A gentle introduction to NFTs - Part 2
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Today’s long read is again special: the second part of the discussion on the NFTs.
It comes a bit late, yet it gives me the chance of sharing another great piece on the topic: a live chat with Michael Cholod, expert on decentralisation. I am very proud that Michael is also a subscriber of this newsletter! Cheers, Mike!
Here’s a quote to get you excited:
This person who paid for it [$69m], now they in effect own a cultural icon for a new generation, just like the Mona Lisa is a cultural icon of the Renaissance. Now you have a cultural icon which is a digital artist's work being the third most valuable piece of art sold for by a living artist. That is a testament to the value of digital creativity and the NFT basically just makes that legitimate."
There is a link at the end, to see the full video.
Meanwhile, enjoy the rest of the story.
Recap
For those of you who haven’t read Part 1, this is the short summary:
I am still puzzled by why people would buy NFTs;
But I was puzzled by why people would pay money for Bitcoin, yet they very much do…
Bitcoin and NFTs are related topics, they use some brilliant mathematics and, at present, they share the idea of a blockchain.
“Fungible” is the attribute of those goods or commodities which are interchangeable or replaceable with something of same quantity and similar quality - e.g. money, corn, gold, bitcoins
Non-Fungible means that something cannot be exchanged. NF in NFT stands for Non-Fungible
The value of an object is subjective, but it does follow some rules: if there is little supply, people value it more, and the opposite.
The highest value is for the unique object
On computers, everything can be copied with perfection and with practically zero cost. So the supply is infinite, therefore the value of a digital asset is zero. (or is it?)
People pay for services (running the software, watching the film, reading the book), and to repay the authors, not for the files themselves.
NFTs are unique (in a way, we’ll see how), non-fungible (we’ll see why) yet digital, and they can be “bought”, just like a yummy hot chocolate in Hampstead. Paradox?
We got the hot chocolates from a fancy place with bearded hipster baristas
Episode 2
The hot chocolate is delicious. A dark, yet creamy and not sour. It warms the hands, and the soul. What a great invention!
“So what are NFTs?” he asks.
“I have to disappoint you, but before I can tell, we need to speak about two other topics -- one is what ownership is and how to create serial numbers for anything.”
“Ownership?”
He’s a bit frustrated, I know, but today is not a day for instant gratification, it cannot be done on this complex issue.
“Yes, ownership, when you have something, when it is your property”
“I know what ownership is, do we have to talk about it? You buy the NFT and you own them, it’s simple, isn’t it? Like buying this hot chocolate.”
“You think buying these cups was simple?”
“Yes!”
“Maybe for us, it was remarkably simple, but it is only the tip of a very complex system.”
“What do you mean?”
“Think about it, how much did they cost?”
“Five pounds twenty”
“What is that?”
“Pounds? You know: money.”
“See, this is the first amazing thing: I tapped my card to their device and got something sweet in return. They trust the bank to be paid, their device talks to the bank instantly, and the bank checks, instantly as well, if I can afford to pay. And all of us in this chain trusted that this money, these pounds, no matter if they are coins, banknotes or numbers on the screen, have value. This is something wonderful we humans created. It is so amazing how it works and that it works in the first place. It took us millennia to get here. There is a lot of trust involved, and because of this, it is also very fragile.”
“Oh, indeed”, he attested.
“We have to trust each other and, more importantly the state.”
“But how can one not trust the state?”
“Here in Europe we now can trust the state. But this wasn’t always the case. In Eastern Europe for example, not so long ago, in the early ‘50s, some states changed the currency overnight, taking all the money from everybody, but of course those who had savings suffered the most.”
“Is this linked to the NFTs?” he asked, kindly pointing out the topic we were supposed to talk about.
“Yes, it is. Because of the word trust. It is about the idea of property in a universe where nobody trusts anybody. Like in post-war Communist Europe. But indeed, let’s see what property means. Is that coat you wear yours?”
He’s surprised: “Yes, duh, it’s obviously mine.”
“Can you prove it?”
“I have it on me, and it’s my size.”
“Makes sense, but not really. You can have one of your friends’ coats. It is not this that shows you own it.”
“I own it, you can ask my mother and my friends, they saw me in it.”
“Bravo! This is it. The fact that the others know it is yours makes it yours. Property is a convention we people have. We know it belongs to you. And even if I convince some to lie, it’s hard to convince all of them. And this is since forever. If twenty thousand years ago you had a goat, and your fellow villagers knew it was yours, anybody trying to snitch it would have been punished for theft. It was a mutual service for them to protect your property, in exchange for you protecting theirs.”
“But what if a strong man with a big bat came and took it?”
“If he had power and he was armed, then everybody would know that it wasn’t yours any more. It is a transfer of property; immoral, illegal, but still a transfer.”
“And if I wanted to exchange the goat?”
“You would tell everyone that you give the goat to your cousin in exchange for some land. And they would know.”
“So, many people need to know that something is mine, for it to be mine.”
“Bingo! Keep this idea, because we’ll need it later. Meanwhile I want us to think what happens if the village is really big, like for example sixty million people.”
“Like the UK?”
“Yes, like the UK. How would people know who knows what?”
“I cannot know what so many people own, like in the village. I have to write down so that I don’t forget.”
“Yes, this is a good step, but it is not enough, and sometimes is not practical. You wouldn’t want to keep a record for when someone bought a t-shirt in Inverness. For small items, we still rely on our friends and on purchase receipts to prove something is ours, but for big things, such as a car or a house, we cannot.”
“Oh, and how do we do it?”
“We ask somebody that everybody trusts, or better said, has to trust, to keep the records of who owns what: houses, cars, boats, airplanes, medical licenses, guns. Who is it?”
“The Queen?”
“What?!” That isn’t not the answer I was waiting for. But then I realise he has a very good point: “Oh, wait! You are right! In the UK, you might say it’s the Queen, as she’s the head of state and so many institutions are Her Majesty’s or Royal. But what I wanted to say is that we trust the State, as it represents, at least as an idea, of all of us, we trust the State with this important task of keeping track of who owns what.”
“For cars?”
“Yes, for cars there is a state agency -- an organisation. They have a list of all cars in the country, who owns each car and where each owner lives. This list is kept safe and it is modified only by them, and only when you show them proof you sold or bought a car. The agency replaced the people in the village about certifying who owns the car.”
He looks interested, so I continue my example with cars: “But how can they tell who owns which car, when so many look the same?”
It is a simple question for him: “They have license plates.”
“Exactly, instead of describing each car in detail, we have registration numbers. And each registration number is unique, so what they need to keep in their database is just the registration number. So the whole car was reduced and is represented by a number. You replace the physical object with the number.”
I take another sip, the chocolate is not cold yet, but pleasantly warm. And now that we’re going back, the slight downhill is adding to the overall pleasure. We contemplate the neighborhood.
“The same can be done with computer files. There is a way to create a serial number for a file. Researchers found a way to generate a number for a file so that number is unique, short and, if you change anything in the file, this serial number becomes invalid.”
“Anything?”
“Yes. Even a tiny change will change the serial number. And as a bonus, if you see this serial number you cannot tell anything about the file. It looks random. So not only it is secure, but private, too.”
“So it is like a fingerprint?”
“Yes, but it is a fingerprint that would change if you pulled a tooth or replaced it with an implant. We call this fingerprint a ‘hash’ or sometimes a ‘token’.”
“Hash as in hashtag?”
“Yes, same spelling but different meaning. These hashes are not used on social media, but on computer programs. So given a file, no matter how large or small, this hash, this token has the same small size.”
“How small?”
“32 bytes. A photo taken on your phone camera has about five million bytes and an one hour compressed HD video about four billion.“
“So small, indeed. But how can this be unique, if it is so small”
“Ha, smart question! The size is small compared to those other files, but in 32 bytes you can have trillions of trillions of trillions of possible hashes — or tokens— 10 followed by 76 zeroes”
“Wow. More than the number of stars in our galaxy!”
“More than the number of stars in the known universe. So this is why the numbers are unique. And also not use too much space.“
“Are these numbers you call ‘tokens’ the T in the NFT?”
“Yes, they are the T in the NFT, good job! For a file that you have, you compute the hash. Then you let the world know that you have that hash. It is brilliant because you don’t have to show the file. But once you release the number publicly you can prove you had the file, because without the file, you cannot have the token.”
“Because anyone who gets the file will be able to compute the fingerprint and check if it’s the same.”
“Yes. You compute the hash and compare to the one that was announced publicly. If they are the same, then for sure you have the original.”
“You said there’s no such thing as an original in the digital world.”
“You got me! I abused the term a bit. When I said ‘original’, I meant a copy of that file that was originally used to calculate that hash, that token.”
“So let’s see if I got it right: I draw something on a tablet. I save the file and I calculate this hash and I tell the world: ‘hello, hello, look at this number I have’, and the world will know.”
“Yes.”
“And then I upload the file on a website, and tell everybody: ‘I made this, it’s mine. If you don’t believe me, compute the token and see that it is the same that I announced a while ago, I couldn’t have this number without the file, so you can be sure it’s mine.’”
“Exactly!”, I confirmed.
He’s very happy with his realisation and with how elegant this system is, and simple, if one ignores the complexity of the maths behind the hashing function, and of course the internet itself. But not for long. I see a shadow of disappointment on his face:
“But they can still see my file. And get a perfect copy, as good as my original.”
“Yes.”
“And I cannot stop them.”
“No, not really. Once you publish the file you cannot stop them. You can call the police on those who use the file without your approval, but stopping them from getting the perfect copy, that you cannot do.”
“So why use this token thing in the first place, then?”
“Because you can prove that you own the drawing, or whatever file you minted, if you want to sue someone. By the way, sometimes you say that you ‘minted’ a file when you compute the token.”
“So it is useful just for that?”
“It is quite something, though.”
“But the token is a file, isn’t it?”
“Yes”
“So they will copy it and say it is theirs.”
“They could, but mathematics helps us again. When you tell the world you minted a token, you actually electronically sign that token. I cannot go into much detail, but there is a way to use a secret that only you know to prove that it was you who announced the token. That is because you know the secret and they don’t.”
“At least that”, he concludes with resignation.
“You seem to be disappointed, but showing that the file came from you is a huge accomplishment in a world of perfect copies. This is usually called ‘provenance’ and it is like a certificate of authenticity, except that is harder to forge.”
He looks satisfied with the answer. And I prepare to finish the discussion without realising I missed something important. Fortunately, he asks the perfect question:
“So what did the 69 million dollar guy buy?”
“He bought the right to call the 32 byte token his own.”
“So he didn’t buy the file? The image?”
“No. He bought the token, not the image. The image is available on the internet”.
“Why pay for the token? It’s just a number.”
“For several reasons. Even if it is not something that I would normally do, some people are happy to pay: they are collectors who want to own a link to an artwork they like, or want to support the creator. Some of them hope they will be able to resell at higher price. So it’s love and greed.”
“But the value of that thing is only in our imagination, isn’t it? The token being precious is an illusion.”
“Yes, exactly like it is with so many other things, such as diamonds, football cards and paintings.”
“But for gold and diamonds and football cards, you can't have them until you buy them. While for the computer files everybody can have them.”
“Yep, no matter what those who sell NFTs say, NFTs are not precious because they are rare. They are actually not rare. Their scarcity is purely artificial, and forced, as opposed to gold and diamonds who are hard to find.”
“So they are not rare and unique?”
“Not in the way they want us to believe. As I said -- it is the collective illusion, but this doesn't mean they have no value at all. I think in several cases they might become quite useful.”
”Which ones?”
“For protecting copyright or for automating payments for one’s work -- for example you make your drawing available and each time anyone displays it you get a tiny amount of money, If the drawing proves popular, you get some money”.
“Is this possible?”
“Could be, but not too easy. NFTs can be good for proving who issued the file, too. They are good to sponsor some artists and make some collectors happy. Now, for example, if there was a cartoonist who would draw something on paper, something that I really like, and publishes it, I would still buy the original, especially if it is signed. That is even if everyone can see the drawing on the internet or in the magazine. I would own the signed paper, but this would not give me the right to make t-shirts with the drawing. This is exactly what an NFT is: a signed original which doesn’t give me any other rights. If I want to own such a thing, then why not? Even if it is a non-fungible token.”
“But the token is a computer file, isn’t it?”
“Yes”
“So if it is a file it means it can be perfectly copied, too.”
“Yes”
“So how can you own something that can be copied?”
“Remember when we talked about villagers knowing that you own something?”
“Yes. If they know that something is mine, it means it is mine. Because they all know it...”
“This is what happens with the tokens, too. You shout out ‘I own this token’ to the internet, in a special application, and this information gets to many many people. Think about them as your villagers. They record what you said you own, and keep it for the records. Because there are so many of them, these records cannot be falsified. The records of who owns every token are public and kept in a public list, called ledger, one after another. It’s easier if you group this information in blocks, so this is why this ledger, is called a ‘blockchain’, a chain of blocks of information. Information on who owns which token, or transactions with the tokens and so on. This is why it is important that these tokens are small in size. Because they are copied everywhere.”
“So everybody knows I own a certain file?”
“No. They know that you own a token. If they know the token, they cannot know which file is that, unless you tell them.”
“How would this look for paintings?”
“You would take the certificate of authenticity with you in Trafalgar square and ask everybody to take a photo of you and that certificate. It would be impossible for anybody to pretend that you didn’t have the certificate with so many witnesses.”
“So the blockchain is the witness.”
”Yes. It is a big database, a ledger, a list that everybody can get a copy of. And the information that somebody owns something is there, so it is impossible to forge. This is why once the NFT is there under your name, as far as the rest of the world is concerned, you own it. And no one could falsify a blockchain record yet. Moreover because it relies on its members it means the blockchain is not under anybody’s power.”
“So the police and the government can’t stop it?”
“No, they can’t. They can make using blockchains illegal, but not actually stop them, because they are everywhere and nowhere in particular.”
“So we have blockchains for tokens?”
“Not only tokens. You can store anything in the blockchain. And in fact the main use for blockchains today is for storing transactions of digital currencies such as Bitcoin or Ethereum. Like a big bank that nobody in particular owns or controls.”
“Well, it seems to be quite amazing.” he says, “But you don’t look too happy about it.“
“Yes, because even if I am full of admiration for blockchains and their opportunities, I am quite concerned about their problems.”
“Which problems?”
“One of them is their environmental impact, which is huge. An important feature of today’s blockchain is that, in order to keep it secure it needs a lot of computers to work and calculate numbers for a long time, wasting huge amounts of electrical energy, just to say a transaction is valid. That is not good for the environment. This is besides all the confusion and the speculation which might get a lot of people to lose their money. Also, having a new form of money you can’t control might have unintended consequences.”
“Why is it bad?”
“For all its shortcomings, the state has a very important role in our lives. And it cannot perform the role without controlling the money, and the taxes. Even if it is inefficient, the state is there when we need it, such as for example helping people and businesses affected by the pandemic, healing those who are sick, and vaccinating the healthy. In addition to educating all of us and defending us from armed enemies. Money is state sovereignty and if uncontrolled digital currencies become the norm, our world won’t change for the better.”
“Oh, so it is bad.”
“Yes, despite having some great potential, blockchains, their currencies and NFTs are also quite dangerous.”
“So, are we going to buy NFTs?”
“Not today. We stick to hot chocolate.”
He’s finished his for a while, and he looks at mine and says:
“Not so hot any more, huh?”
The End
Some interesting links
These are some interesting pages that I stumbled upon since we last met:
A brilliant explanation of how the blockchain and bitcoin work
Michael Cholod on NFTs. This chat is part of my technology “Ain’t Magic” event series. 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.
Also, an interesting HBR article on What a Year of WFH Has Done to Our Relationships at Work
See you soon! Meanwhile, be happy, be bright, be you!
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