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When you look at what is happening with NFTs, it seems absolutely crazy. Why are people paying millions of dollars to buy digital monkeys?

First things first. There is undoubtedly a significant amount of FOMO (Fear Of Missing Out) driving the NFT speculation. And yet, there is something fundamentally transformative that NFTs, decentralized finance (DeFi) & decentralized autonomous organizations (DAOs) are driving. It is hard to understand where the value stops and where the bubble starts. You need to see behind the surface to see what is really going on.

At the heart of this transformation is web3, expanding the application of property rights to the digital world. Web3 re-defines what we consider assets, how we convert them into capital and how wealth is created. The promise of web3 is to unlock capital in assets other than physical assets from human capital to social and brand capital.

Take, for example, social capital. People put in money into NFT projects not to own stickers and digital images, but to join exclusive clubs and communities with others who own similar limited edition digital images. In a world where the number of Twitter followers is an asset, such club memberships can be lucrative.

In the 2001 book, The Mystery of Capital, by Peruvian economist Hernando de Soto, the author’s key observation was that ‘assets’ such as real estate in the developed economies lead a parallel life as capital outside the physical world.

The key innovation that enables this is the formal property system which begins to process assets into capital by recording the ownership into a ledger and embodying it in a title. Since each title is unique and not-interchangeable with another, we call it is non-fungible. Since the title is a token of ownership, the property title was perhaps the earliest non-fungible token (NFT).

The importance of the property title as a token of ownership is that it can be put up as collateral for loans. The property owner can now access capital for starting a business. This is what gives assets a parallel life as capital outside the physical world.

The property rights created for physical assets, the title deed and the processes to use such deeds as a collateral took decades to evolve. But their impact was transformational. Economies which did this, unlocked the potential energy in their assets creating engines of growth.

The biggest impact of web3 is the ability to extend the process of creating any asset into capital - virtually on demand. Today, it is easy to create a trusted ledger of ownership of any asset using blockchain and embodying it in a title as an NFT.

This NFT can then be used to be put up as collateral for a loan. In web3, the loan is facilitated by digital escrows called smart contracts, which are programmed to lock the NFTs as collaterals and release cryptocurrency-based loans and vice versa. This is one of the innovations of DeFi, which is called thus since there is no bank or financial institution involved in the process.

This is the real aha! moment.

What web3 is fundamentally about is the ability to create economies on demand by converting any asset into capital. NFTs can be made from cultural, social and even intellectual capital.

Across various applications and use cases of NFTs, we see a consistent theme. The ability of NFTs to represent digital assets which can be verified, bought, sold and collateralized digitally. In less than a decade, expect every physical and digital asset to be represented as an NFT that can be bought and sold in real time across the world.

Just like capital can flow seamlessly across international boundaries today, web3 will allow any asset to be traded in real time across the world.

Assets like intellectual property, human potential and social influence can now be converted into capital. The importance of these asset titles (as NFT) is that as a token of ownership, it can be put up as collateral for a loan. The property owner can now access capital, which is what gives assets a parallel life as capital.

The global nature of the digital economy that web3 is creating will break down international boundaries for commerce, creating new efficiencies, unlocking capital tied up in assets and creating new winners and losers.

Praphul Chandra is the founder and CEO of enterprise blockchain platform KoineArth.

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