A gentle introduction to NFTs - Part 1
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Today’s read is special: a discussion with my son. It’s quite long, but, according to people who have read it, it has “considered pacing, and tender treatment” (Thank you, Natalie, Najla, and Viktor!).
Enjoy the story (and the links at the end)!
Cover Story - A gentle introduction to NFTs - Part 1
“Are they about mushrooms?”
“What?! Haha, no! Non-fungible is not about mushrooms, not at all! I say just as he’s putting on his jacket. It’s still a bit cold, at least it’s not raining. He heard me talking not very nicely about Non Fungible Tokens.
“Why are they called ‘fungi’ then?”
“Aaaa… like fungus? No, it’s not that word. It is another one that sounds like it, from Latin, fungor, same that gave us function and defunct.” I am pretty sure he doesn’t know what defunct means. “But, high five for knowing about fungi!”.
The compliment pleases him. He’s twelve and curious. I am forty-something and always happy to share knowledge, like any decent father. We like to walk and talk. And London is great for this activity, with small quiet residential streets.. Today we are walking towards Hampstead.
“Why were you upset?” he asks as we got outside.
“I wasn’t upset. Or not upset as in sad-upset, but a bit angry, as I don’t get why people would behave like this”.
“Like what?”
“Like paying seventy millions to pretend they own a JPEG. It just doesn’t make sense...”
“Wow, so much money! Are those people insane?”
“No… I mean maybe…. I don’t know. You know, when I read in 2011 that a someone bought a pizza with Bitcoin, I laughed, thinking how dumb it is to use real money to buy numbers on the internet. And now here we are. Ten years later, somebody paid as much as a teacher of yours would make in forty lifetimes, for another number on the internet. I am not upset that I didn’t buy 100 dollars of Bitcoin back then, I am upset that I thought Bitcoin was crazy and I dismissed it. And now I am prepared to laugh and ignore the NFTs, too.”
He doesn’t seem too impressed about the social issue.
“So, Bitcoin is crazy?”
“Yes, it is, but at the same time brilliant and world-changing. Just like NFTs.”
“Are NFTs useful?”
“No... not really. Not how they are used today.”
“So, why do people use NFTs, then?”
“Because some think they can make money — a few of them really do, to the expense of many. Others think the NFTs are going to make the world better.“
“Which one are you?”
“Neither actually, and a bit of both at the same time. I envy those who make money, and I admire how brilliant NFTs’ mathematics and engineering are. But overall I think they are not good. And, if they don’t change, they are in fact unhealthy and dangerous, too.”
“Why?”
“They use a technology that is very, very bad for the climate. They also give the artists wrong motives and they make people who buy think they own something when in fact they actually don’t.”
“Oh...”
We cross Finchley Road to pass by the Marlborough Road abandoned underground station. Usually he asks me to hold him up to see the trains, but today he doesn’t. As we get nearer it, sometimes smells of trains and abandoned basements, and the ground would shake a bit when a tube passes underneath, but today the street and the tracks are quiet.
I contemplate that the hole in the ground was made for the early underground trains to release their smoke and steam from burning coal, before electricity was a thing. And now, Bitcoin, which is pure electricity, is valued more than all the underground trains in the world together. A world no longer rational.
~~~~ Fungibility ~~~~
“Do you know what an NFT is?” I ask.
I know he doesn’t.
“It’s a Bitcoin,” he speculates, quite close to reality.
“Nope, not really. It is related to Bitcoin, but like a watercolor painting is related to a banknote. They are both on paper, and sometimes people consider them valuable. And while you can swap a banknote for two smaller one with the same value, you would not split your painting or just exchange it for any two smaller ones.”
“Why not?”
“Two five-pound notes are exactly the same, and they can be exchanged for ten pound coins or one tenner. When you can exchange something for the same value, we call it fungible. Gold is fungible, money is fungible, oil is fungible, too. You care only about the quantity, not the object itself. Can you think about other fungible assets? An asset is something of value.”
“Sand?”
“Yes”
“Corn?”
“Yes, that, too. Anything is fungible if the same quantity can replace it, of similar quality of course. Bitcoin is fungible because one bitcoin is as valuable as any other Bitcoin”.
He knows about Bitcoin of being something like Euros and Dollars, but on computers. I don't want to bother him with details about decentralisation, blockchain. They are important. For now, the knowledge of bitcoins being “money on the internet” is enough.
“Anything that you cannot interchange even if they are the same in number?”
“People?”
“Haha, yes. Quite an extreme example, but yes, people are non-fungible. You cannot interchange them. What about houses?”
“You cannot change them. Not fungible.”
“Exactly. You are right. NF in NFT means non-fungible. Before I can explain what an NFT is exactly we need to talk about value.”
~~~~ Value ~~~~
“Value?”
“Yes, it’s quite complicated for me too. The simplest I can think of is how much you would pay for something, how much is worth. Also, it is often quite personal — for you a Real Madrid jersey is worth paying for, for me it isn’t.”
“Yes”
“So while it is hard to say precisely how much something is worth, there are some rules about it. For example, if many people want something, how is the price going?”
“Up”
“Exactly. And the opposite, if not enough people want something, the price goes down. Now can you think about something that is precious, valuable?”
“Hmm… gold!”
“Gold is precious, yes, it is so rare and hard to mine.. But what do you think would happen if somebody invented a machine that runs on batteries and can make gold and diamonds out of sand or rocks?”
“I would really like to have that machine!!”
“Yes, but everybody in the world would have it, it would be as cheap and available as an electric toothbrush.”
We stop to think and to breathe a bit. The hill is getting steeper towards Hampstead.
“Well,” he says, “the gold would be very cheap because everybody will make it.”
“So the more it is, the cheaper it gets.”
“What about if there is a disease that kills most of the cows, so there would hardly be any cow left to give us milk, what would happen to the milk?”
“It would get to be very expensive. Cheese, too!”
“Yes, and my flat white as well… see, the less available something is, the more expensive it gets. The easier is to make, the cheaper it is. So, thinking of that, how can you make something expensive?”
“You make sure it is hard to find.“
“Bravo! Or you make sure there are just a few of them. We call this scarcity. If you want anything to be of maximum value, what is the minimum quantity you want for it?”
“Zero!”
“Haha, yes, in mathematics, it is indeed zero. In the real world it is not zero, but one, you want one item. If you have zero items, you cannot sell. You want your product to be the only one in the world.”
“Like the special black Bugatti, which is the only one in the world?”
“Yes, like that one. When there is only one, we call it unique. Can you think about somebody that makes every time something unique?”
“An artist?”
“Yes, an artist — a sculptor, and a painter, a potter… They create something unique every time. This is why you hear about some paintings being sold for millions of pounds. They are unique.”
“But not all paintings are expensive.”
“Yes, because people don’t want any painting. We want only those who are special — because of their history, or because of who painted them. A tennis ball signed by Federer is not fungible any more. Because it’s rare, it is much more valuable.”
“If you can duplicate something for free and it would use no materials. How many can you make?”
“A billion…. No, an infinite!”
“Yes. And what would the price of that be? You know, when the more you have the less it is.”
“Little. Very little, zero?”
“Indeed, if you can make an infinite amount of something and if the cost of making another one is zero, then the price is close to zero, too.“
"But you cannot create something from nothing, can you?"
"You cannot, not in the physical world. In the physical world, to create copies you do need materials and time. The copies are not perfect, either: your hand cannot reproduce the genius artist’s stroke, and you cannot play the violin like the virtuoso musician. But what if you are on a computer and you work with files?"
We both stopped to admire a nice house... this neighbourhood is beautiful.
"If I take a photo of this house, I can duplicate it, just like that. And the duplicate is the exact, the perfect copy of the one I took. In fact, I do not even need to make a copy, because the phone already created a backup copy in the Google Cloud. And I wanted to point out another difference: when you send a letter on the post, you don’t have the paper anymore, but when you send a computer file, the receiver gets a copy of it — you still have the file, it is not deleted or anything. So in the computer world, everything is a copy. The idea of an original makes no sense."
“So on my phones everything is a copy?”
“Most of it is: the software is a copy, all the images you see in your browser, all the music you stream, all the podcasts you listen to. If you created something without backing it up, then it is not a copy, but most likely your phone operating system will copy it soon somewhere. So far, it looks like the price of anything on the computer is free, doesn’t it?”
He doesn’t fall into the trap.
“You pay for Kindle Books and you bought a film from Apple.”
“You got me!”, I said, seeing the satisfaction on his face. “Almost!”
He’s puzzled. I continue:
“When I buy an ebook, I do not actually buy the files, but the right to download and read them. Same with the films, music, phone apps, software. You do not buy the file, you buy the service. The industry tried everything to stop people from copying and sharing the files, but they couldn't, really. So the internet is full of free pirate copies.”
“So why doesn’t everybody just download the pirate copies?”
“For convenience and to pay the authors who put in the hard work. Also, it is illegal to download pirate copies.”
“But people still do it.”
“Yes, people still do it.”
Then he realised we do not talk about what I promised.
“You said that you are going to tell me what NFTs are.”
“I am. Everything we talked about helps you understand what they are. We know NFTs are not fungible, so we cannot just exchange them, because they are unique. Yet, they are a digital product, a file, a piece of information. What a paradox this is. But we’re going to discuss it after we eat some nice pastries. We deserve them.”
I spotted a nice cafe which seems to have some heavenly danishes on display.
“Can I have a hot chocolate, too?”
~~~~ End of part 1 ~~~~
Coming up next week: is it a real paradox? Can it be solved, is there a workaround? Plus what are people actually getting when buying NFTs?
Meanwhile, if you want to learn more and discuss about the topic, I organise a free live event next Wednesday, on the 31st of March 2021, 6pm London time. My guest is Michael Cholod, an expert on decentralisation and a big fan of any technology that gives us more freedom and makes our lives fairer. There is no hidden agenda, you can watch us live, ask questions, and if you want share ideas with the other attendees. 45 minutes.
NFTs. Collective insanity or a great invention?
part of the #Ain’tMagic Event SeriesNFTs look like they are here forever: a boon for struggling artists, a fairer and more secure way to redistribute and store wealth.
But are they?
#Ain’tMagic is a free event series (courtesy of Hypersay.Events) with the goal to expose the tricks behind today’s technologies and show there is no magic in there. Events are short (less than one hour), in plain English and for people who are not necessarily involved with technology.
Some interesting links
These are some interesting pages that I stumbled upon since we last met:
Age of distractions
Santeri Liukkonen describes his struggle (which I share) with concentrating and getting deep focus moments in today’s world. WI realised I am not really to read hard books any more, and I wish I got this strength. Maybe some practice? Can you still concentrate deeply? Share your frustration or your victory!I want a Computer that I Own
The author is having the realisation that we actually own less and less when buying a computer. This wasn’t the case 20 years ago, but today if you think about, and he does think about it, Google and Microsoft and Amazon have so much power on how we use our computers, especially smartphones. Do you think it is worth paying less and get more convenience, but lose some freedom?Gombe Chimpanzee War
I was flabbergasted to find auth that humans are not the only species that wage war and celebrate a killing. “The outbreak of the war came as a disturbing shock to Goodall [the researcher who documented this], who had previously considered chimpanzees to be, although similar to human beings, rather 'nicer’ in their behaviour”. Does this change your view about human conflicts, too?NFTs Are Triggering A Gold Rush. What Are They Exactly?
Michael Cholod’s article show a happier view on NFTs. You can meet Michael live next Wednesday (see above the link and the event description).
Before I say goodbye, I also want to thank again my friends and fellows from the On Deck Writing Fellowship for their time, kindness and encouragement.
See you soon!
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Read the second and final part here.