The Problem With NFTs
For online content creators the unavoidable subject of 2021 has been NFT’s. From incredibly cringe-worthy ape profile pics, to incomprehensibly tasteless tributes to deceased celebrities, to six-figure sales of the “original copy” of a meme, it is the thing that is currently dominating the collective brain space of digital artists and sucking up all the oxygen in the room. And I do want to talk about that, I want to talk about my opinions on NFTs and digital ownership and scarcity, all the myriad dimensions of the issue, but I don’t just want to talk about NFTs, I can’t just talk about NFTs because ultimately they are just a symbol of so much more, and it is that “more” that is ultimately important. So let me tell you a story. [Drumming] In 2008 the economy functionally collapsed.
The basic chain reaction was this: Banks came up with a thing called a mortgage-backed security, a financial instrument that could be traded or collected that was based on a bundle of thousands of individual mortgages. Based on the general reluctance of banks to issue mortgages, the risk-aversion in lending someone hundreds of thousands of dollars that they’ll pay off over the course of decades, these bonds were seen as especially stable. However they were also immensely profitable for the banks who both issue the mortgages and the bonds. Because of that perceived stability a lot of other financial organizations, like pension funds and hedge funds, used them as the backbone of their investment portfolio. In this arrangement a mortgage becomes more profitable to the bank issuing the mortgage as a component of a bond than it is as a mortgage. Proportionally the returns per mortgage from the bond are just that much better than the returns from the isolated mortgage.
There’s some problems, though. Problem one is that the biggest returns on a bond come from when it first hits the market, a new bond that creates new securities sales is worth more than an old bond that is slowly appreciating, but not seeing much trade. Problem two is that there are a finite number of people and houses in America; the market has to level out at a natural ceiling as eventually all or nearly all mortgages are packaged into bonds, thus very few new bonds can be generated and sold. So here’s the incentives that are created. One: it’s good for banks if there are more houses that they can issue mortgages for Two: the more mortgages issued the better, because a bad mortgage is worth more as a component of a bond than a good mortgage that’s not part of a bond.
So real estate developers find that they have a really easy time getting funding from banks for creating vast new suburbs full of houses that can be sold to generate mortgages, but rather than building the kind of housing most people actually need and want, they focus specifically on the kinds of upper-middle-class houses that fit into the sweet spot from the perspective of the banks packaging the bonds. Buyers, in turn, find that they have a suspiciously easy time getting a mortgage despite the fact that, for most people, the economy wasn’t doing so great. Wages were stagnant and yet even though developers were going absolutely haywire building new housing, the houses being built were all out of their price range to begin with, and counter intuitively this massive increase in supply wasn’t driving down the price. This is because the houses were being bought, just mostly not by people intending to live in them. They were being bought by speculators who would then maybe rent them out or often just leave them vacant with the intent to sell a couple years later.
Because speculators were buying up the supply it created synthetic demand. The price keeps going up because speculators keep buying, which creates the illusion that the value is going up, which attracts more speculators who buy up more supply and further inflate the price. These speculators are enabled by a system that is prioritizing generating new mortgages purely for the sake of having more mortgages to package into bonds.
The down payments are low and the mortgages all have a really attractive teaser rate, meaning that for the first three to seven years of the mortgage the monthly payments are rock bottom, as low as a few hundred dollars per month against a mortgage that would normally charge thousands. Caught up in all this are legitimate buyers who have been lured into signing for a mortgage that they can’t afford by aggressive salespeople who have an incentive to generate mortgages that they can then sell to a bank who can put it into a bond to sell to pension funds to make a line go up, because it’s good when the line goes up. It’s a bubble. The bubble burst as the teaser rates on the mortgages started to expire, the monthly cost jumped up, and since the demand was synthetic there were no actual buyers for the speculators to sell the houses to. So the speculators start dumping stock, which finally drives prices down, but because the original price was so inflated the new price is still out of reach of most actual buyers.
Legitimate buyers caught in the middle find their rates jumping, too, but because the price of the house is going down as speculators try and dump their stock the price of the house goes down relative to the mortgage issued, and thus they can’t refinance and are locked into paying the original terms. Unable to sell the house and unable to afford the monthly payments, the owners, legitimate and speculators, default on their mortgages, they stop paying. Eventually the default rate reaches criticality and the bonds fail. As the bonds fail this impacts all the first order buyers of the bonds, hedge funds, pension funds, retirement savings funds, and the like. It also cascades through all derivatives, which are financial products that take their value directly from the value of the bond.
This creates a knock-on effect: huge segments of the economy turn out to be dead trees, rotten to the core, but as a rotten tree falls it still shreds its neighbours and crushes anything below it. It was a failure precipitated by a combination of greed, active fraud, and willful blindness at all levels of power. The banks issuing the bad mortgages were the same banks selling the bonds and providing the capital to build the houses to generate the mortgages. The ratings agencies checking the bonds were, themselves, publicly traded and dependent on being in good relations with the banks, incentivized to rubber stamp whatever rating would make their client happy. The regulatory agencies that should have seen the problem coming
were gutted by budget cuts and mired in conflicts of interest as employees used their positions in regulation to secure higher paying jobs in industry. And, the cherry on top, the people largely responsible for it all knew that because they and their toxic products were so interwoven into the foundations of the economy they could count on a bailout from the government because no matter how rotten they were, they were very large trees. [Drumming] This naked display of greed and fraud created what would be fertile soil for both anti-capitalist movements and hyper-capitalist movements: both groups of people who saw themselves as being screwed over by the system, with one group diagnosing the problem as the system’s inherently corrupt and corrupting incentives, and the other seeing the crisis as a consequence of too much regulation, too much exclusion. The hyper-capitalist, or anarcho-capitalist argument is that in a less constrained market there would be more incentive to call foul, that regulation had only succeeded in creating an in-group that was effectively able to conspire without competition. Of course this argument fails to consider that a substantial number of people within the system did, in fact, get fabulously wealthy specifically by betting against the synthetic success of the market, but regardless.
Into this environment in 2009 arrived Bitcoin, an all-electronic peer-to-peer currency. Philosophically Bitcoin, and cryptocurrency in general, was paraded as an end to banks and centralized currency. This is what will form the bedrock, both philosophical and technological, that NFTs will be built on top of. It’s a bit of a hike
from here to the Bored Ape Yacht Club, so I guess get ready for that. Strap in. As we get into this we’re going to need to deal with a lot of vocabulary, and a lot of complexity. Some of this is the result of systems that are very technically intricate, and some of this is from systems that are poorly designed or deliberately obtuse in order to make them difficult to understand and thus appear more legitimate.
The entire subject sits at the intersection of two fields that are notoriously prone to hype-based obfuscation, computer tech and finance, and inherits a lot of bad habits from both, with a reputation for making things deliberately more difficult to understand specifically to create the illusion that only they are smart enough to understand it. Mining and minting are both methods for making tokens, which are the base thing that blockchains deal with, but the two are colloquially different processes, where mining is a coin token created as a result of the consensus protocol and minting is a user-initiated addition of a token to a blockchain. All blockchains are made of nodes, and these nodes can be watcher nodes, miner nodes, or validator nodes, though most miner nodes are also validator nodes. Fractionalization is the process of taking one asset and creating a new asset that represents portions of the original. So you get $DOG, a memecoin crypto DeFi venture capital fund backed by the fractionalization of the original Doge meme sold as an NFT to PleasrDAO on the Ethereum network.
I’m sorry, some of this is just going to be like that. The idea behind cryptocurrency is that your digital wallet functions the same as a bank account, there’s no need for a bank to hold and process your transactions because rather than holding a sum that conceptually represents physical currency, the cryptocoins in your cryptowallet are the actual money. And because this money isn’t issued by a government it is resistant to historical cash crises like hyperinflation caused by governments devaluing their currency on purpose or by accident. It brings the flexibility and anonymity of cash and barter to the digital realm, allowing individuals to transact without oversight or intermediaries. And in a one-paragraph pitch you can see the appeal, there’s a compelling narrative there. But, of course, in the twelve years since then none of that played out as designed.
Bitcoin was structurally too slow and expensive to handle regular commerce. The whole thing basically came out the gate as a speculative financial vehicle and so the only consumer market that proved to be a viable use was buying and selling prohibited drugs where the high fees, rapid price fluctuations, and multi-hour transaction times were mitigated by receiving LSD in the mail a week later. And as far as banking is concerned, Bitcoin was never designed to solve the actual problems created by the banking industry, only to be the new medium by which they operated. The principal offering wasn’t revolution, but at best a changing of the guard. The gripe is not with the outcomes of 2008, but the fact that you had to be well connected in order to get in on the grift in 2006. And even the change of the guard is an illusion. Old money finance assholes like the Winkelvoss
twins were some of the first big names to jump on to crypto, where they remain to this day. Financial criminal Jordan Belfort, convicted of fraud for running pump and dump schemes and barred for life from trading regulated securities or acting as a broker, loves Crypto. Venture capitalist Chris Dixon, who has made huge bank off the “old web” in his role as a general partner at VC firm Andreessen Horowitz Capital Management, is super popular in the NFT space. He likes to paint himself as an outsider underdog fighting the gatekeepers, but he also sits on the boards of Coinbase, a large cryptocurrency exchange that makes money by being the gatekeeper collecting a fee on all entries and exits to the crypto economy, and Oculus VR, which is owned by Meta, nee Facebook.
Peter Thiel, who also went from wealthy to ultra-wealthy off the Web2 boom via PayPal, loves crypto, and is friends with a bunch of eugenics advocates who promote cryptocurrency as a return to “sound money” for a whole bunch of extremely racist reasons because when they start talking about banks and bankers, they mean Jews. Some of the largest institutional holders of cryptocurrency are the exact same investment banks that created the subprime loan crash. Rather than being a reprieve to the people harmed by the housing bubble, the people whose savings and retirements were, unknown to them, being gambled on smoke, cryptocurrency instantly became the new playground for smoke vendors. This is a really important point to stress: cryptocurrency does nothing to address 99% of the problems with the banking industry, because those problems are patterns of human behaviour.
They’re incentives, they’re social structures, they’re modalities. The problem is what people are doing to others, not that the building they’re doing it in has the word “bank” on the outside. In addition to not fixing problems, Bitcoin also came with a pretty substantial drawback.
The innovation of Bitcoin over previous attempts at digital currency was to employ a distributed append-only ledger, a kind of database where new entries can only be added to the end, and then to have several different nodes, called validators, compete over who gets to validate the next update. These are, respectively, the blockchain, and proof-of-work verification. Now, proof-of-work has an interesting history as a technology, typically being deployed as a deterrent to misbehaviour. For example, if you require that for every email sent the user’s computer has to complete a small math problem it places a trivial load onto normal users sending a few dozen, or even a couple hundred emails a day, but places a massive load on the infrastructure of anyone attempting to spam millions of emails. How it works in Bitcoin, simply put, is that when a block of transactions are ready to be recorded to the ledger all of the mining nodes in the network compete with one another to solve a cryptographic math problem that’s based on the data inside the block. Effectively they’re competing to figure out the equation that yields a specific result when the contents of the block are fed into it, with the complexity of the desired result getting deliberately more difficult based on the total processing power available to the network.
Once the math problem has been solved the rest of the validation network can easily double-check the work, since the contents of the block can be fed into the proposed solution and it either spits out the valid answer or fails. If the equation works and the consensus of validators signs off on it the block is added to the bottom of the ledger and the miner who solved the problem first is rewarded with newly generated Bitcoin. The complexity of the answer that the computers are trying to solve scales up based on the network’s processing power specifically to incur heavy diminishing returns as a protection against an attack on the network where someone just builds a bigger computer and takes over. Critics pointed out that this created new problems: adversarial validation would deliberately incur escalating processing costs, which would in turn generate perverse structural incentives that would quickly reward capital holders and lock out any individual that wasn’t already obscenely wealthy, because while the escalating proof-of-work scheme incurs heavy diminishing returns, diminishing returns are still returns, so more would always go to those with the resources to build the bigger rig. No matter what Bitcoin future was envisioned, in the here and now computer hardware can be bought with dollars.
Rather than dismantling corrupt power structures, this would just become a new tool for existing wealth. And that’s… exactly what happened. Thus began an arms race for bigger and bigger processing rigs, followed by escalating demands for the support systems, hardware engineers, HVAC, and operating space needed to put those rigs in. And, don’t worry, we’re not forgetting the power requirements. These rigs draw an industrial amount of power and, because of the winner-takes-all nature of the competition, huge amounts of redundant work are being done and discarded.
Estimates for this power consumption are hard to verify, the data is very complex, spread across hundreds of operators around the globe, who move frequently in search of cheap electricity, and it’s all pretty heavily politicized. But even conservative estimates from within the crypto-mining industry puts the sum energy cost of Bitcoin processing on par with the power consumption of a small industrialized nation. Now, evangelists will counter that the global banking industry also uses a lot of power, gesturing at things like idle ATMs humming away all night long, which is strictly speaking, not untrue. On a factual level the entire global banking industry does, in fact, use a lot of total electricity.
But, for scale, it takes six hours of that sustained power draw for the Bitcoin network to process as many transactions as VISA handles in one minute, and during that time VISA is using fractions of a cent of electricity per transaction. And that’s just VISA. That’s one major institution. So, like, yes, globally the entirety of the banking industry consumes a lot of power, and a non-trivial portion of that is waste that could be better allocated.
But it’s also the global banking industry for seven billion people, and not the hobby horse of a few hundred thousand gambling addicts. So just to head all this off at the pass, Bitcoin and proof-of-work cryptocurrency aren’t incentivizing a move to green energy sources, like solar and wind, they are offsetting it. Because electrical consumption, electrical waste, is the value that underpins Bitcoin. Miners spend X dollars in electricity to mine a Bitcoin, they expect to be able to sell that coin for at least X plus profit. When new power sources come online and the price of electricity goes down, they don’t let X go down, they build a bigger machine.
[Drumming] In 2012 Vitalik Buterin, a crypto enthusiast and butthurt Warlock main set out to fix what he saw as the failings and inflexibilities of Bitcoin. Rather than becoming the new digital currency, a thing that people actually used to buy stuff, Bitcoin had become an unwieldy speculative financial instrument, too slow and expensive to use for anything other than stunt purchases of expensive cars. It was infested with money laundering and mired in bad press. After the FBI shut down Silk Road you couldn’t even buy drugs with it anymore.
In practice you couldn’t do anything with your Bitcoin but bet on it, lock up money you already have in the hopes that Bitcoin goes up later, and pray you don’t lose it all in a scam, lose access to your wallet, or have it all stolen by an exchange. The result, launched in 2014, was Ethereum, a competing cryptocurrency that boasted lower fees, faster transaction times, a reduced electrical footprint, and, most notably, a sophisticated processing functionality. While the Bitcoin blockchain only tracks the location and movement of Bitcoins, Ethereum would be broader. In addition to tracking Ether coins, the ledger would also be able to track arbitrary blocks of data. As long as they were compatible with the structure of the Ethereum network, those blocks of data could even be programs that would utilize the validation network as a distributed virtual machine. Vitalik envisioned this as a vast, infinite machine, duplicated and distributed across thousands or millions of computers, a system onto which the entire history of a new internet could be immutably written, immune to censorship, and impossible for governments to take down.
He saw it dismantling banks and other intermediary industries, allowing everyone to be their own bank, to be their own stock broker, to bypass governments, regulators, and insurance agencies. His peers envisioned a future where Ethereum became not just a repository of financial transactions, but of identity, with deeds, driver’s licenses, professional credentials, medical records, educational achievements, and employment history turned into tokens and stored immutable and eternal on the chain. Through crypto and the ethereum virtual machine they could bring all the benefits of Wall Street investors and Silicon Valley venture capitalists to the poorest people of the world, the unbanked and forgotten. This heady high-minded philosophy is outlined in great detail in the journalistic abortion The Infinite Machine by failed-journalist-turned-crypto-shill Camilla Russo. The book is actually really interesting.
Not for the merits of the writing, Russo fails to interrogate the validity or rationality of even the simplest claims and falls just shy of hagiography by occasionally noting that something was a bit tacky or embarrassing, but only just shy. She tells florid stories about the impoverished people that Vitalik and friends claimed to be working to save, but never once considers that the solutions offered might not actually work, or that the people claiming to want to solve those problems might not even be working on them. That’s actually a big issue, since the entire crypto space, during the entire time that Russo’s book covers, was absolutely awash with astroturfing schemes where two guys would go to some small community in Laos or Angola, take a bunch of pictures of people at a “crypto investing seminar”, generate some headlines for their coin or fund, and then peace out. For years dudes were going around asking vendors if they could slap a Bitcoin sticker onto the back of the cash register, because the optics of making it look like a place takes Bitcoin was cheaper and easier than actually using Bitcoin as a currency. We have an entire decade of credulous articles about how Venezuela and Chile are on the verge of switching entirely to crypto, based entirely on the claim of two trust fund dudes from San Bernardino. A whole ten years littered with discarded press releases about Dell and Microsoft and Square bringing crypto to the consumers before just quietly discontinuing their services after a year or two when they realize the demand isn’t actually there.
The fact that the development of Ethereum was extremely dependent on a $100,000 fellowship grant from Peter Thiel is mentioned, but the ideological implications of that connection are never explored, the entire subject occupies a single paragraph sprinkled as flavour into a story about Vitalik and his co-developers airing their grievances about some petty infighting. The book is mostly useful for it’s value as a point of reference against reality. It’s a very thorough, if uncritical, document of absolutely insane claims. “The idea was that traits of blockchain technology—such as having no central point of failure, being uncensorable, cutting out intermediaries, and being immutable—could also benefit other applications besides money. Financial instruments like stocks and bonds, and commodities like gold, were the obvious targets, but people were also talking about putting other representations of value like property deeds and medical records on the blockchain, too. Those efforts—admirable considering Bitcoin hadn’t, and still hasn’t, been adopted widely as currency—were known as Bitcoin 2.0.”
I love this paragraph because it outlines just how disconnected from reality the people actually building cryptocurrencies really are. They don’t understand anything about the ecosystems they’re trying to disrupt, they only know that these are things that can be conceptualized as valuable and assume that because they understand one very complicated thing, programming with cryptography, that all other complicated things must be lesser in complexity and naturally lower in the hierarchy of reality, nails easily driven by the hammer that they have created. The idea of putting medical records on a public, decentralized, trustless blockchain is absolutely nightmarish, and anyone who proposes it should be instantly discredited.
The fact that Russo fails to question any of this is journalistic malpractice. Now, in terms of improvements over Bitcoin, Ethereum has many. It’s not hard. Bitcoin sucks.
In terms of problems with Bitcoin, Ethereum solves none of them and introduces a whole new suite of problems driven by the technofetishistic egotism of assuming that programmers are uniquely suited to solve society’s problems. Vitalik wants his invention to be an infinite machine, so let’s ask what that machine is built to do. [Drumming] In order to really understand the full scope of this we do need to dig a bit more into the technical aspects, because that technical functionality informs the way the rest of the system behaves. In a very McLuhanist way, the machine shapes the environment around it. As already mentioned, a blockchain consists of two broad fundamental components: the ledger and the consensus mechanism. All currently popular blockchains use an append-only ledger.
Now this is, on its own, not that remarkable. Append-only is just a database setting that only allows new entries to be added to the end of the current database, once something is written to the database it’s read-only. Standard applications are typically things like activity logs, which is conceptually all a blockchain really is: a giant log of transactions. The hitch is that it’s decentralized, with elective participants hosting a complete copy of the entire log, and this is where the second component comes in, the consensus mechanism.
All validating participants, called nodes, have a complete copy of the database, and no one copy is considered to be the authoritative copy. Instead there is a consensus mechanism that determines which transactions actually happened. This is all the proof of work stuff. Proof of work isn’t the only consensus mechanism, but it’s popular because it’s very easy to implement by just cloning Bitcoin and is resilient against the kinds of attacks that crypto enthusiasts care about. It’s a very brute-force solution, but legitimately if you want a network of ledgers where no one trusts anyone else, just making everyone on the network do extreme amounts of wasted, duplicate work is a solution. One of the major problems that this machine solves is what’s called the double-spend problem: how do you stop someone from spending the same dollar twice? If someone tries, how do you determine which transaction really happened? Banks solve this problem by not correlating account balance with any specific dollar, processing transactions first-come-first-serve, which they track with central resources, and punishing users with overdraft fees for double-spending.
Eschewing a central solution, cryptocurrencies rely on their consensus mechanism. The most popular alternative to proof-of-work is proof-of-stake, where validators post collateral of some kind, usually whatever currency is endemic to the chain, with the amount of collateral determining their odds of being rewarded the validation bounty for any given transaction. The main proposal of proof of stake is that it significantly reduces the wasted power problems of proof of work, but it’s less resilient than proof of work. On the energy cost side of things, proof of stake is still inefficient, just by virtue of the sheer volume of redundancy, but on a per-user basis it’s at least inefficient on the scale of, like, an MMO as opposed to a steel foundry. This is difficult to assess because the most popular proof of stake chains are still unpopular and low traffic in the scope of things, heavily centralized. Claims about scalability are backed up by nothing but the creators’ word.
Proof of stake is also significantly more complex because there now needs to be some mechanism for determining who gets to do the validations, and also determining how audits are conducted, and then the question of who has control over that system, and whether or not someone can gain control of that system or control over the whole stake, via just buying out the staking pool, et cetera et cetera et cetera. Proof of Stake also, even more explicitly, rewards the wealthy who have the capital to both stake and spend. It’s also even more explicitly exclusionary. Ethereum’s proposed proof-of-stake migration has a buy-in of 32 Ether, which at the time of writing is about $130,000, so really only early adopters and the wealthy can actually meaningfully participate for more than just crumbs.
This is, in turn, compounding inherent problems with the long term growth of the chain. Even if you solve the escalating power requirements of proof of work, the data requirements of storing the chain and participating as a validator are also prohibitive in a way that inevitably centralizes power in the hands of a few wealthy operators. Vitalik: 85 terabytes per year is actually fine, right? Like, because, uh, 85 terabytes per year, like, if you have, if you have even one person that just keeps buying, like, um, a hundred dollar hard drive, like, uh, I think once every month then they can store it, right, like it’s something like that. So, it’s too big for just like a casual user that just
wants to run the chain on their laptop, but one dedicated user who cares, they can totally afford to, uh, afford to store the chain. And so 85 terabytes, not a big deal, right, but once you crank that number higher there comes a point at which it starts becoming a really big deal. The major downside of all these systems is that they’re extremely slow. Proof of work is inefficient by design, and proof of stake has multiple layers of lottery that need to be executed before any transaction can be conducted, and in particular suffers from delays when elected validators are offline and the system needs to draw again. As an extension of being slow they’re also prone to getting overwhelmed if too many people try to make transactions simultaneously, which can cause de-syncs between validators and even lead to what’s called a fork, where two or more pools of validators reach a different consensus about the state of the network and each branch keeps on going afterwards assuming that it is the authoritative version. Forks can also be caused on purpose, and this is, in fact, the only way to effectively undo transactions. Like if someone stole your coins the only way to get them back would
be to convince the people who manage the chain itself to negotiate a rollback. That’s foreshadowing for later. Now, because the nature of a fork involves a disagreement on what transactions actually happened, and who got paid for those transactions, this means that each arm of the fork has a vested interest in its own arm being the authoritative arm, so resolving forks can turn into irreconcilable schisms, which is funny as an outside observer viewing it as inane internet drama, but is frankly unacceptable for anything posturing as a serious and legitimate currency. Like, it’s important to stress that because of the nature of the chain, the way that the ID numbers of later blocks are dependent on the outcomes of previous blocks, these aren’t just a few disputed transactions that need to be resolved between the buyer, the seller, and the payment processor, these are disagreements on the fundamental state of the entire economy that create an entire alternate reality.
It’s an ecosystem that absolutely demolishes consumer protections and makes the re-implementation of them extremely difficult. One of the big selling points of all this technology is that it’s particularly secure, very difficult for anyone to hack it directly, since there’s so much redundancy. A lot of hay is made about the system’s resiliency against man-in-the-middle attacks, which are your classic Hollywood hacker type attacks. Someone sends a command from point A and on the way to point B it is intercepted and altered. Someone hacks into the bank and adds an arbitrary number of zeroes onto their account balance. Evangelists will commonly claim that blockchain could revolutionize the global shipping industry and reduce fraud.
It’s a good claim to interrogate. First, the things that blockchain is capable of tracking are things that manufacturers and shippers are already tracking, or at least trying to track, so this is not so much “revolution” as it would be “standardization.” Even that is built on a predicate assumption that everyone picks the same chain. It’s an extremely optimistic assumption. Many, many, many firms deliberately want their information centralized and obfuscated to protect against corporate espionage.
The lack of a shared, standardized bucket to put all the information into is not because it’s been heretofore impossible, but because it’s been undesirable. Second, it assumes the existence of a theoretical mechanism that ensures the synchronization of the chain and reality above and beyond the current capacity of logistics software, some means of preventing people from just lying to the blockchain and giving it the information it expects to be receiving, the blockchain equivalent of ripping off the shipping label and slapping it on the new box. The bigger problem here is that in the pantheon of fraud, man-in-the-middle attacks are actually pretty rare. Global shipping needs to deal with it in certain capacities, but taken on the whole the vast majority of fraud doesn’t come from altering information as it passes between parties, rather from colluding parties entering bad information at the start.
Con artists don’t hack the Gibson to transfer your funds to their offshore accounts, they convince you to give them your password. Most fraud comes from people who technically have permission to be doing what they’re doing. Rather than preventing these actual common types of fraud, cryptocurrency has made them absurdly easy, and the main reason why cryptocurrency needs to be so resistant to man-in-the-middle attacks is because the decentralized nature of the network otherwise makes them acutely vulnerable to those attacks. What this all kinda means is that blockchains are all pretty bad at doing most of the things they’re trying to do, and a lot of the innovations in blockchains are attempts at solving problems that blockchains introduced. The biggest issue that cryptocurrencies have suffered from is a lack of tangible things to actually use them on as currencies, rent or food or transit, and this is for pretty simple reasons. One is that the transaction fees on popular chains are so prohibitive that it’s pointless to use them on any transaction that isn’t hundreds, if not thousands of dollars; no one is going to buy the Bitcoin Bucket from their local KFC. Ethereum’s main transaction fee,
called Gas, on a good day runs around $20 US per transaction, but that’s severely optimistic. As of December 2021 the daily average cost of Gas hasn’t gone below $50 US since August, with the three month daily average riding over $130. And that’s just the daily average. The hourly price can, and does, swing by up to two orders of magnitude. The throughput of blockchains is so abysmal that transaction slots are auctioned off to the highest bidder, that’s why these numbers are so extreme. It only takes a few high rollers competing on a transaction to drive the hourly price of gas up over $1000 US. The internal term for this is a “gas war” because it’s just that common.
Bots, in particular, can drive gas prices well into the tens of thousands of dollars as they compete to capitalize on mistakes, such as someone listing something for sale well below its general market price. Also, it needs to be stressed: these gas wars aren’t localized to just the thing that’s being fought over. If Steam is getting hammered because ConcernedApe posted Stardew Valley 2 by surprise, that will probably stay pretty well contained. If Taylor Swift concert
tickets go on sale and LiveNation gets crushed, you might never even know. What those don’t do is cause the cost of placing an order on DriveThruRPG to spike by eight thousand percent for three hours. The second big reason is that value on the coins themselves is so volatile that unless you’re willing to engage with the speculative nature of the coins there’s actually a huge risk in accepting them as payment for anything.
Bitcoin in particular, owing to its glacial transaction times, suffers from problems where the value of the coin can change dramatically between the start and end of a transaction. This is such a problem that it’s led to the rise of an entire strata of middlemen in the ecosystem, so-called “stablecoin” exchanges like Tether that exist to quickly transfer cryptocurrencies between each other and lock-in values. The stablecoins, rather than having a speculative value, have a value that’s pegged to the value of an actual currency, like the Euro or US dollar. The underlying problem that they exist to solve is itself twofold. One is that converting cryptocurrency into dollars is the step of the process that makes you accountable to the tax man, and the primary goal of crypto in general is to starve public services, so that’s a no go.
The second is that there just aren’t actually that many buyers, and there’s not enough liquidity in the ecosystem to cash out big holdings. Tether, the largest stablecoin, used to advertise itself as being backed on a one to one basis back when it was called Realcoin, but that language has become far more nebulous over time as it’s become obvious that it just isn’t true. This is a very complicated situation, but the short version is that the people who own Tether also own a real money exchange called Bitfinex, and there’s evidence that the two services, both which require having actual dollars on hand in order to back their products and facilitate exchanges, are sharing the same pool of money, swapping it back and forth as needed.
This means that at any given time either service is potentially backed by zero dollars, or at least that’s what the data implies might be the case. Point is that if you’re a high roller with tens of millions of conceptual dollars tied up in cryptocurrency, there’s a fundamental cash problem. Your holdings have inflated to tens, hundreds, or thousands of times what you put in, but that price is just theoretical. It’s speculative.
You have all this crypto, you can’t meaningfully spend it, and there’s not enough buyers for you to get it out. In order for you to cash out you need to convince someone else to buy in. These factors, taken holistically, mean that cryptocurrency is a Bigger Fool scam. There’s a lot of digital ink spilt trying to outline if it’s a decentralized Ponzi scheme or a pyramid scheme or some hybrid of the two, which is a taxonomical argument that I’m not here to settle, but, like both of those, it’s a Bigger Fool scam.
The whole thing operates by buying worthless assets believing that you will later be able to sell them to a bigger fool. The entire structure of cryptocurrencies at their basic level of operation is designed to deliver the greatest rewards to the earliest adopters, regardless of if you’re talking about proof-of-work or proof-of-stake. This is inherent to their being. As Stephen Diel put it “These schemes around crypto tokens cannot create or destroy actual dollars, they can only shift them around. If you sell your crypto and make a profit in dollars, it’s only because someone else
bought it at a higher price than you did. And then they expect to do the same and so on and so on ad infinitum. Every dollar that comes out of cryptocurrency needs to come from a later investor putting a dollar in. Crypto investments cannot be anything but a zero sum game, and many are actually massively negative sum. In order to presume a crypto investment functions as a store of value we simultaneously need to suppose an infinite chain of greater fools who keep buying these assets at any irrational price and into the future forever.” So with all that out of the way, let’s talk about the ape in the room.
♪ NFTs super-sexy, man it always lures me ♪ ♪ I’m too focused and you know you’ll never ever deter me ♪ ♪ Crypto astronaut ♪ ♪ Degen moving so hazardous ♪ ♪ Crypto what I’m gon’ dabble uh ♪ ♪ OpenSea is like chapel yeah ♪ NFTs, non-fungible tokens. On a conceptual level the tech acts as a sort of generic database to mediate the exchange of digital stuff. The most optimistic read on it is a framework for a type of computer code that creates so-called true digital objects, meaning digital objects that possess the attributes of both physical objects and digital, being losslessly-transmittable while providing strict uniqueness, which is an important concept.
Strict uniqueness is a way of saying that two different things are different things, even if they’re different copies of the same thing. My copy of Grey by EL James is strictly unique. While millions of copies of the book exist, this is the only copy that is this copy, and this is the only copy that has the very specific damage of being glued shut and thrown into the Bow River. [splash] It is also strictly scarce. While millions of copies of Grey exist, that’s still a finite number, meaning it is possible, though not immediately practical, for the world to run out of copies.
NFTs impose a simulacrum of this physical scarcity and uniqueness onto digital objects within their ecosystem. [splash] On a technical level a non-fungible token is just a token that has a unique serial number and can’t be subdivided into smaller parts. Two tokens, even two that tokenize the same conceptual thing, are still strictly unique with different serial numbers.
Within the context of Ethereum and its clones these tokens are effectively a small packet of data that can contain a payload of code. It’s a box that you can put a micro program into. That micro-program is called a smart contract, a name that is so comically full of itself that I feel like it’s misleading to even call them that, but I have to for simplicity's sake. But real quick, yes, that is how the inventors conceptualize the role of these things, as the unity of programming and law.
The phrase “code is law” gets bandied about as an aphorism, and it’s just so full of holes that we’re going to be spending the next forever talking about it. Before we move into that this is the root of it: there is a tremendous disconnect between what NFT advocates say they do and what they actually do. But, and this is very important, both the claimed functionality and the actual functionality are both bad. It’s all broken, none of it works well, so the idea of it becoming the norm is terrible, but the prospect of what the world would look like if all the mythologizing and over-promising came true also super sucks. The end goal of this infinite machine is the financialization of everything. Any benefits of digital uniqueness end up being a quirk, a necessary precondition of turning everything into a stock market.
There’s nothing particularly offensive underpinning the concept of digital collectibles, frameworks and subcultures for digital collectibles have existed for decades within various contexts, but NFTs exist to lend credibility and functionality to the cryptocurrencies that they exist on top of. Okay, okay, okay, code is law. Now, what that little smart contract program does is up to the token creator. It can be a relatively sophisticated applet that allows the user to execute various commands, or it can be a plain hypertext link to a static URL of an image, or anything in between. Most are a lot closer to static URLs than they are to functional programs. This is in part because the thing that NFTs have become synonymous with are digital artworks, but really what the token represents is arbitrary.
It can be a video game item, a permission slip, a subscription, a domain name, a virus that steals all your digital stuff, or a combination of all of those. While the concept has been floating around since 2015 when the framework was thrown together in a day during a hack-a-thon, and the first Ethereum implemented tokens were minted in 2017, for the mainstream the story starts in the spring of 2021 following a string of high-priced sales of tokens minted by digital artist Beeple, culminating in a $69 million dollar sale of a collage of Beeple’s work in March via old money auction house Christie’s. This high-profile sale triggered a media frenzy and an online gold rush as various minor internet celebrities raced to cash in on the trend, hoping to be the next to cash out big. Over the course of about six weeks the ecosystem burnt through just about every relevant meme possible. Laina Morris, popularized on Reddit as Overly Attached Girlfriend, sold the “original screengrab” to Emirati music producer Farzin Fardin Fard for the equivalent of a little over $400,000 US. Zoe Roth, aka Disaster Girl, sold the original Disaster Girl photograph to Fard, for also $400,000.
Kyle Craven sold the original Bad Luck Brian photo for $36,000 to anonymous buyer @A. Nyan Cat sold for almost $600,000 with multiple variants also selling for six figures. Allison Harvard sold Creepy Chan I and II for $67,000 and $83,000, respectively, also both to Fard.
In addition to these high-profile sales of things that were already popular, whale buyers like Fard were dropping four and five figure sales onto a random assortment of other artworks. Corporations and individuals auctioned off NFTs representing intangible, non-transferable concepts, like the “first tweet” or “the first text message.” Cryptocurrency evangelists jumped at every opportunity to proselytize this new, bold, revolutionary marketplace that would free artists from the yoke of the gig economy and provide buyers with an immutable record of ownership of authenticated artworks stored on an eternal distributed machine. You could be holding the next generation’s Picasso! Artists could continue to earn passive revenue from secondary sales! Imagine what it’ll be worth in five years! This created an air of absolute mania, as it seemed like anything could be the golden ticket.
Digital artists, especially those working with media like generative art that’s difficult to monetize via conventional channels like physical prints, raced into the space and, on the whole, lost a lot of money. Critics began questioning what it was that was actually being bought and sold. Copyright? Commercial permissions? A digital file? Bragging rights? In a huge number of cases the answer wasn’t very clear, and even the sellers, caught in the promise of a payday, weren’t altogether sure what they had even sold. Tons of the tokens did little more than point to images stored on normal servers readily accessible via HTTP, meaning the bought assets would be just as vulnerable to link rot as anything else.
Some pointed to images stored on peer-to-peer IPFS servers, which are more resistant to link rot as, similar to a torrent, it only requires that someone keep the file active somewhere, rather than requiring the original server to stay up, but as millions of dead torrents prove: that’s still a far cry from the “eternal” storage solution that evangelists were claiming. The images were stored and delivered the same way as any other image on the internet, easily saved or duplicated simply by virtue of the fact that in order for your computer to display an image it needs to download it. Claims of digital scarcity apply only to the token itself, not the thing the token signified. More than that, there was no cryptographic relationship between the images and the tokens. The image associated with a token could be easily altered or replaced if the person with access to the server that the image was hosted on just changed file names, making the relationship between the two tenuous and flimsy in a way that undermined the claims that this was somehow a more durable, reliable way of transacting digital art. There was also no root proof of authenticity, no confirmation that the person minting the artwork was the person who created the artwork.
This is a pretty handy encapsulation of the way that blockchain fails to solve the most common problems with fraud, which tend to start with bad data going into a system at the input, not data being altered mid-stream. Artists who complained about this system which clearly incentivized impersonating popular artists, including deceased artists, were told that it was their fault for not jumping in sooner, that if they had bought in and minted their stuff first then it would be easy to prove the forgeries. Because evangelists don’t see this as a tool, as a market that may or may not fit into an artist’s business, they see it as the future, so failure to participate isn’t a business decision, it’s just a mistake. They’re terrible people. All told the frenzy collapsed pretty quickly. By June the market had already receded by about 90%, which, incidentally, just further incentivized the low-effort process of minting other peoples’ artwork, to the point that art platform Deviant Art implemented an extremely well received feature that scans several popular NFT marketplaces for matching images.
The output of that is extremely depressing. Not to labour this point, but reposting digital art without attribution is nothing new. Profiting off someone else's art is also nothing new. All that’s new is NFTs represent a high-energy marketplace with an irrational pricing culture where the mean buyer is easily flattered and not particularly discerning. The potential payoff is extremely high, much, much higher than a bootleg Redbubble store, the consequences border nonexistent, and the market is clearly in an untenable state, so there’s an incentive to get in at as low a cost as possible before it collapses, hence the absolute plague of art theft.
Even the argument that artists could make passive revenue off secondary sales turned out to have a lot of caveats attached. One, the smart contract for the token needs to have a function that defines royalties, so anyone who minted a token based off of hype making it sound like an inherent function of the system was out of luck. And, two, the token doesn’t know what a sale is and can’t differentiate between being sold and being transferred, so it’s actually the marketplace that informs the token “you’re being sold” and collects the royalties.
End result, royalties are easily bypassed simply by using a marketplace that doesn’t collect royalties or uses a different format of royalty collection that’s incompatible with the function the token uses. While a few sellers, legitimate and otherwise, made off with undeniably big paydays, hundreds of thousands of artists bought in only to find that there wasn’t a new, revolutionary, highly trafficked audience of digital art collectors. Instead there was a closed market dealing in casino chips where the primary winners were those already connected, who already had the means to get the attention of the whales and the media, a market where participation required buying into a cryptocurrency at a rapidly fluctuating price in order to pay the minting costs to post the work, where it would sit, unsold. This left those artists in the lurch, where they had to choose between just eating the losses, or attempting to convince their existing audience to buy-in as well. The people who actually won were the people with large holdings of cryptocurrency, specifically Ethereum which mediated the vast majority of these big ticket purchases. David Gerrard, author of Attack of the 50 Foot Blockchain, summarized it on his blog very succinctly as such: “NFTs are entirely for the benefit of the crypto grifters. The only purpose the artists serve
is as aspiring suckers to pump the concept of crypto — and, of course, to buy cryptocurrency to pay for ‘minting’ NFTs. Sometimes the artist gets some crumbs to keep them pumping the concept of crypto.” The rush benefits them in two ways: first the price of Ether itself goes up directly from the spike in demand, between January and May the price of Ether rose from $700 to $4000, and second there’s new actual buyers who aren’t just trading Bitcoin for tether for ether and back again, but are buying in with dollars, providing the whole system with the liquidity needed for whales to actually cash out. This arrangement, needing to buy a highly volatile coin from people who paid far, far less for it in order to participate in a market that they control, is why people reflexively describe the whole arrangement as a scam. If you buy in at $4000 and compete against people who bought in at $4, you’re the sucker.
It reveals the basic truth that these aren’t marketplaces, they’re casinos. And, indeed, even through all the rhetoric of “protecting artists” and whatnot was the ever-present spectre of the gamble: whatever you buy now might be worth hundreds of times more later. Constantly invoked is the opposite proposition of the bad deal: what if you had been the person who bought in at $4? Let’s take a closer look at that eye watering $69 million Beeple sale. Independent journalist Amy Castor has done an enviable job running down the details here in her piece “Metakovan, the mystery Beeple art buyer, and his NFT/DeFi scheme“ but to summarize the long and short of her notes, the buyer is a crypto entrepreneur named Vignesh Sundaresan who purchased the piece to boost the reputation and value of his own crypto investment scheme Metapurse and Metapurse’s own token B.20, which Beeple owns 2% of the total supply of. Following the Christie's sale the reported value of B.20 went from 36¢ per token to $23. And that’s just the anatomy of a single sale.
The very obvious conclusion observers reached was that none of this is about the art at all, but the speculative value; not what it’s worth to you, but what it’ll potentially be worth in the future to someone else. It’s not a market, it’s a casino, gambling on the receipt for an image or video that’s otherwise infinitely digitally replicable. The thing itself is immaterial as long as it can make a line go up. This is the essence of the market, and a microcosm of what evangelists imagine they want to see as the future, the financialization of everything. The frenzied market around old Reddit memes was doomed from the start. There’s a finite supply of meaningful originals, so to keep this thing going, to keep the line going up, you need something more, something less tied to anything specific.
-- In the months since the initial craze the marketplace had mutated. The It Thing was no longer memes or digital works from established artists, but character profiles from large, procedurally generated collections with names like CryptoPunks, Bored Ape Yacht Club, Lazy Lions, Cool Cats, Ether Gals, Gator World, Baby Llama Club, Magic Mushroom Club, Rogue Society Bot, and Crypto Chicks. These were notable for, again, commanding utterly irrational prices seemingly completely decoupled from any legitimate or legal transaction, and being generally extremely fugly. This surge generated an immediately adversarial relationship between the buyers, who touted them as both evidence of their extravagant wealth and their foresight into the future of digital economies, and pretty much everyone else.
A very common response to anyone using one of these profile pics, or bragging about their purchase, became saving and reposting the image in reply, or even changing profile pics to match. Spurred by a speculative tweet from Twitter developers suggesting that they were working on an NFT verification system, Twitter users broadly rallied at the opportunity to immediately identify people that it was okay to bully. Tweets from within the cryptosphere started leaking out, things like Santiago Santos tweeting things like “NFTs = Identity 2.0. Can’t remember the last time I used my pic on the left.”
Emphasis on physical traits. Genetic lottery. Prone to bias and prejudice. Identity by choice. Unique and digitally scarce. Representation of values and beliefs. Of course what Santiago was leaving out was that he had paid the equivalent of $171,000 US for that profile pic, which probably gives him some incentive to really commit to it as something interesting and special, even though, stripped to the studs, literally all he was describing was using a non-representational image as a profile pic. For about six years my profile pic on the Dungeons and Dragons forums was a stock photo of a cabbage. So, not really breaking new ground here.
Greg Isenberg sat at his computer and decided to bang out “most people who make fun of NFTs - Own zero NFTs - Have never minted an NFT - Have never participated in a community - Have never staked their NFT - Haven’t built on-top of an NFT project - Have never earned an NFT playing a game - Missed out on BAYC, Punks, Cool Cats etc.” A chain of logic implying that skeptics of the market are just uninformed sore losers. Incidents like these lent to the very accurate perception that the loudest voices in NFTs weren’t very familiar with internet culture as a whole, weren’t terribly smart in general, and were by and large coming at all this from the financial side, further supported by all of them having “tweets are not investment advice” in their twitter bios. In short the same people who made and bought Juicero.
It also laid bare that the conversa
2022-01-24 02:04
