
What if some owners holdout for more money? What is some owners lost the keys to their rights token, rendering it inaccessible?
With smart contracts we can design tokens to prevent these sorts of situations using mechinisms like tokens that expire, multisignature access, etc.
So NFT design is truly engineering property rights!