What Is Digital Scarcity and Why It Matters in Crypto
When studying cryptocurrency and the technology behind it, you will likely come across the word “digital scarcity” several times. But what does this mean exactly? And why does it matter to crypto?
Digital scarcity is the process of permanently limiting the availability of a certain asset with the intention of making it deflationary. In cryptocurrency, digital scarcity is also an aspect of the security of an asset and essential to protecting individuals using the blockchain. Read on to learn more about digital scarcity in cryptocurrency and what it means for you.
What is Digital Scarcity?
Digital scarcity is scarcity as it applies specifically to digital products. If you’re new to cryptocurrency, you may be wondering why someone doesn’t just code themselves some Bitcoin to sell and become rich, and the answer is digital scarcity.
To create digital scarcity, a digital product is permanently coded so that more can’t simply be created. Rather, a finite number is pre-coded for use by miners when creating the cryptocurrency. When all of the available coding is used up, no more can be created, meaning there is a limit to the number of blocks in a certain cryptocurrency.
Because there are only a certain number of tokens that can ever be created, this creates a scarcity mindset, which is where the term digital scarcity comes into play.
Why is Digital Scarcity Important?
1. Managing Inflation
Unfortunately, most currencies in the world are inflationary—meaning if money becomes tight, a government holds the power to print more. The only exception is Switzerland, which is the only country in the world to back its currency 92% with assets following national law. Of course, there is 8% which is uncovered, but this is still better than the rest of the world, which is merely surviving on people’s trust in their currency. This is the main reason the Swiss Franc tends to be the strongest currency in the world, and while it is still affected by inflation, it is affected to a much lesser extent than any other country.
When an asset operates under digital scarcity, like Bitcoin, for example, there is no way to print more. When all the Bitcoins are created (21 million to be exact), that’s it; there is no more. Because inflation comes as almost a direct result of governments printing money, making a digital asset scarce is what helps them battle inflation in the long run.
2. Immutability
One of the reasons cryptocurrency is considered “safe” is because it is immutable. Immutable means that someone can’t simply “code” themselves more Bitcoin. Again, all Bitcoins have already been pre-coded, and when they’ve all been used, no more can be made.
Immutability is an aspect of blockchain security, as it prevents double spending and lowers the chances of fraud. Because while someone can still email you to try and convince you to give them your passwords or bitcoin maliciously, they cannot sell you “fake” Bitcoins—because they cannot make them thanks to digital scarcity.
3. Incentivization
As more and more Bitcoins are mined, the process of mining becomes increasingly difficult. Every single Bitcoin transaction is recorded on a ledger, and as it is used more and mined more, the ledger continues to grow, requiring more computing power. Because Bitcoin is deflationary (scarce), the price paid to miners as they continue to mine only increases—this is by design.
Let’s look at it this way—the more Bitcoin is mined, the more it costs to do so. If the rewards for mining a single block were never changed (thanks to an increase in value), many miners would drop out of mining as it became more expensive. Thanks to scarcity, mining continues to pay more (in exchange, not in Bitcoin) as we draw nearer to the end of mining Bitcoin, thus keeping the mining going.
4. Increases Network Strength
This is a hard concept to explain, but digital scarcity is what makes Bitcoin impossible to kill. While currencies like the US dollar continue to weaken, losing their power with each passing year, Bitcoin will never die thanks to digital scarcity.
Of course, we can’t make promises that Bitcoin will succeed either, but because Bitcoin cannot be recoded or uncoded thanks to the aspects used to create digital scarcity, Bitcoin is strong. And it will last—even if the US dollar doesn’t. If you still think the US dollar isn’t suffering massive inflation, you’ve been lied to. We discuss why governments lie about inflation more in this article.
Is Digital Scarcity Always Good?
Unfortunately, while we love what digital scarcity has done for Bitcoin, it isn’t something that automatically protects an asset from deflation. When used correctly, yes, it is good for a cryptocurrency, but in terms of digital art, like NFTs there is far more at play.
NFTs, and other forms of digital art, are immutable simply because they are unique. Sure, someone can try to copy an NFT, but the coding behind it is one of a kind—similar to bitcoin. That being said, the fact that an NFT is immutable does not protect its value in the same way it does Bitcoin.
This is because, just like in the real world, art fads come and go. So even if you have a one-of-a-kind cryptokitty, there is no guarantee you will be able to sell it. Bitcoin and cryptocurrencies have a use: meaning people see their value in hard times; the same can’t be said for art.
Remember, art is always subjective. If subjectivity changes, so does the value of the art. Even digital scarcity can’t guarantee we will always enjoy the same art, and therefore NFTs are not always deflationary, even though they experience digital scarcity just like cryptocurrency tokens.
So, while we do love digital scarcity and what it did for Bitcoin, remember that it isn’t an end-all and doesn’t guarantee a technology’s success. Just ask all of the people who still have worthless Beanie Baby collections in their basement.
