As a science fiction geek, life changed when Star Wars was released. Like many kids, I soon had a complete set of action figures representing my favorite characters from my favorite movie, which took place long ago in a galaxy far, far away. The full set, including Luke, Leia, Obi‐Wan, Darth Vader – I mean all – were my toybox's treasure. As time passed, some were lost, some were destroyed in a house fire, and some were kept for years and then just given away. Little did I think that 45 short years later, these figures could be worth hundreds, thousands, or, in some cases, hundreds of thousands of dollars. An auction in 2019 demonstrated a Ben (Obi‐Wan) Kenobi figure that sold for $64,900 and a Darth Vader action figure that sold for $62,823.20.¹ Of course, not all figures command these prices. A quick Etsy search shows that I can find a 1979 Boba Fett figure for as little as $75, while the same figure in mint condition in its original packaging can be found on eBay for $575. However, this is quite different from the vintage “Boba Fett J‐Slot shooting prototype,” which sold for $204,435² in 2022. The difference? Scarcity.

Every collector pretty much had the basic Boba Fett figure, so, while we don't know exactly how many were made, we can reasonably assume there are millions in circulation. If you want one, it's not too hard to get. Of the J‐Slot shooting prototype, however, only 30 were ever made, which points to the $204,435 price. That, my friends, is the power of scarcity.

The simple fact that has stood the test of time is that if there aren't many of something, and many people want that something, then that will tend to drive up prices. Scarcity creates something special. Something rare. Something that not everyone can have and, therefore, something that is quite desirable. Scarce items can be of limited quantity or can be as exclusive as one‐of‐a‐kind. Think Mona Lisa. The Hope Diamond. Starry Night. You get the point. These are one‐of‐a‐kind items that are impossible to replicate and, to the right people, are priceless.

Provable Scarcity

Let's break down this concept of scarcity a little more formally. Let's define something scarce as having two specific characteristics. The first characteristic is that it must be rare AND hard to acquire. If there are a lot of copies of something, if it is plentiful, then it's just not scarce. Let's look at gold, for example. Gold is rare. There's a limited amount on the planet. Importantly, it's also very hard to get. If you could just go to your backyard, dig a hole, and find a deposit of gold, it wouldn't quite have the same value, would it? The corollary to this is that something isn't scarce just because you say it's rare and hard to get. It's scarce when it is provably scarce. This means that you can prove that an item, whatever item that may be, is indeed rare and hard to get. Artists do this all the time with limited editions, issuing say, a run of 100 signed prints of a particular image. That establishes rarity. In addition, if these prints are only sold at an auction, or through very specific dealers, or have so much demand that they sell out as soon as they hit the market, they in turn also become hard to get. This is demonstrable.

The other component to scarcity is that there must be acceptance that the item has value. The fact is that my hand‐painted pet rock could be one of a kind – but if nobody wants it, if it's not generally accepted as a thing of value, then it ultimately has no monetary worth. Likewise, there may be a limited run of photographs that my neighbor made (great neighbor, great photographer), but if no one wants her work, if there is no acceptance, then there is no real value. Items that are produced in limited numbers, that can be proven to be rare and hard to get and are something people want – those, we can call provably scarce. It's human nature to want things we can't have and, as such, provably scarce items have the greatest chance of value appreciation.

We see this concept of provable scarcity in watches, cars, art, even wine! In fact, it may surprise you to learn that rare and desired wine, on the whole, has appreciated at a rate of 13.8% per year (see Figure 16.1). This is more than the rate of return of the S&P 500, which has a history of returning 10.6% per year.³

As if that's not enough, according to the ArtPrice 100 index, rare art has outpaced the S&P 500 by 250% from the year 2000 to 2020 and was up 36% in 2021 alone.⁴ This is the power of scarcity, and an example of how provable scarcity (rare wine) over time has more value than production capital (investing in stocks).

Digital Scarcity: The New Frontier

It's easy to determine scarcity in the physical world. What about the digital world? This has been another thing entirely, as digital items are generally very easy to replicate. In many ways, this was one of the advantages that the Internet provided, the ability to share information with anybody, anywhere, at virtually no cost. Email revolutionized communication, and it was easy to send a message or a digital picture to a friend, a colleague, a neighbor, or, by publishing it on social media, share it with the world. In most cases take a right‐click of a mouse and you have a digital copy that can be shared.

What this sharing did not address, however, was this concept of a unique digital object.  You see, digital objects exist today. Think of them as something that's represented electronically. Think of a file on a computer – these can easily be copied and transmitted. They can be documents, data, or graphics, but in general there is nothing to demonstrate their uniqueness. In addition, digital objects can include items from a video game, for example, or the number of dollars that your bank says is in your account.

This is the breakthrough of blockchain, as now we can have provably scarce digital items. Provably scarce digital items are items that cannot be properly copied in their entirety and/or are not controlled by a central entity like a bank or a video game. They are objects that reside in a cryptographically secure wallet that only you control and, at the same time, are provably scarce. This was not possible before blockchains. This is important for many reasons.

The Case for Money

So now, let's look at bitcoin. It follows the principles of “sound money”; however, the most important of these principles is provable scarcity. Bitcoin, as discussed earlier, has a supply limited to 21 million bitcoin, approximately 19 million of which are in circulation.

This is a fundamental principle of sound money: sound money must be scarce. In this case, bitcoin is provably scarce due to its fixed reserve pool (see Figure 16.2). The reserve pool of bitcoin has been limited by design, as is part of the actual software programming. We know this is the case because the software is transparent, everyone can see it, and all miners must adhere to it in order to be miners. Slowly, tokens from this pool are released onto the network. Tokens are rare and hard to get (miners compete for allocation of supply) and, over time, we've seen a rise in demand as bitcoin has become more and more accepted while, at the same time, the available supply has been shrinking. Provable scarcity. Imagine, if you will, that bitcoin had an unlimited supply available. It would then cease to hold any value because there would be no provable scarcity. Notably, bitcoin is an example of a fungible scarce object.

We discussed briefly earlier: fungibility is a property of nonuniqueness. Anything fungible can be swapped with any other like fungible item and it has the same value. This could be a bitcoin, a can of cola from a store, or even a U.S. dollar. A dollar is a dollar, a can of cola is a can of cola, and, likewise, a bitcoin is a bitcoin. They are, ostensibly, the same. Not particularly unique in and of themselves when compared to each other. Specifically, no bitcoin is more or less rare than any other bitcoin and no bitcoin is more or less unique than any other bitcoin. Fungible items can be provably scarce, such as bitcoin, or not provably scarce, such as cola (it's pretty easy to get a can of cola almost anywhere in the world) or toilet paper (except in the middle of a pandemic). A bitcoin can't be copied with a mouse click, and blocks, once written, can't be changed.

Scarcity in the Metaverse

The metaverse opens up a whole new world (literally!). It's a digital‐only world inside of which we can participate. It's easy to demonstrate ownership and provable scarcity in the physical world, and that gives things value, and now we can move that into the metaverse. This is the evolution of the use of non‐fungible tokens (NFTs).

We see that in art, real estate, even sneakers (which are cult collectibles), with the most valuable pair in the world having originally retailed for $60 and now on sale for $90,000 at the time of this book's printing.⁵ Well, we can have that same phenomenon now in the metaverse. Imagine, if you will, that you put on your VR headset and are now walking in a virtual world. You're going to meet some friends, one of whom lives in Paris and another in Australia, for a virtual game of cards. What will you wear? The biggest brands in the world – Nike, Adidas, even Louis Vuitton, are betting that you're going to want to go into your virtual closet, put on your virtual sneakers, sling your virtual Louis Vuitton bag over your shoulder, and know that each item is provably scarce. That's right. Your kids are doing this now in video games – they are buying digital goods that have provable scarcity, and the big brands believe that before long everyone will do the same just like they do in the real world.  This may sound crazy, but the point is that we now have the possibility of supply and demand of goods.

NFTs – Provable Uniqueness

At this point we need to touch on NFTs, non‐fungible tokens. Fungible means easily replaced by another item of the same kind – interchangeable, as it were. So then, a non‐fungible token is a token (a digital object) that cannot be swapped with any other object, because it is unique.

NFTs get to be NFTs because of provable scarcity. In fact, they are in a very special subset in that they are provably unique. An NFT may not be exchanged for another NFT like a bitcoin or a can of cola, because each NFT is a unique, one‐of‐a‐kind representation of a digital good. This is why our scenario works. Your avatar can only put on its digital Nike sneakers because it controls the NFT for that pair of sneakers. Likewise with the Louis Vuitton bag. This creates a whole new dimension of digital ownership, for, unlike right‐clicking on the Internet, that pair of sneakers can't be copied and used by anyone else. Now, you could let someone borrow your digital sneakers by sending them the token, but they then control that item and, just like in real life, if they don't give it back, you don't have access to it.

So, to sum all this up, provable scarcity is at the heart of supply and demand, and blockchain allows us to translate this concept into the digital world. Understanding this is fundamental to understanding why properly defined tokens can have value. If a token is desired, and provably scarce, it can retain or grow in value. If it is not, well then, it simply won't.