If you’ve been following cryptocurrency1 news lately, or really tech news in general, you’ve probably heard about NFTs (non-fungible tokens). A lot of the articles and discussions I’ve seen about them are from people who are less interested in the actual technology and long term implications of cryptocurrency and more in the profits they can gain from it (just like with Bitcoin itself).
I’m not one of those people. I find the tech extremely interesting, but the practical use is overshadowed by the massive amount of energy consumption that’s necessary for many of these currencies to function2.
I want to talk about what NFTs are, how they work, how digital ownership of things compares to physical ownership, and why even as a future oriented person who owns a lot of digital shit, this doesn’t really add up to me.
I’ll start with an explanation of some of the terms.
Cryptocurrency
Bitcoin, Ethereum, Stellar Lumens, Litecoin, Dogecoin, etc. Each one is an independent ledger (called a blockchain) that keeps track of which accounts/addresses have how much currency. Each entry in the ledger says something like “this address sent this many units of currency to this other address”.
Each one of these ledgers/blockchains is distributed through the internet. For those of you who are familiar with BitTorrent, imagine creating a spreadsheet that keeps track of how much currency everyone owes everyone else and then uploading it to a torrent site so anyone who wants to see it can always download it from anyone else who has it.
Through lots of math, cryptography, and a very interesting and complicated protocol3, these ledgers/blockchains/spreadsheets (whatever analogy makes the most sense) are secured against people lying about how much they’ve spent or when they spent it.
NFTs
Non-fungible tokens are related to (and a form of) cryptocurrency. But while both a dollar and a bitcoin are fungible (it doesn’t matter WHICH 1 dollar bill you have; if you have a dollar, you have 1 dollar), each non-fungible token is unique. You can make a dollar bill non-fungible by drawing a unique piece of art on it. Now that specific dollar is unique and has a different value than other dollar bills.
So, similar to the dollar with the art on it, an NFT is a unit of Ethereum cryptocurrency that’s unique and describes itself as a specific thing (like a song, a piece of art, or anything really).
Ethereum is interesting because an address can also contain code along with data. Any program that exists on the Ethereum ledger/blockchain is called a Smart Contract. It’s basically programmable currency, and it’s one of key parts of NFTs.
So that’s:
- A secure ledger that can’t be tampered with that describes exactly which addresses own which tokens
- The ability to store both data and code in this ledger
- People with digital goods/works/art to sell
Digital Ownership
Putting all that together, there’s now the ability to securely buy and sell digital representations of anything by creating a NFT that says it’s a thing and is cryptographically signed by the creator. The only way to change ownership is through a valid transaction.
Unforgeable digital ownership of things.
Already this is interesting enough to artists/fans/collectors, but it’s even more interesting when you consider that a Smart Contract can specify something like “any time this token is sold, send this percentage of that transaction to a specific address.”
Which means the potential for automatic, perpetual, built-in royalties for the first owner/creator of the NFT (if programmed to do so).
The NFT Craze
In addition to artists creating NFTs for their works, anyone who owns anything notable are getting involved. Jack Dorsey (creator of Twitter) is selling the NFT for his first tweet. How? He went to a website called Valuables that manages NFT auctions. They’ll create a digital representation of his tweet (which they state is “signed by the original owner”), and make sure his account/Ethereum address owns it. Once the auction is won, the transaction will happen just like it would if it was a fungible Ethereum token.
There will always be a record of this transaction in the blockchain, and proof that there’s a new owner. This token can continue to be bought/sold just like a physical object. The current bid as of this writing is $2.5 million.
- Grimes just recently sold $6,000,000 worth of art as NFTs.
- Nyan Cat was purchased for about $536,571.
- A group of anonymous art enthusiasts created an NFT of a Banksy screenprint and then burned the original work so that it only exists digitally. The NFT sold for $394,000.
NFTs, art, and the physical world
Even as we continue to digitize everything we do and own, people will always want to be able to say they own unique shit. This kind of thing is inevitable. But do NFTs actually make sense?
“Owning” a physical work of art doesn’t mean you own all the rights to the work right? There’s a long history of laws, copyright acts, and lawsuits over the exact rights between creators and buyers of visual art. For example, buying a piece of art doesn’t mean you automatically get the rights to make and sell derivative works.
Some rights art collectors/owners do have:
- Showing or withholding the original work to/from others
- Loaning the original work to a museum or other organization
- Decorating their home with the original work
- Telling people they own the original work
- Selling the original work to someone else
How does that compare to the rights granted to art-based NFT owners?
Showing or withholding the original work to/from othersLoaning the original work to a museum or other organizationDecorating their home with the original work- Telling people they own the
original workNFT - Selling the
original workNFT to someone else
It just doesn’t seem like a great comparison.
Artists, Celebrities, and Gettin Paid
A lot of the excitement I’m seeing about NFTs are about more artists getting paid for their work more often. Especially considering automatic and perpetual royalties to artists are now possible. That part sounds like a great thing.
But wouldn’t an artist need enough exposure and success to have buyers interested in “owning” their original works in the first place? I’m not seeing this helping the artists who actually need help.
All of the big NFT sales I’ve seen so far are from people who can already easily monetize their popularity. Jacob Kastrenakes from the The Verge article I referenced earlier:
Grimes is the latest artist to get in on the NFT gold rush, selling around $6 million worth of digital artworks after putting them up for auction yesterday.
…
The bulk of the sales came from two pieces with thousands of copies available that sold for $7,500 each. The works, titled “Earth” and “Mars,” are both short videos featuring their titular planet with a giant cherub over it holding a weapon, also set to original music. Nearly 700 copies were sold for a total of $5.18 million before sales closed.
So she sold 700 “unique” tokens for a thing you can fully experience right there on the purchase page?
Is this just a new, extremely energy wasteful way for people who already have money and the ability to make lots of money… make even more money?
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I always refer to it as cryptocurrency, not just crypto. I’m a relatively security (and encryption) focused developer. To me, crypto means the general field of cryptography, which really fucking interesting and is more than just 💸💰 ↩︎
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One of the methods for keeping a cryptocurrency functioning securely is something called “proof of work”. The computers gathering and storing transactions into a blockchain solve mathematical “problems” (puzzles) that are hard to answer but easy to verify (the opposite of encryption techniques that are easy to generate, but very hard to solve/break). These puzzles, which are core to how the currency functions, are made to stay hard to solve even as computers get faster. By design, “proof of work” based cryptocurrencies must always use huge amounts of energy. ↩︎
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Check out this very long but very interesting article about some of the details how blockchain protocols use “proof of work” to manage the ordering and timing of transactions. ↩︎