What do NFTs mean for privacy?Aug 4, 2021
As blockchain and crypto have continued to gain attention and popularity over the past year, non-fungible tokens, or NFTs, have surged into the spotlight. The first half of 2021 saw tokenized art, video clips, and various esoterica sold for astronomical prices amid frenzied interest. And although the hype has died down for the moment, a look at the technology behind NFTs shows that this is only the tip of the iceberg. These blockchain assets are likely to emerge as an important pillar of the new economy -- with important implications for privacy.
To understand all that NFTs can do, it's important to explore what they are and how they work -- and how they can be applied to much more than art and pop-culture souvenirs.
What are NFTs and how do they work?
Non-fungible tokens are unique digital assets that can be created and traded on blockchain networks. Unlike fungible cryptocurrencies, they are not interchangeable with one another. In other words, 1 ETH is 1 ETH, but no two NFTs are the same.
This uniqueness has created digital scarcity in a world of "Internet plenty." Many artists whose work has been duplicated online without permission have used NFTs to create digital "original editions." Other kinds of NFTs can be purchased and traded in secondary markets. And as non-fungible tokens continue to become more popular, innovators continue to identify potential use cases for them far beyond the art world.
Because NFTs are unique, they can represent tradeable, blockchain-based ownership rights to specific assets. They can act as digital "certificates of ownership" for real estate, fine art, classic cars -- the list is almost endless. NFTs are also increasingly used to represent ownership of new kinds of digital assets: unique, virtual objects in video games and other types of virtual worlds.
But the potential use cases for NFTs extend into more complex use cases too. Ultimately, ownership of any asset can be boiled down to a series of rights: the right to access, the right to control, to use, consume, or even destroy. Each of these rights can be minted and traded as an NFT.
Further, features like token redeemability expand NFT use cases into the so-called "gig economy". For example, tokens could be minted to grant short-term access to rental properties and shared cars. They can also support secure transactions in retail markets.
Tokenizing ownership rights isn't about "digitizing for the sake of digitizing." NFTs stand to make markets more efficient, secure, and transparent; they can also enable secure identity in the online world. Together, these two forces can -- if properly implemented -- directly support the realization of a privacy-focused Internet and decentralized digital economy.
NFTs reduce friction & privacy risks in financial markets
NFTs have the potential to become the basis of many different kinds of essential transactions. Real estate is one example: the terms of a contract could be set so that the token representing the real estate would only be transferred after the buyer has deposited the required amount of funds.
As the example shows, an important advantage of NFTs is their ability to reduce friction in markets, particularly those that traditionally suffer from bureaucratic red tape. This is because transactions on blockchain networks do not need to be cleared by intermediaries. In addition to reducing the amount of time and money involved, this lack of middlemen also reduces risks to privacy.
The role of clearinghouses, buying agents, retailers, wholesalers, and other intermediaries was originally to guide commercial and financial markets and to prevent mishaps. However, each of these intermediaries introduces a potential point of failure in the transaction process. Any centralized institution can be compromised. Therefore, transactions settled through an intermediary are vulnerable to hacks, system errors, and other possible problems.
Not only are intermediaries disruptive to the transaction process -- they also put sensitive information at risk. In addition to large amounts of money and other assets, intermediaries handle high volumes of personal financial and KYC information.
Many companies are required by law to collect and store users' personal data to verify it. Users must hand over their names and phone numbers, as well as their home and email addresses. They are also frequently required to share images of passports or other forms of photo ID.
The need for this kind of "piecemeal" identity verification can be found across the Internet. People must manually enter our personal information, bit by bit, into countless web forms. Not only is this process tedious -- it also creates unnecessary privacy risks. In addition to being stored on centralized servers, personal data is vulnerable to spyware and phishing attempts during the process of sharing it.
NFTs have important implications for secure, private identity online
Some centralized Internet services have attempted to reduce the risk and inconvenience of identity verification by offering centralized authentication services. For example, Google and Facebook offer their users the ability to log in to thousands of websites and applications using their accounts (e.g., "Sign in with Google").
These authentication mechanisms may simplify the process of identity verification -- and, in a sense, offer some level of privacy protection to users. However, this approach underlines the fundamental flaw in how centralized systems interact with personal data: users don't truly own their identity. As long as this is the case, true online privacy will not be possible.
By contrast, NFTs do not rely on centralized intermediaries to verify and store sensitive data. Instead, transactions can be made directly between buyer and seller using smart contracts. And the security of smart contract-based transactions can be further enhanced with the introduction of another kind of token: NFTs representing secure, private, and user-owned digital identity.
NFT-based digital identity can strengthen online privacy by reducing the number of instances where personal information is directly shared with third parties. Using this technology, it is possible to create identity mechanisms that verify and collect necessary data in a decentralized manner -- without ever sharing it directly with counterparties. Effectively, NFTs can make it possible to verify that a person or entity meets certain criteria without actually sharing specific information that could be vulnerable to being compromised.
Can NFTs help build the "Privacy Economy"?
NFT-based identity could be used to tackle both data ownership and quick verification across the web. Instead of using centralized services like Google as the "keys" to identity across the Internet, personal data can be stored inside non-fungible tokens that interact directly with smart contracts. With the permission of the user, the smart contract could verify necessary information without ever exposing it to a third party. And because smart contracts are transparent, it would be extremely difficult to design a hidden "back door" that hackers could exploit to steal or spy on information.
The concept of connecting private, NFT-based identity with ownership rights on a macro level offers tantalizing possibilities: people could efficiently and transparently trade ownership of assets without compromising their privacy. This can also be applied on a micro level. If tokenized rights can be used to make goods and services in the gig economy more efficient, tokenized identity can also be used to make these markets more private and secure.
Using NFT-based identity, consumers could securely pay for goods and verify personal information without directly sharing it with centralized service providers. NFT identity could make renting a car, reserving a hotel room, or booking an Uber into "trustless" processes. Everyday retail transactions could be deconstructed using NFTs: consumers could purchase the NFT-based ownership rights to the goods and services they need, and use tokenized identity to share relevant information with service providers -- without compromising their privacy.
The prospect of NFT-based identity and ownership rights raises the possibility of building a truly decentralized, secure, and private economy. Still, in addition to the potential to reshape the way assets are traded and identities are managed, it is important to consider potential risks and challenges in the ways that NFTs can impact privacy rights online. Specifically, NFTs have important implications when it comes to anonymity, pseudonymity, and the "right to be forgotten."
NFTs, pseudonymity, and anonymity
The European Union's General Data Protection Regulation (GDPR) describes the right to be forgotten this way: "The data subject shall have the right to obtain from the controller the erasure of personal data concerning him or her without undue delay and the controller shall have the obligation to erase personal data without undue delay." In other words, service providers must not store personal data online any longer than is absolutely necessary.
The immutable nature of blockchain technology presents a challenge to this imperative, since data that is written to a blockchain cannot be removed or changed. Therefore, when an NFT transaction takes place in today's market environment, public keys and transaction details are permanently, and publicly, recorded.
The immutability of blockchains applies to NFT transactions as well, and reflects a broader truth about the way blockchains like Ethereum are designed. While they can be a powerful tool for privacy, transparency, and autonomy, since they are public ledgers, they are not anonymous. Ethereum, for example, records all transactions on a record that is accessible to anyone, and makes the public key associated with the wallet making any transaction visible. While this pseudonymity doesn't explicitly link transactions to real-world identities, it makes enough information public that it could conceivably be possible to identify the person behind a series of actions on the network.
In an economy based around NFTs, it is conceivable that millions of transactions, big and small, could be immutably, pseudonymously recorded on a public ledger in this way. Renting a car, renovating a house -- even buying clothing -- could all take the form of a transaction on the public ledger. In this scenario, additional steps would be needed to ensure our economic activity, and our identities, remained truly private.
Fortunately, the technology to achieve privacy in a world of NFTs already exists. Orchid's design takes into account the public nature of the Ethereum blockchain on which the network is built, and introduces novel concepts to maintain a high level of privacy. Orchid's layer-2 scaling solution, known as probabilistic nanopayments, allows payment to be made in a random way that still appropriately compensates those selling bandwidth on the network. Because only these random-seeming payments are recorded on-chain, the true nature of user activity is obfuscated and privacy is strengthened.
By combining the innovative capabilities of NFTs with strong privacy solutions like nanopayments, it is possible to design a new, smart-contract based economy that prioritizes efficiency, access, transparency, and privacy -- encoding these values directly into the processes, tools, and assets that underlie the financial system. And while NFTs remain a new technology, Orchid is already working to explore and demonstrate how they can help further the cause of digital privacy.
NFTs and Orchid
Recognizing the importance that NFTs could have for the future of online privacy, digital market efficiency, and Internet culture, Orchid is actively engaging NFTs and their creators. The first Priv8 Virtual Privacy Summit in March 2021 included an NFT drop with custom art by our own Chad Soren Harper.
NFTs can help drive the growth of a privacy-centered Internet. A privacy economy built on NFT-based identity and tokenized ownership rights aligns with Orchid's vision of a privacy-centered Internet. These assets can be a meaningful part of the infrastructure that will support decentralized identities and economies, leading to stronger privacy and a freer Internet for all.
Orchid is working hard to restore the Internet as a place of freedom and exploration. Our decentralized, blockchain-powered VPN marketplace helps people around the world reclaim their right to free, open, and private Internet exploration.
Privacy is Orchid's mission. NFT users and creators can use Orchid to create strong privacy conditions for minting and trading tokens. Orchid is highly accessible and easy to use; people can purchase bandwidth using nothing more than an ordinary credit card. The service is pay-as-you-go, so users are only charged for the bandwidth they use. And now, it only costs $1 to get started.
Download Orchid today to start exploring the Internet freely.