Wrote this to a buddy whose pseudo-daughter is a recent high school grad with tens of thousands of instagram followers digging her sketches but no real pathway to a career or monetization. Decided it was good enough to forward to a few people. Decided fukkit here it is.

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This is a high-level document that touches on a lot of terms that exist as buzz-words in the public consciousness but are fundamentally paradigm-shifting changes in the nature of commerce, ownership and the exchange of value. In order to truly understand what NFTs are, it’s important to know what they can do and why, and that requires some deep-diving. I’ll try to keep it normal.

BLOCKCHAIN

One of the basic things you must understand to grasp the implications of “crypto” is the way information is recorded. You have probably heard about bitcoin “mining” and how horrible it is for the environment. Bitcoin mining is horrible for the environment, no doubt about it, but the upside of that horror is that every miner has a copy of every single transaction ever recorded on the blockchain. 350 gigabytes as of this writing, one identical copy on every miner, about 2.3 million miners out there on Bitcoin alone. If you send someone bitcoin, you are interacting with that blockchain, and every single miner out there records that transaction.

This makes the falsification of data impossible. Not hard, not a pain in the ass, not extraordinarily difficult, impossible. If there are 5,000 miners, and one of them says “A paid B 1BTC” and the other 4,999 don’t, then there’s suddenly 4,999 miners on the blockchain and the one that pays A with B’s BTC is paying A with a splinter fork of the blockchain that can no longer transact with the rest of the miners. It basically makes the money instantly counterfeit. in order to come back into the fold, that miner has to throw away all its old data and download the blockchain again. Whatever coin A paid B in, it no longer exists.

CRYPTOCURRENCY

This indelible record of transactions has obvious benefits for commerce. This is why everyone uses the term “Ledger” - really, cryptocurrency is nothing more than a record of transactions that is simultaneously held by every single miner on the blockchain. The current incentive structure for cryptocurrency (Bitcoin in particular, but also currently Ethereum and many other currencies) is “mining” whereby every “block” (if the ledger were a book, “blocks” would be its pages) gives the first miner who solves a puzzle a reward and once the puzzle is solved, its answer provokes a new puzzle that must be solved and so on. The reason “mining” is so horrible for the environment is the more hot-shit your computer, the more puzzles you can solve and the more likely you are to get the reward. The architecture of the system requires you to be present to solve the puzzles, and while you’re there you record transactions. Proof-of-work cryptocurrency basically works by burying a piece of candy in a giant pile of shit and giving every miner a shovel. Once the candy is found, more shit (and a piece of candy) is piled on and the process starts anew. It’s actually an ugly and primitive process.

CRYPTOCURRENCY IMPROVED

Bitcoin is an ugly, stupid protocol. It doesn’t do much. It was probably written by a murderous sociopath libertarian scammer. As a consequence it’s good for one thing - moving large amounts of illicit value out of the watchful eye of the authority. It’s basically a digital replacement for bearer instruments, which you might know from Die Hard. Bearer bonds are what Hans Gruber wanted at Nakatomi Plaza because they’re untraceable. Unfortunately for the black market, Bitcoin has become much easier to trace as technology moves forward and the Bitcoin protocol stands still. Paul LeRoux has been in custody since like 2013 so bitcoin is permanently frozen in a world where Obamacare didn’t exist and gay marriage wasn’t 50-states legal.

The idea sparked a lot of innovation, however. The former editor of “Bitcoin Magazine” came up with a protocol he called Ethereum that is Turing complete - in other words, the language of Ethereum (because all cryptocurrencies are basically programming languages) is sophisticated enough that you can write all of Ethereum in Ethereum. Fundamentally this means that anything you can do in, say, OS X or Windows 10 can be done in Ethereum.

SMART CONTRACTS

Ethereum being Turing-complete means that it can do anything. It remains, however, a “distributed ledger” - every miner/node on the Ethereum blockchain is recording transactions. Transactions, in this case, however, also means “lines of code.” At a basic level, this can be stuff like “when A's phone is in range of the smart lock on B's rental property, withdraw .01 ETH from A’s balance, give it to B and unlock the door.” Or, “if A hasn’t left within 72 hours of unlocking for the first time, withdraw .05 ETH from A’s wallet and give it to B.” The sky is the limit. You can write whole entire games that run on the blockchain. But just as importantly, and crucially important for ownership, you can create NFTs.

NON-FUNGIBLE TOKENS

A “token” is any marker of value within a system. a “fungible token” is anything that can be replaced with anything else that is equal in terms of the system. One dollar bill is the same as any other dollar bill for purposes of buying and selling stuff. One copy of an Adele mp3 file is the same as any other. A “non-fungible token”, on the other hand, is unique. By definition. Every node on the blockchain agrees that there is exactly one whatever, and that whatever can be anything because again, Turing-completeness.

In real terms, this means that everything under the sun can be given a land-registry-grade title, like a car or a house or a boat or a motorcycle, regardless of its value. Anything under the sun can get better-than-DMV-grade ownership credentials. Every time it changes hands, every node on the blockchain acknowledges that it has changed hands, and it can’t change hands without every node on the blockchain agreeing that the exchange was kosher and followed the rules.

BLOCKCHAIN ART

So you have a piece of digital art. Maybe it’s a sketch of a My Little Pony. You upload it to Opensea and your friend, who is an asshole, immediately right-clicks on it and says “lol so much for your art career I just copied your one-of-a-kind art!”

What he doesn’t understand, though, is that only one person can ever own that NFT. Only one person can ever sell that NFT. Think of it like naming rights to a stadium, or bricks at the local pavilion or airport or whatever - anybody can walk on them but there’s only room for one name there, and that name is yours. It’s a fan’s wet dream - imagine baseball cards, except there will only ever be one. No wonder NBA Top Shot did $300m in sales between March and May this year. Sure - any schmuck can screencap your Alonzo Mourning dunk against Shaq but anybody on the platform can see that you are the fan that wanted naming rights to that dunk. Or, you know, you and 899 strangers you’ll never meet.

ART AND FANDOM

This can get really dumb. Everyone lost their shit when Beeple sold 5,000 NFTs for $69m at Christie’s. But, I mean, browse around. These things are basically useful as Twitter avatars. And they transact for crazy money because they mean more than Twitter avatars.

ART, FANDOM AND YOU

What the artist needs to fundamentally understand is that selling NFTs is a lot like selling at an art market except that you can control the terms of the sale, perpetually get royalties from any future sale, connect all buyers of your art together, and allow the entire community to see the value of your art (and all of your artwork) immediately everywhere forever.

Imagine Instagram where one fan can buy the post, but all the other fans can see the post. They can also see what the post was bought for, what other posts that collector purchased, what other of your posts are for sale, who they’re for sale from, and what the sales history of your instagram posts are, at this very minute, constantly updating without needing any intermediaries or moderation. When one of your posts sells for a lot, it increases the perceived value of every other post you’ve ever made, and makes each subsequent post more anticipated and more likely to profit. Of course, if one of your posts sells for bupkis, everyone who owns your current posts starts freaking out and puts theirs up for sale at a small loss because a small loss beats a big loss. But depending on the market and depending on the contract, every panic sale also makes you money.

THE LANDSCAPE

I’ve never bought an NFT. I’ve never sold an NFT. None of them appeal to me, but I’m an old kermudgeon who happens to understand too many things. Simply googling “opensea vs. rarible” will open a whole world of jargon and in-speak that any competent individual will be able to internalize without too many problems. There’s a real “etsy problem” right now in that there’s a bunch of garbage out there that nobody is paying any attention to - but if you already have an audience, dragging that audience with you automatically gives you a leg up.

Fundamentally, getting a bunch of hits on Instagram makes Zuckerberg rich. Getting a bunch of hits on Instagram that point to an NFT, on the other hand, puts money in your pocket.

THE BONUS ROUND

I find very few artists understand the commerce of art. My favorite quote on the subject is from Frank Zappa: “Art is the knack of making something out of nothing and selling it.” Meanwhile, “Art” is one thing and “fine art” is quite another and at the prices some people are getting for NFTs, we can’t ignore “fine art.” And the fine art market doesn’t run at all like you think it does, nor is fine art bought and sold for the reasons you think it is.

If you have the time, I wholeheartedly recommend Don Thompson’s The Twelve Million Dollar Stuffed Shark: The Curious Economics of Contemporary Art. The title is a reference to Damien Hirst’s The Physical Impossibility of Death in the Mind of Someone Living which is fundamentally a dead fish in formaldehyde. Damien Hirst neither caught it nor preserved it, nor built the tank nor filled it with formaldehyde yet nonetheless, it sold for office building money and helped make Damien Hirst famous.

Damien Hirst, by the way, gets NFTs.

Hope that was informative without being long-winded,

kb