March 24, 2021 • 49 mins
Non fungible tokens or NFTs have been in the news recently. What the heck are they and how do they work?
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Episode Transcript
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Speaker 1 (00:04):
Welcome to tex Stuff, a production from I Heart Radio.
Hey there, and welcome to tex Stuff. I'm your host,
Jonathan Strickland. I'm an executive producer with I Heart Radio
and I love all things tech. And there's been a
lot of talk recently about n f t s, which
(00:25):
of course made me think I should probably do an
episode about them to help explain what they are and
why they are and how they work. And in some
ways it's a pretty simple concept but tries to get
around some really tricky elements about digital goods um and
in other ways it's just incredibly confusing and at least
(00:48):
in my case, frustrating. But we'll get there. So let's
get some definitions out of the way. First. N f
T stands for non fungible token, which is irritated eating
because I bet a lot of people don't know what
fungible means. I mean, I'm gonna be honest here. I
had heard the word before, but if there had been
(01:09):
space in my brain that held that definition at some point,
it was empty until recently. So does it have something
to do with mushrooms? I thought, no, it does not.
My brain is a bit slow, So my apologies and
for all of those of you out there who already
know what fungible means, and you've known it since you
were three days old, My hats off to you. You
(01:32):
are very smart. Just don't go gloating at me, because
we're not all you. Okay. Now, the word derives from
the Latin fun guy to perform, So again, nothing to
do with mushrooms. But you see why I got confused.
Since about sixty nine, which is when Miriam Webster says
(01:55):
the earliest found example of the word being used in
this particular way, fungible means essentially interchangeable. Something is fungible
if there are lots of it, and one version or
one instance or one example of it is just as
good as any other of equal amount, or even if
(02:18):
you look at parts of a thing, if one part
of a thing can be exchanged for an equal part
of that same thing, then it's fungible. So the simplest
example I can think of is a unit of currency.
And since I'm American, I'm gonna go with the dollar bill.
So a dollar bill is worth one dollar or four
(02:41):
quarters or twenty nickels, or will you get it? So
if I have a dollar bill and you have a
dollar bill. We could trade those dollar bills and nothing
else really changes. We would each still possess a thing
of the same value as what we had previously. We
could spend either version of that dollar bill the same way.
(03:01):
So if we didn't make the trade, if I kept
my dollar and you kept yours, we could use our
respective dollars to buy something like chewing gum or something.
But if instead we had swapped dollars, well, then we
could still use those swapped dollars to buy our chewing gum. Heck,
if I had a dollar bill and you had four quarters,
(03:22):
we could still do this right. We could interchange my
currency for yours, because from a value perspective, there is
no difference between my dollar bill and your four coins,
each worth twenty five cents. And one last example, Let's
say that I'm a little short on cash and you
generously lend me five bucks. The next day, I've got
(03:45):
cash to repay you. Now, you don't care if the
five dollar bill that you gave me is the same
as the five dollar bill I give back to you.
You don't care. If it's the exact same five dollar bill.
You don't care if I pay you back with five
one dollar bills. Now, you might be irritated if I
tried to pay you back and change, but as long
(04:06):
as the change adds up to five dollars, the actual
value of the transaction would be the same. The convenience
it becomes an issue, but let's ignore that for now.
I mean, heck, if all I had was a ten
dollar bill, but you happen to have another five dollar bill,
I could give you the ten dollars that I had,
you'd give me the five dollar bill you had. And
(04:28):
now we're square, right, because I returned the five dollars
I owed you, and then you squared off the extra
five dollars I gave you in the form of that
ten dollar bill. The fungibility of currency means that any
version of this transaction is fine because the value of
the exchange remains the same. Other stuff that can count
(04:48):
as fungible includes commodities, you know, like lumber. Barring any
clear differences in quality, one amount of a commodity is
roughly equal to the same amount of that commodity. Usually,
even if the samples were taken from totally different sources,
there's no practical difference between them. So it's a very
pragmatic way to go about things. You know, that pile
(05:09):
of lumber is just as good as that other pile
of lumber, you might think. Now, sure, if you were
to get down to details, like the really fine stuff,
there's going to be differences. But at scale it sort
of is a wash from a pragmatic standpoint. So what
does non fungible mean. Well, as the non tells us,
it's the opposite of fungible. So it's something that is
(05:32):
not interchangeable with something else, like a car, for example.
So let's say you own a nineteen fifty nine Cadillac
Fleetwood Series and I also happened to own one of
those as well. Now, first of all, you've got yourself
a sweet ride that you probably can't park anywhere because
it's not so much a car, it's really a space station.
(05:54):
I mean, that sucker is huge. But I'm getting off track.
Our respective cars are non fungible. Even though they are
the same year, the same make, the same model. We
wouldn't just interchange them. We wouldn't just swap them back
and forth. I mean, there are many other factors that
determine the actual value of a car. How much has
each car been driven how many parts are original to
(06:17):
the car, what condition is the car in and its parts?
Has either of those cars been in any accidents? Did
one of them serve as the vehicle for Doc Hopper,
the bad guy in the Muppet movie. All of these
sort of things affect the value of the car, and
so these two cars, while possessing lots of similarities, are
not interchangeable. And to go back to the lending example,
(06:39):
let's say you are a very kind person and you
lend me your car, despite the fact that you know
I don't actually drive, But for this example, we'll say
that I do so for a week you lend me
your car. It would not be acceptable for me to
return a car that was different from the one you
lent me. Even if the car I brought back was
(07:00):
the same year, the same make, and the same model
as the car you lent me. It's not your car.
That's a problem. You would probably have some choice words
for me if I tried to pull that kind of
stunt and me, well, I'd be like, huh, you know
that is weird. Where did I even get this car?
And fungibility does admittedly get a bit fuzzy because the
(07:24):
line between fungibility and non fungibility isn't always easily distinguishable.
For example, let's take gold. Now, in general, gold is
considered a fungible commodity. If you pan for gold and
you end up with half an ounce of gold, that way,
that's worth the same as a half ounce of gold
in any other format, whether it's a nugget or dust
(07:49):
or a teeny tiny piece off a gold bar or whatever.
One bit of gold is worth the same as an
equivalent amount of that gold, assuming that other things are
the same, like the pure pity of the gold is
the same. That does account for differences in value. But
let's say that you go to the Federal Reserve Bank
in New York City. Maybe you're the sibling of a
(08:12):
thief who had a really unsuccessful run at Nakatomi Plaza
and you want to clear out the Federal Reserve. Now,
this bank stores gold in an underground vault, and it
holds it on behalf of financial institutions from all over
the world. Each gold bar has a serial number that
identifies that gold bar and to whom that gold bar belongs.
(08:34):
These serial numbers correspond with ledgers, and those ledgers are
a complete record of which gold bars belong to which
financial institutions, and in this case, the gold bars are
measured with incredible precision to determine their weight and purity,
which means each gold bar has its own distinct value.
And it also means you can't just swap the bars around.
(08:55):
You couldn't turn to Liechtenstein and say, okay, so you
want five gold bars and you just grab any five
off the vault shelves. You would have to retrieve the
specific bars indicated by whichever client you're talking to, because
each bar would have a specific value that could vary
a little bit or maybe even a lot from other
bars that are in the vault. So this type of
(09:16):
gold bar is not fungible. Okay, but what does all
this have to do with digital goods. Let's consider the
nature of digital stuff for a bit. One of the
big differences between digital and physical goods is the ease
of replication and distribution. This is something that has been
an enormous issue in the business world, and it's something
(09:39):
that we see prompting big companies to overreact in ways
that range from bewildering, too, incredibly negligent and beyond. So
let's consider a few examples. Essentially, whenever a technology comes
along that allows the common folk you know, like me,
to copy stuff, well, big companies get ants in their bridges.
(09:59):
If you want to go all economic thought on this,
it's all about the means of production and who has
access to them. In a capitalist society, the means of
production are in the hands of private individuals and companies
who then may profit off the stuff that they produce.
And that totally makes sense, right you make something, you
can profit off of that something if someone else wants
(10:20):
to buy it. And of course, in the world we
live in, a lot of the stuff we can buy
comes from really big companies that are churning out products
at an enormous scale. So when tech comes around that
can make copies of stuff, that scares these companies. One
thing big companies do not like to see for some
reason are things that can make their numbers next to
(10:41):
profit go down on a spreadsheet. And if a technology
allows people to copy stuff rather than buy things from
a company, that's a potential hit to the bottom line.
And we've seen this over and over from the first
cassette tape and audio recorders that made it possible to
duplicate music abums, to VCRs that created a home theater industry,
(11:04):
to the MP three format, to peer to peer networks
that facilitated file transfers. In each of these cases, big
established industries like movie studios, television studios, and music labels
have lobbied governments to come up with increasingly harsh penalties
that target people who are creating unauthorized copies of work,
so in other words, making copies of stuff without permission. Now,
(11:27):
in most of these cases, it turned out that the
concerns were largely unwarranted. Yes, the ability to copy stuff
can be scary, but the real issue was that these
very big companies that got accustomed to the industry working
a certain way, we're not ready for changes. When those
changes happened, eventually, these same companies found new ways to
(11:48):
do business that were just as if not more profitable,
than previous methods. Movie and TV studios hated the idea
of VCRs when they first came out when VCRs had
home recording capabilities, but this eventually gave birth to the
home video industry, and those same companies found out that
the properties they owned, many of which had laid dormant
in storage because there was no place to exhibit them.
(12:12):
Suddenly that represented a new stream of revenue. Music labels
discovered first the lucrative market of MP three stores, and
later the potentially even more lucrative market of streaming audio,
which hey represented the best of all worlds because with streaming,
the end customer never actually owns a copy of the work,
They just have permission to experience the work by streaming
(12:34):
it to wherever they happened to be in a given moment.
On top of all that, the entertainment industry would claim
that any unauthorized download represents a monetary loss, which was
something that just wasn't supportable. Here's how the argument goes.
Company A produces some form of digital entertainment. Let's say
it's an album from a popular performer. Pirate B decides
(12:57):
to download an unauthorized copy of that album. Now, Company
A claims that they have experienced a loss, that Pirate
B has stolen something from Company A. But here's the thing.
It's a digital copy. The original file is still with
Company A. It's not like pirate be hacked into the
company's database and removed a file so that that file
(13:21):
is no longer there. The original file still exists, the
Company A can still sell copies of that file off
to customers, so Company A hasn't lost a product. If
we contrast this with a physical store, a shoplifter does
cost people money because that shoplifter has taken a physical
item from the store. The store can't magically reproduce that
(13:44):
physical item and then sell it off to a legitimate customer.
That's an actual loss. But with the digital model, the
same thing doesn't apply. Further, there's no way to argue
that Pirate B would have ever purchased that album legitimately,
so Company A can't even really claimed that they lost
out on a sale because it's entirely possible that if
(14:05):
Pirate B had never copied the album, that pra B
just never would have listened to the album at all.
And someone not buying something is not the same thing
as someone stealing something. If I walk into a store
and I look at a new computer, but I decide
I don't really need this right now, and I walk out,
I haven't stolen anything. I haven't cost the company a sale.
(14:29):
I just didn't decide to buy it. So even the
US government's Accountability Office concluded that media companies were going
way too far, with various claims of loss in numerous
lawsuits filed against people who had downloaded music without authorization.
Some of those cases were ludicrously vengeful, with studios seeking
hundreds of thousands of dollars and damages against folks who
(14:53):
had maybe downloaded a few songs. And the point is
that these arguments that the studios were making just weren't
so portable. But even though the arguments didn't hold water,
they do point to a problem. Digital goods have value,
that is clear. I mean people want them, so there
is value to those digital goods. And digital goods are
(15:16):
also replicable. It's easy to make copies of files. But
what if you wanted to buy the equivalent of an
autographed version of a digital piece of art. Maybe you
want to support a specific artist, maybe you're kind of
a digital collector. How would you even go about doing that?
I mean, what does that mean? In a world where
(15:37):
these files can just be replicated in too infinity? I mean,
how would you do it? Well? N f T s
are a way to establish who ultimately has ownership of
a unique, but not necessarily the original digital item, even
if there are millions of copies of that digital item
(15:57):
floating around. When we come back, will explain the backbone
of what makes this possible. But first, let's take a
quick break. All right, so we've covered how digital goods
present a challenge or a few challenges. How do you
(16:19):
control supply of a digital good? And sure, the thought
of controlling supply sounds a bit gross because you could
flip that on its head and say, how do you
limit access to something? But we have to remember that
creating stuff requires effort and skill. Creating something means that
someone somewhere spent time and utilize their talent in order
(16:40):
to do it. Presumably they should receive something in return
if other people want to access that work. Now, if
we all lived in the start Trek universe, where we
learned that money is no longer a concern because scarcity
doesn't exist, and so everyone can do whatever they want
whenever they want because they like to do it, well,
we would be having a different conversation. But instead, we
(17:02):
live in a world where we need to be able
to pay for stuff like rent, food, and medical bills
and whatnot, and we have a limited number of hours
in our lifetimes and being able to earn money from
spending some of those hours in our lives in ways that,
if we're lucky, are both fulfilling and profitable. That's a
big deal. But the digital world makes this challenging. It's
(17:25):
why we have processes like d m c A takedowns,
which can also sometimes get more than a bit overreactive. Ideally,
you would use a d m c A takedown to
stop someone from publishing or sharing your work without your authorization,
but of course some rights holders overstepped and will issue
takedown notices when someone is making fair use of work.
(17:47):
But that's a topic for another episode. Another approach to
protecting digital works is the dreaded digital rights management or
DRM category. The purpose of DRM is to limit how
a work can be copy and or distribute it. Sometimes
it involves including code in a digital product that limits
the number of devices that can have access to that
(18:09):
digital work. For example, you might purchase a game from
an online store and then see that you are authorized
to install that game on up to say three devices,
and furthermore, you might be limited on how many devices
can access that digital work at a given time, so
that if you are running an instance of a game
on one machine, you cannot launch that same game on
(18:32):
another machine while that first instance is still going. But
DRM can lead to a lot of problems. For one thing,
sometimes companies will employ measures that make it really hard
for legitimate customers to actually consume the digital work that
they have purchased. So let's say I've made a legitimate
purchase of a music album using my phone, and now
(18:53):
I've decided I want to listen to this album on
my digital sound system so that I can enjoy it
on a really good audio system. I want to transfer
the file to the sound system. I don't want to
just cast it from my phone. I might find that
transferring the file over so that I can listen to
it on the sound system is a huge hassle. I
might have to jump through numerous hoops just to get
(19:14):
it to work. Now, this is incredibly frustrating, and it
often leads to old fogies like me saying, you know what,
in the old days, we just take a Vinyl album.
It didn't matter if you played it on one turn
table or the other. It's not fair to compare digital
and physical media to one another this way, because it's
not apples to apples. I swear that's not an iPod reference,
(19:34):
but you get the point. Beyond that, some companies have
taken DRM to do really stupid stuff. There's the famous
example of Sony that introduced DRM on c d s,
and if you inserted the CD into a CD ROM
drive on a computer, it created a potential back door
for someone else to gain access to your computer. Sony
(19:56):
ended up paying dearly for that mistake. So DRM can
actually push some people who would be legitimate customers of
a product into piracy because one of the things we
frequently see in online piracy is that hackers will find
ways to strip DRM from digital works. Now, this streamlines
the experience of actually using the digital works, and so
(20:19):
there's a case to be made that using certain strategies
to protect digital works actually creates the incentive that pushes
people towards piracy. It's complicated stuff beyond that, how do
you determine who owns a specific instance of a digital work?
If it's something that's replicable and easily distributable, how do
(20:40):
you ascertain who owns it? And how do you have
a tracking system to track the transfer of ownership from
one party to another. Well, there is a solution to
that problem, and it depends upon a system that was
developed largely in tune with cryptocurrency. So let's go back
to the world of physical currency first. If we're talking
(21:00):
actual physical currency of notes and coins and whatnot, we've
got a big requirement to make that currency work. Actually,
we've got a lot of requirements, but one of the
big ones is that we need to make sure that
the average person cannot easily duplicate currency. We need that
currency protected against counterfeiting. Otherwise, someone with the means would
(21:21):
just create a whole bunch of fake cash and use
it to stand in for the real thing. This causes
all sorts of huge problems, from leading to losses at
the point of purchase all the way to undermining confidence
in the financial systems that support an entire economic system
like a country. And there are a lot of different
protections that go into physical currency. There are special inks,
(21:42):
special materials for notes, they're special water marks, serial numbers,
all these kind of things. These are all elements that
help protect against counterfeiting and make it easier for people
to spot a fake before someone can pass it off
as the real thing. And obviously we've gotten better at
creating or sophisticated protections. These don't guarantee that someone won't
(22:03):
come up with a counterfeiting process, but they raise the
level of difficulty to a point where it's really, really
hard to do. And if you make something hard enough,
that means that if you do want to do it,
it's going to be really expensive. So if it's so
expensive that you're not likely to be able to pay
off the method you used to do the illegal thing,
(22:24):
you're not going to do the illegal thing. It just
doesn't make It's a it's a bad return on investment, right.
So that's one way to protect against counterfeiting. Just make
it super hard to do. Well. That's physical money. Cryptocurrency,
being digital, needs some similar protections. It needs the digital
equivalent of that special blend of paper and cloth that
(22:45):
dollar bills have, or the serial number, or the ink
or transparent pains within the note, or whatever it might be.
It needs a way to protect against duplication. Otherwise you
might grab a bitcoin through some means, maybe you've purchased one,
maybe you mind it, whatever, Then you might copy it
a billion times and either become a billionaire or more likely,
(23:07):
crash the value of the cryptocurrency beyond repair. If you
could find a way to duplicate bitcoin, then the entire
system falls apart because no one would ever know if
a bitcoin is quote unquote real or a duplicate. It's
already digital, which gives people a sense that it's not
quote unquote real to start off with. But digital goods
do have value as long as people have a desire
(23:28):
for those digital goods. A digital good is only worthless
if literally no one wants it, and at least no
one wants it enough to spend money or effort at
getting it. How then, do cryptocurrencies avoid duplication? How can
bitcoin make certain that someone doesn't try and spend the
same virtual coin more than once. This is where blockchain
(23:50):
comes into play, and it's important to note right off
the bat that blockchain and bitcoin are not synonymous. Heck,
blockchain and cryptocurrency aren't son onymous. Bitcoin depends upon the
technology of blockchain, but blockchain can apply to lots of
different types of transactions, not just bitcoin or cryptocurrency in general.
But let's get into how it works, because man, this
(24:13):
technology is one that is a challenge for people to understand.
We're going to use bitcoin as an example for this
because it's arguably the most well known, at least on
a surface level of An example of this technology. At
the heart of the matter is a ledger. This is
a record of every single transaction made within the bitcoin
(24:35):
system and every node in that system, that is, every
computer or computer network. It's a point of contact. All
of them have access to seeing this ledger. It is
a universal ledger that everyone has access to. The ledger
broadcasts each and every transaction that occurs within the system.
(24:55):
The nodes, as in those points of contact, then decide
the order in which the transactions occur. They agree upon this,
and that last bit is a really critical piece. Not
all digital currencies rely on blockchain. Some are controlled by
financial institutions like banks. These institutions step into arbitrate issues,
such as if there's a payment dispute. But because the
(25:18):
banks have to do this, they have to act as
an arbiter. These same banks tend to have a lot
of fees for customers to pay but to cover the
cost of being an arbiter. Also, the process moves rather slowly.
The blockchain approach replaces everything with cryptographic evidence, and the
nodes agree on what evidence actually is. So let's say
(25:40):
that I have a bitcoin and I want to buy
something with it. Here's the fun part. When I started
researching this episode, a bitcoin's value was around fifty seven
thousand U S. Dollars. Side note, as I record this
is closer to fifty dollars either way, I guess I'm
buying a car with it. So I plopped down my
bitcoin digitally speaking, and I purchase a brand new Tesla
(26:02):
Model three, which means I should actually get some change
back on that deal, because I think a fully kitted
out Tesla Model three with all the options would top
out under fifty dollars. So I fill up my online
shopping cart with a Tesla Model three and I make
the purchase. But then I quickly switched tabs to a
different shopping window. And in that window, let's say I've
(26:23):
got a Chevrolet Camaro, and this one's not totally tricked out,
because those can get upwards of around seventy dollars with
all the options, So I hit purchase on that as well.
Now I only have one bitcoin to my name, but
I've just tried to spend it twice, and the process
to verify a transaction can take about ten minutes. So
(26:43):
what happens, Well, each of those transactions gets submitted to
the ledger, which announces the transaction to all the nodes
that connect to the blockchain system. The nodes then work
out the order of transactions, and a majority of the
nodes have to agree on which came first. That will
invalidate the other transaction, because I cannot say, spend the
same bitcoin twice. So does that mean I'm going to
(27:06):
end up with the Tesla? Probably, but not necessarily. The
majority of notes could conclude that I actually ordered the
Camaro first, But even so, that would mean that the
Camaro transaction will be authorized and the Tesla one would
be null and void. Each bitcoin is in effect a
series of digital signatures that if you were to trace
them back from most recent to oldest, it would lead
(27:30):
back to the original creation of the bitcoin and every
transaction it had been through since that point. Each signature
is a record of a transaction, which means a bitcoin
effectively has a memory of every single time someone used
it in some form of transaction. In addition, bitcoin relies
on the cryptographic practice of maintaining a public key, that is,
(27:52):
a cryptographic key that everyone has access to, as well
as a private key for each user. Only the user
has access to the their own personal private key. So
when I make this transaction, my public key and the
most recent of the transactions that was on the bitcoin,
the one the most recent transaction before the one I'm
(28:12):
making that is, those get hashed together, and my digital
signature adds on to that Bitcoin hash. By the way,
as a process by which I can feed a string
of characters into an algorithm and it produces a fixed
size output based on whatever my input was. So let's
say the hash creates a string that's twenty characters long.
(28:33):
That's going to be the output. It does not matter
how long of a string of data I feed to
this algorithm. I might feed a one string one character
string into it, or a thousand character string into it.
The output is going to be twenty characters long. However,
the actual characters in that string, you know, there's gonna
(28:53):
be twenty of them, but the specific ones that appear
in that string are going to depend on whatever I
used as the in put. The hashes created on bitcoin
show the chain of ownership. It's this paired with the
time stamped transactions from the server and the nodes that
are agreeing on transaction order that I'll prevent bitcoins from
being double spent. Oh and blockchain groups transactions together into
(29:17):
blocks of data. That's why it's called block chain. You
have a chain of blocks of transactions. Each block is
cryptographically hashed to the previous blocks. Now that also means
there's no way to change the record. So let's say
that this chain is ten blocks long. If you tried
to change the record of a transaction that was back
(29:38):
in block number four, it would force everything from block
five onward to change as well. And since the ledger
is universal, meaning every computer or node on the system
can see it, no one would be able to get
away with those changes because everyone would see that the
ledger was changing. That's the basics of blockchain and bitcoin.
Now there's more to it than that, and it gets
(30:00):
really technical, but now we have the basis of what
makes n f t s work. When we come back,
we'll learn a bit more about n f t s
in particular. But first let's take another quick break so
I can breathe. And now we're up to non fungible
(30:22):
tokens like bitcoin. N f t s are tied to
block chains. Ethereum is one of the most common ones.
Ethereum has the built in support for things that are
not just cryptocurrency to work on that block chain. So
and if a lot of n f T s are
built on the Ethereum system, so a blockchain doesn't have
(30:44):
to be connected to cryptocurrency. It can be a way
to track any type of transaction. Some companies are using
blockchain to create a way to track different components in
supply chains. So using a block chain, it would be
possible to maintain a record of stuff ranging from fruit
that has picked hundreds of miles away and all the
stops that made before it finally got to your kitchen table,
(31:05):
or tracking authentic designer handbags from the point of origin
to the point of sale so that you know you're
not looking at a counterfeit. The blockchain gives insight and
peace of mind. You know exactly where that thing has
been because there's an unalterable digital record of every transaction
involving that thing. So, an n f T is a
(31:27):
token that connects to a digital item that has a
unique I D. This is different from bitcoins. A bitcoin
technically doesn't have its own I D. Bitcoins are associated
with specific transaction outputs, so the transaction has an I D,
but technically speaking, the bitcoin itself does not n f
T s have to have an I D. This is
(31:48):
how you identify which instance of a digital something is
in fact the one that is up for purchase, And
in a way, it's like saying, how can you tell
who owns a specific in stance of a unique digital item,
and the n f T is the way of doing that.
With physical goods, like a book, you can have a
lot of ways of differentiating them, right, they could be
(32:11):
hard bag, they could be paperback, they could be an
original edition, they could be autographed. All of this is
easily verifiable. With digital goods, it's a lot more challenging
because they're digital, they're ephemeral. So really what an n
f T ends up being is a digital signature, much
like what we see with cryptocurrencies like bitcoin, and just
(32:31):
like cryptocurrencies, and n f T can be part of
a transaction and making that transaction means that the n
f T goes through a very similar process as a
bitcoin or other cryptocurrency. There's a time stamped transaction and
a cryptographic hash that records the transfer of the n
f T, so it moves from one party's ownership to another.
(32:52):
The transaction enters into a universal ledger, and every node
within that system can see that universal ledger, and then
odes verified the block of transactions that the n f
T was part of, and thus ownership has changed hands
and everybody knows about it. Now. Nothing physical has actually
changed hands. It's not like a painting at an auction,
(33:12):
where you might go to an auction, you bid truckloads
of money for a money and at the end of
the auction, assuming that you won the bid, you could
take that painting home, or you can put in a
museum or whatever. But with an n f T, what
has happened is that there is a record of digital
ownership that has changed hands. You own the n f
(33:35):
T instance of whatever digital item you were buying, but
because it's digital, it's still ephemeral. What's more, there might
be many many copies of that digital thing out in
the wild. In fact, if it's a popular piece of
digital art, there could be countless copies out there. And
(33:56):
an n f T is not the same thing as
owning the original instance of something. It's not like going
to an art auction and buying the original canvas painting
of a moon Ai. It might be like going to
an art auction and buying a print of a mon
Ai that happens to be autographed by somebody, presumably not
(34:16):
mon Ai. I don't think Mona's around signing prints of
Monai's work. But n f T doesn't even mean that
the owner of that n f T tokened digital item
has any copyright to that work. If I purchase an
n f T connected version of, say, the keyboard Cat video,
(34:37):
all that means is that specific n f T instance
of keyboard Cat is what I own. The actual creator
of the keyboard Cat video could make as many n
f T s based off that video as they liked.
They could have a different n f t uh version
of the keyboard Cat video for like twenty fifty thousand
(34:58):
different people if they wanted to. Each n f T
would be digitally unique from a signature standpoint, but they
would all represent the same source of digital work, which
is kind of weird right now. If we go back
to thinking about books, you can start to grock this
a little better, at least I can. So. An author
writes a book, the author auctions off the chance for
(35:19):
someone to buy an autographed, personalized copy of the book.
The person who wins that auction Obviously, they don't get
the copyright to the book itself. They can't break in
the royalties for sales of that book. The author still
retains the copyright and can continue to make a living
off that book. What you have is a specific instance
(35:41):
of that book that is autographed and personalized. There's also
nothing stopping the author from doing more auctions to offer
more chances for autographed copies personalized to other people. These
instances are all unique in of themselves, but they all
come from the same source material. Now, there have been
several extremely high profile n f T transactions recently. For example,
(36:06):
Jack Dorsey, the CEO of Twitter, auctioned off and n
f T representing his first tweet ever, which just said
quote just setting up my Twitter end quote. Twitter was
spelled without vowels, so as t W T t R.
He posted that back on March twenty one, two thousand six,
and he auctioned off an n f T token representing
(36:30):
the tweet. The winning bid came in at more than
two point nine million dollars. And you know, this doesn't
mean that the tweet has disappeared from everybody else's view, right,
So what does ownership even mean? I'm not sure I
could even tell you. We're getting into some fuzzy territory here,
(36:50):
because clearly everyone can still see the tweet. Everyone knows
what that tweet is. Where is the value? What is
the point of ownership? I'm not sure I know I
can tell you. However, the Dorsey donated the proceeds of
that auction to a charity, which was pretty awesome. Or
take the work of the artist people whose real name
(37:13):
is Mike Winkelman. He's been making digital art for more
than a decade and he began to experiment with n
f T s a few months ago. This led to
an n f T representing a collection of his works
going on auction at Christie's, the company that oversees like
really big, real legit art auctions, and this brought in
(37:34):
a lot of money, as in sixty nine million dollars.
But these works of art exist on the Internet, which
means you can actually look at them, you can copy them,
you could store them on your home device, on your phone, whatever.
You can make as many copies as you liked. So again,
what does n f T ownership actually mean? Because you
(37:54):
don't own the original, It's not like purchasing that painting
that an artist has created. Personally, you don't own the copyright.
What do you own? Well, you own a record of
a transaction. YEA. N f T S can be a
way that let you support an artist, and that I
think is totally cool. Digital art is very hard to
(38:16):
monetize because of this replicability and easy to distribute nature
of digital goods. It's Harvard digital artists to make money
off their work because it's so easy to just lift
it for free, you know, unless it's part of an
established commercial endeavor. A lot of digital artists struggle to
make money from their work. So maybe there's an artist
(38:39):
that you like who creates really cool digital art. Purchasing
a work connected to n f T might be a
way to show your support. And because that transaction happens
on a publicly viewable blockchain, or at least publicly viewable
to any node connected to that blockchain, that support that
you gave is public, and public support can be a
(38:59):
huge which helped to an artist. If more people see
that a certain artist's work is moving, like people are
buying in a T tokens representing pieces of work from
this particular artist, then maybe they go and help support
that artist, and that artist flourishes as a result. That's great,
but a lot of the reporting on n f t
s right now isn't so much about supporting artists as
(39:22):
it is about speculation. Like speculation from an economic standpoint,
this means that n f t s are kind of
in a way, being treated sort of like cryptocurrency is.
You've likely heard me say on many occasions that cryptocurrency
really comes across more as a commodity than as a currency.
(39:42):
The value of cryptocurrencies tends to be, let's say, fluid,
and thus it's hard to treat cryptocurrency as a real
means of exchange. More people treat it as a way
to invest and increase their money, and n f t
s seem to be headed in at general direction right now.
Owning the digital signature of a transaction for a specific
(40:05):
instance of art is sort of like having bragging rights,
and as long as people ascribe value to those bragging rights,
it will be worth something. In fact, at least in
the short term, the value will likely go up because
lots of people are hearing about n f t s,
they're curious about it, they want to get in on it,
especially the cryptocurrency fans, they really want to jump on
(40:28):
this this bandwagon. But a lot of people, including people,
it turns out, have expressed some concern that what we're
seeing is sort of a speculative bubble that could collapse
at any moment. All right, but how do you store
n f T S. I mean, if you were to
buy a physical work of art, you would have to
put that in some physical location. But if an n
(40:50):
f T is a digital signature, where does it go.
The answer to that is a digital wallet. Though it
has to be a digital wallet, it's also compatible within
f T S. This is the same way that cryptocurrencies work.
That digital wallet would exist on a physical piece of
hardware like a computer, preferably one that is a prey
(41:11):
secure location and has password protection. But it also means
that if you were to ever lose that hardware or
lose the password to access it, you would also lose
all access to the n f T. Now you would
still own it, but you would never be able to
transfer that n f T to anyone else. So let's
say you bought an n f T for a dollar
(41:33):
and now, according to the market, it's worth like a
gazillion dollars, but you no longer have access to the
computer that holds the that digital wallet. You would be
up the creek. Oh and one other thing we have
to talk about. While we've been chatting about digital processes,
it's time to talk about environmental impact of n f
t s because there is one. And that's because the
(41:56):
process of proof of work cryptographic approaches, which is what
underlies n f t s and the cryptocurrencies that they
work on top of. Bitcoin is of an example ethereum
as an example, That approach is tied to how much
computer processing power is dedicated toward that system. So see
(42:16):
the way those blocks get formed on a blockchain and
bitcoin is that you've got these bitcoin miners and what
they're trying to do, essentially is to solve a very
hard math problem with their computer systems. The more computational
power that is applied to those problems, the harder those
problems get. This is a dynamic that's inherent in the
(42:39):
way the system works. It's geared towards having blocks of
transactions solved every ten minutes or so. But that's that's
the goal, is to keep that ten minutes pretty standard,
to keep that timeline steady. The system has to adjust
the difficulty of the problems that the different miners have
to solve in order to you you know, verify a
(43:01):
block and have them added to the chain. Because the
problems are too easy, then the blocks would be solved
in less than ten minutes. And if it's too hard,
then it would take too long. So every so often
the system readjusts how difficult these problems are, and it's
essentially guessing a really big number. It's it's that's hard
(43:22):
to do. It's hard to guess a very specific, very
big number. And the reward for solving these problems, which
again ultimately verifies a block of transactions so that it
can join the blockchain. The reward are a certain number
of bitcoins. At least in the case of bitcoin, uh
that number of bitcoins actually goes down over time, like
(43:44):
the longer Bitcoin is in action, the fewer coins you
get when you solve a block. Right now, if you
were to be running a computer system, or more likely
a computer network system that solved that problem that guests
that very hard number, you would get a reward of
six point to five bitcoins that would be worth around
(44:07):
thousand dollars. As I record this. But again, remember that
you know, the value of bitcoin dropped two thousand dollars
since I started researching this episode, which, um fun fact
means that over the course of one day, we've seen
the value of bitcoin fluctuate by two thousand dollars. Still,
(44:28):
that's a huge payout, right. I mean, if you have
that computer system and it solves the problem to validate
a block of transactions and you get six point two
five bitcoin, that's more than a quarter of a million dollars.
So that is an enormous incentive for bitcoin miners who
spend ridiculous amounts of money to create very fast, very
(44:52):
sophisticated networks of computers that are just dedicated to tackling
these problems. That's all these computers are doing. They're trying
to guess that number. And it also means the average
person running a typical computer has next to zero chance
when it comes to mining. It would be kind of
like if you were given a pick axe that was
covered in rust, and the person next to you is
(45:14):
running a one hundred ton high tech, high speed drill,
and you're both given the task to try and find
a specific gym somewhere in a mountain of stone. You're
not going to be able to keep up. But it
also means that bitcoin mining requires a lot of electricity
to power all these computers all over the world, and
(45:35):
the same is true for other cryptocurrencies, and it's also
true for n f T transactions. They all kind of
are wrapped up with each other. In fact, n f
T transactions are typically overlaid on top of an existing
cryptocurrency system. The n f T transactions become parts of
blocks representing also cryptocurrency transactions, and all this relies upon
(45:56):
that massive computer power that's just chugging away a racing
against other similarly powerful networks of computers, all trying to
be the first to guess that very big number to
validate a block and thus reap the rewards. Memo Acting
on Medium wrote up a pretty exhaustive series of blog
posts that really went into detail about the energy requirements
(46:20):
that are needed just to verify n f T transactions,
and the estimates are really daunting. Acting specifically focused on
Ethereum because the Ethereum cryptocurrency system allows for n f
T transactions and is a very popular option, and a
single Ethereum transaction has an estimated electricity requirement of thirty
(46:42):
five kilowatt hours of electricity, or about the same amount
of electricity that a resident in the European Union would
use over the course of four days for just one transaction.
In turn, Acting states that this generates an estimated twenty
ms of carbon diets emissions once you trace back the
origin point for electricity generation like where your where's your
(47:05):
electricity coming from? So, in other words, the fundamental process
used by cryptocurrencies like bitcoin and ethereum, as well as
n f t s, feeds into a system of eye
popping amounts of energy consumption, which of course feeds back
to the need for greater amounts of energy production and
(47:25):
then in turn creates a big ecological impact, particularly with
carbon emissions. Now, I think I might hate n f
t s for a couple of reasons. I do like
the ability to support artists who work in digital media.
That part I think is really awesome. I really like that.
But just about everything else either kind of irritates me
(47:46):
in that grumpy old man kind of way, or it
legitimately worries me. But I'm curious to hear what you think.
Don't let my bias affect you. I come at this
admitting that I have a specific point of view, and
I also admit that my point of view does not
necessarily reflect what is right or what is wrong. Oh,
(48:07):
bi Wan would be so proud of me. And that
wraps up our episode to explain what n f T
s are and how they work. I hope you found
this episode useful. I covered a lot of different topics here,
but they all do tie into the general systems that
make n f T s what they are, and I
felt like leaving any of it out would have meant
(48:30):
that I would have been lacking some context for you.
If any of you folks have suggestions for topics I
should tackle in future episodes of tech Stuff, I welcome
you to send them to me. The best way to
do that is on Twitter. Please don't make me buy
an n f T token version of your tweet. I
don't have that kind of cheddar on me right now,
(48:52):
but otherwise send it to me the handles text stuff
H s W and I'll talk to you again really
you soon. Y. Text Stuff is an I Heart Radio production.
For more podcasts from I Heart Radio, visit the i
Heart Radio app, Apple Podcasts, or wherever you listen to
(49:14):
your favorite shows,
Welcome to tex Stuff, a production from I Heart Radio.
Hey there, and welcome to tex Stuff. I'm your host,
Jonathan Strickland. I'm an executive producer with I Heart Radio
and I love all things tech. And there's been a
lot of talk recently about n f t s, which
(00:25):
of course made me think I should probably do an
episode about them to help explain what they are and
why they are and how they work. And in some
ways it's a pretty simple concept but tries to get
around some really tricky elements about digital goods um and
in other ways it's just incredibly confusing and at least
(00:48):
in my case, frustrating. But we'll get there. So let's
get some definitions out of the way. First. N f
T stands for non fungible token, which is irritated eating
because I bet a lot of people don't know what
fungible means. I mean, I'm gonna be honest here. I
had heard the word before, but if there had been
(01:09):
space in my brain that held that definition at some point,
it was empty until recently. So does it have something
to do with mushrooms? I thought, no, it does not.
My brain is a bit slow, So my apologies and
for all of those of you out there who already
know what fungible means, and you've known it since you
were three days old, My hats off to you. You
(01:32):
are very smart. Just don't go gloating at me, because
we're not all you. Okay. Now, the word derives from
the Latin fun guy to perform, So again, nothing to
do with mushrooms. But you see why I got confused.
Since about sixty nine, which is when Miriam Webster says
(01:55):
the earliest found example of the word being used in
this particular way, fungible means essentially interchangeable. Something is fungible
if there are lots of it, and one version or
one instance or one example of it is just as
good as any other of equal amount, or even if
(02:18):
you look at parts of a thing, if one part
of a thing can be exchanged for an equal part
of that same thing, then it's fungible. So the simplest
example I can think of is a unit of currency.
And since I'm American, I'm gonna go with the dollar bill.
So a dollar bill is worth one dollar or four
(02:41):
quarters or twenty nickels, or will you get it? So
if I have a dollar bill and you have a
dollar bill. We could trade those dollar bills and nothing
else really changes. We would each still possess a thing
of the same value as what we had previously. We
could spend either version of that dollar bill the same way.
(03:01):
So if we didn't make the trade, if I kept
my dollar and you kept yours, we could use our
respective dollars to buy something like chewing gum or something.
But if instead we had swapped dollars, well, then we
could still use those swapped dollars to buy our chewing gum. Heck,
if I had a dollar bill and you had four quarters,
(03:22):
we could still do this right. We could interchange my
currency for yours, because from a value perspective, there is
no difference between my dollar bill and your four coins,
each worth twenty five cents. And one last example, Let's
say that I'm a little short on cash and you
generously lend me five bucks. The next day, I've got
(03:45):
cash to repay you. Now, you don't care if the
five dollar bill that you gave me is the same
as the five dollar bill I give back to you.
You don't care. If it's the exact same five dollar bill.
You don't care if I pay you back with five
one dollar bills. Now, you might be irritated if I
tried to pay you back and change, but as long
(04:06):
as the change adds up to five dollars, the actual
value of the transaction would be the same. The convenience
it becomes an issue, but let's ignore that for now.
I mean, heck, if all I had was a ten
dollar bill, but you happen to have another five dollar bill,
I could give you the ten dollars that I had,
you'd give me the five dollar bill you had. And
(04:28):
now we're square, right, because I returned the five dollars
I owed you, and then you squared off the extra
five dollars I gave you in the form of that
ten dollar bill. The fungibility of currency means that any
version of this transaction is fine because the value of
the exchange remains the same. Other stuff that can count
(04:48):
as fungible includes commodities, you know, like lumber. Barring any
clear differences in quality, one amount of a commodity is
roughly equal to the same amount of that commodity. Usually,
even if the samples were taken from totally different sources,
there's no practical difference between them. So it's a very
pragmatic way to go about things. You know, that pile
(05:09):
of lumber is just as good as that other pile
of lumber, you might think. Now, sure, if you were
to get down to details, like the really fine stuff,
there's going to be differences. But at scale it sort
of is a wash from a pragmatic standpoint. So what
does non fungible mean. Well, as the non tells us,
it's the opposite of fungible. So it's something that is
(05:32):
not interchangeable with something else, like a car, for example.
So let's say you own a nineteen fifty nine Cadillac
Fleetwood Series and I also happened to own one of
those as well. Now, first of all, you've got yourself
a sweet ride that you probably can't park anywhere because
it's not so much a car, it's really a space station.
(05:54):
I mean, that sucker is huge. But I'm getting off track.
Our respective cars are non fungible. Even though they are
the same year, the same make, the same model. We
wouldn't just interchange them. We wouldn't just swap them back
and forth. I mean, there are many other factors that
determine the actual value of a car. How much has
each car been driven how many parts are original to
(06:17):
the car, what condition is the car in and its parts?
Has either of those cars been in any accidents? Did
one of them serve as the vehicle for Doc Hopper,
the bad guy in the Muppet movie. All of these
sort of things affect the value of the car, and
so these two cars, while possessing lots of similarities, are
not interchangeable. And to go back to the lending example,
(06:39):
let's say you are a very kind person and you
lend me your car, despite the fact that you know
I don't actually drive, But for this example, we'll say
that I do so for a week you lend me
your car. It would not be acceptable for me to
return a car that was different from the one you
lent me. Even if the car I brought back was
(07:00):
the same year, the same make, and the same model
as the car you lent me. It's not your car.
That's a problem. You would probably have some choice words
for me if I tried to pull that kind of
stunt and me, well, I'd be like, huh, you know
that is weird. Where did I even get this car?
And fungibility does admittedly get a bit fuzzy because the
(07:24):
line between fungibility and non fungibility isn't always easily distinguishable.
For example, let's take gold. Now, in general, gold is
considered a fungible commodity. If you pan for gold and
you end up with half an ounce of gold, that way,
that's worth the same as a half ounce of gold
in any other format, whether it's a nugget or dust
(07:49):
or a teeny tiny piece off a gold bar or whatever.
One bit of gold is worth the same as an
equivalent amount of that gold, assuming that other things are
the same, like the pure pity of the gold is
the same. That does account for differences in value. But
let's say that you go to the Federal Reserve Bank
in New York City. Maybe you're the sibling of a
(08:12):
thief who had a really unsuccessful run at Nakatomi Plaza
and you want to clear out the Federal Reserve. Now,
this bank stores gold in an underground vault, and it
holds it on behalf of financial institutions from all over
the world. Each gold bar has a serial number that
identifies that gold bar and to whom that gold bar belongs.
(08:34):
These serial numbers correspond with ledgers, and those ledgers are
a complete record of which gold bars belong to which
financial institutions, and in this case, the gold bars are
measured with incredible precision to determine their weight and purity,
which means each gold bar has its own distinct value.
And it also means you can't just swap the bars around.
(08:55):
You couldn't turn to Liechtenstein and say, okay, so you
want five gold bars and you just grab any five
off the vault shelves. You would have to retrieve the
specific bars indicated by whichever client you're talking to, because
each bar would have a specific value that could vary
a little bit or maybe even a lot from other
bars that are in the vault. So this type of
(09:16):
gold bar is not fungible. Okay, but what does all
this have to do with digital goods. Let's consider the
nature of digital stuff for a bit. One of the
big differences between digital and physical goods is the ease
of replication and distribution. This is something that has been
an enormous issue in the business world, and it's something
(09:39):
that we see prompting big companies to overreact in ways
that range from bewildering, too, incredibly negligent and beyond. So
let's consider a few examples. Essentially, whenever a technology comes
along that allows the common folk you know, like me,
to copy stuff, well, big companies get ants in their bridges.
(09:59):
If you want to go all economic thought on this,
it's all about the means of production and who has
access to them. In a capitalist society, the means of
production are in the hands of private individuals and companies
who then may profit off the stuff that they produce.
And that totally makes sense, right you make something, you
can profit off of that something if someone else wants
(10:20):
to buy it. And of course, in the world we
live in, a lot of the stuff we can buy
comes from really big companies that are churning out products
at an enormous scale. So when tech comes around that
can make copies of stuff, that scares these companies. One
thing big companies do not like to see for some
reason are things that can make their numbers next to
(10:41):
profit go down on a spreadsheet. And if a technology
allows people to copy stuff rather than buy things from
a company, that's a potential hit to the bottom line.
And we've seen this over and over from the first
cassette tape and audio recorders that made it possible to
duplicate music abums, to VCRs that created a home theater industry,
(11:04):
to the MP three format, to peer to peer networks
that facilitated file transfers. In each of these cases, big
established industries like movie studios, television studios, and music labels
have lobbied governments to come up with increasingly harsh penalties
that target people who are creating unauthorized copies of work,
so in other words, making copies of stuff without permission. Now,
(11:27):
in most of these cases, it turned out that the
concerns were largely unwarranted. Yes, the ability to copy stuff
can be scary, but the real issue was that these
very big companies that got accustomed to the industry working
a certain way, we're not ready for changes. When those
changes happened, eventually, these same companies found new ways to
(11:48):
do business that were just as if not more profitable,
than previous methods. Movie and TV studios hated the idea
of VCRs when they first came out when VCRs had
home recording capabilities, but this eventually gave birth to the
home video industry, and those same companies found out that
the properties they owned, many of which had laid dormant
in storage because there was no place to exhibit them.
(12:12):
Suddenly that represented a new stream of revenue. Music labels
discovered first the lucrative market of MP three stores, and
later the potentially even more lucrative market of streaming audio,
which hey represented the best of all worlds because with streaming,
the end customer never actually owns a copy of the work,
They just have permission to experience the work by streaming
(12:34):
it to wherever they happened to be in a given moment.
On top of all that, the entertainment industry would claim
that any unauthorized download represents a monetary loss, which was
something that just wasn't supportable. Here's how the argument goes.
Company A produces some form of digital entertainment. Let's say
it's an album from a popular performer. Pirate B decides
(12:57):
to download an unauthorized copy of that album. Now, Company
A claims that they have experienced a loss, that Pirate
B has stolen something from Company A. But here's the thing.
It's a digital copy. The original file is still with
Company A. It's not like pirate be hacked into the
company's database and removed a file so that that file
(13:21):
is no longer there. The original file still exists, the
Company A can still sell copies of that file off
to customers, so Company A hasn't lost a product. If
we contrast this with a physical store, a shoplifter does
cost people money because that shoplifter has taken a physical
item from the store. The store can't magically reproduce that
(13:44):
physical item and then sell it off to a legitimate customer.
That's an actual loss. But with the digital model, the
same thing doesn't apply. Further, there's no way to argue
that Pirate B would have ever purchased that album legitimately,
so Company A can't even really claimed that they lost
out on a sale because it's entirely possible that if
(14:05):
Pirate B had never copied the album, that pra B
just never would have listened to the album at all.
And someone not buying something is not the same thing
as someone stealing something. If I walk into a store
and I look at a new computer, but I decide
I don't really need this right now, and I walk out,
I haven't stolen anything. I haven't cost the company a sale.
(14:29):
I just didn't decide to buy it. So even the
US government's Accountability Office concluded that media companies were going
way too far, with various claims of loss in numerous
lawsuits filed against people who had downloaded music without authorization.
Some of those cases were ludicrously vengeful, with studios seeking
hundreds of thousands of dollars and damages against folks who
(14:53):
had maybe downloaded a few songs. And the point is
that these arguments that the studios were making just weren't
so portable. But even though the arguments didn't hold water,
they do point to a problem. Digital goods have value,
that is clear. I mean people want them, so there
is value to those digital goods. And digital goods are
(15:16):
also replicable. It's easy to make copies of files. But
what if you wanted to buy the equivalent of an
autographed version of a digital piece of art. Maybe you
want to support a specific artist, maybe you're kind of
a digital collector. How would you even go about doing that?
I mean, what does that mean? In a world where
(15:37):
these files can just be replicated in too infinity? I mean,
how would you do it? Well? N f T s
are a way to establish who ultimately has ownership of
a unique, but not necessarily the original digital item, even
if there are millions of copies of that digital item
(15:57):
floating around. When we come back, will explain the backbone
of what makes this possible. But first, let's take a
quick break. All right, so we've covered how digital goods
present a challenge or a few challenges. How do you
(16:19):
control supply of a digital good? And sure, the thought
of controlling supply sounds a bit gross because you could
flip that on its head and say, how do you
limit access to something? But we have to remember that
creating stuff requires effort and skill. Creating something means that
someone somewhere spent time and utilize their talent in order
(16:40):
to do it. Presumably they should receive something in return
if other people want to access that work. Now, if
we all lived in the start Trek universe, where we
learned that money is no longer a concern because scarcity
doesn't exist, and so everyone can do whatever they want
whenever they want because they like to do it, well,
we would be having a different conversation. But instead, we
(17:02):
live in a world where we need to be able
to pay for stuff like rent, food, and medical bills
and whatnot, and we have a limited number of hours
in our lifetimes and being able to earn money from
spending some of those hours in our lives in ways that,
if we're lucky, are both fulfilling and profitable. That's a
big deal. But the digital world makes this challenging. It's
(17:25):
why we have processes like d m c A takedowns,
which can also sometimes get more than a bit overreactive. Ideally,
you would use a d m c A takedown to
stop someone from publishing or sharing your work without your authorization,
but of course some rights holders overstepped and will issue
takedown notices when someone is making fair use of work.
(17:47):
But that's a topic for another episode. Another approach to
protecting digital works is the dreaded digital rights management or
DRM category. The purpose of DRM is to limit how
a work can be copy and or distribute it. Sometimes
it involves including code in a digital product that limits
the number of devices that can have access to that
(18:09):
digital work. For example, you might purchase a game from
an online store and then see that you are authorized
to install that game on up to say three devices,
and furthermore, you might be limited on how many devices
can access that digital work at a given time, so
that if you are running an instance of a game
on one machine, you cannot launch that same game on
(18:32):
another machine while that first instance is still going. But
DRM can lead to a lot of problems. For one thing,
sometimes companies will employ measures that make it really hard
for legitimate customers to actually consume the digital work that
they have purchased. So let's say I've made a legitimate
purchase of a music album using my phone, and now
(18:53):
I've decided I want to listen to this album on
my digital sound system so that I can enjoy it
on a really good audio system. I want to transfer
the file to the sound system. I don't want to
just cast it from my phone. I might find that
transferring the file over so that I can listen to
it on the sound system is a huge hassle. I
might have to jump through numerous hoops just to get
(19:14):
it to work. Now, this is incredibly frustrating, and it
often leads to old fogies like me saying, you know what,
in the old days, we just take a Vinyl album.
It didn't matter if you played it on one turn
table or the other. It's not fair to compare digital
and physical media to one another this way, because it's
not apples to apples. I swear that's not an iPod reference,
(19:34):
but you get the point. Beyond that, some companies have
taken DRM to do really stupid stuff. There's the famous
example of Sony that introduced DRM on c d s,
and if you inserted the CD into a CD ROM
drive on a computer, it created a potential back door
for someone else to gain access to your computer. Sony
(19:56):
ended up paying dearly for that mistake. So DRM can
actually push some people who would be legitimate customers of
a product into piracy because one of the things we
frequently see in online piracy is that hackers will find
ways to strip DRM from digital works. Now, this streamlines
the experience of actually using the digital works, and so
(20:19):
there's a case to be made that using certain strategies
to protect digital works actually creates the incentive that pushes
people towards piracy. It's complicated stuff beyond that, how do
you determine who owns a specific instance of a digital work?
If it's something that's replicable and easily distributable, how do
(20:40):
you ascertain who owns it? And how do you have
a tracking system to track the transfer of ownership from
one party to another. Well, there is a solution to
that problem, and it depends upon a system that was
developed largely in tune with cryptocurrency. So let's go back
to the world of physical currency first. If we're talking
(21:00):
actual physical currency of notes and coins and whatnot, we've
got a big requirement to make that currency work. Actually,
we've got a lot of requirements, but one of the
big ones is that we need to make sure that
the average person cannot easily duplicate currency. We need that
currency protected against counterfeiting. Otherwise, someone with the means would
(21:21):
just create a whole bunch of fake cash and use
it to stand in for the real thing. This causes
all sorts of huge problems, from leading to losses at
the point of purchase all the way to undermining confidence
in the financial systems that support an entire economic system
like a country. And there are a lot of different
protections that go into physical currency. There are special inks,
(21:42):
special materials for notes, they're special water marks, serial numbers,
all these kind of things. These are all elements that
help protect against counterfeiting and make it easier for people
to spot a fake before someone can pass it off
as the real thing. And obviously we've gotten better at
creating or sophisticated protections. These don't guarantee that someone won't
(22:03):
come up with a counterfeiting process, but they raise the
level of difficulty to a point where it's really, really
hard to do. And if you make something hard enough,
that means that if you do want to do it,
it's going to be really expensive. So if it's so
expensive that you're not likely to be able to pay
off the method you used to do the illegal thing,
(22:24):
you're not going to do the illegal thing. It just
doesn't make It's a it's a bad return on investment, right.
So that's one way to protect against counterfeiting. Just make
it super hard to do. Well. That's physical money. Cryptocurrency,
being digital, needs some similar protections. It needs the digital
equivalent of that special blend of paper and cloth that
(22:45):
dollar bills have, or the serial number, or the ink
or transparent pains within the note, or whatever it might be.
It needs a way to protect against duplication. Otherwise you
might grab a bitcoin through some means, maybe you've purchased one,
maybe you mind it, whatever, Then you might copy it
a billion times and either become a billionaire or more likely,
(23:07):
crash the value of the cryptocurrency beyond repair. If you
could find a way to duplicate bitcoin, then the entire
system falls apart because no one would ever know if
a bitcoin is quote unquote real or a duplicate. It's
already digital, which gives people a sense that it's not
quote unquote real to start off with. But digital goods
do have value as long as people have a desire
(23:28):
for those digital goods. A digital good is only worthless
if literally no one wants it, and at least no
one wants it enough to spend money or effort at
getting it. How then, do cryptocurrencies avoid duplication? How can
bitcoin make certain that someone doesn't try and spend the
same virtual coin more than once. This is where blockchain
(23:50):
comes into play, and it's important to note right off
the bat that blockchain and bitcoin are not synonymous. Heck,
blockchain and cryptocurrency aren't son onymous. Bitcoin depends upon the
technology of blockchain, but blockchain can apply to lots of
different types of transactions, not just bitcoin or cryptocurrency in general.
But let's get into how it works, because man, this
(24:13):
technology is one that is a challenge for people to understand.
We're going to use bitcoin as an example for this
because it's arguably the most well known, at least on
a surface level of An example of this technology. At
the heart of the matter is a ledger. This is
a record of every single transaction made within the bitcoin
(24:35):
system and every node in that system, that is, every
computer or computer network. It's a point of contact. All
of them have access to seeing this ledger. It is
a universal ledger that everyone has access to. The ledger
broadcasts each and every transaction that occurs within the system.
(24:55):
The nodes, as in those points of contact, then decide
the order in which the transactions occur. They agree upon this,
and that last bit is a really critical piece. Not
all digital currencies rely on blockchain. Some are controlled by
financial institutions like banks. These institutions step into arbitrate issues,
such as if there's a payment dispute. But because the
(25:18):
banks have to do this, they have to act as
an arbiter. These same banks tend to have a lot
of fees for customers to pay but to cover the
cost of being an arbiter. Also, the process moves rather slowly.
The blockchain approach replaces everything with cryptographic evidence, and the
nodes agree on what evidence actually is. So let's say
(25:40):
that I have a bitcoin and I want to buy
something with it. Here's the fun part. When I started
researching this episode, a bitcoin's value was around fifty seven
thousand U S. Dollars. Side note, as I record this
is closer to fifty dollars either way, I guess I'm
buying a car with it. So I plopped down my
bitcoin digitally speaking, and I purchase a brand new Tesla
(26:02):
Model three, which means I should actually get some change
back on that deal, because I think a fully kitted
out Tesla Model three with all the options would top
out under fifty dollars. So I fill up my online
shopping cart with a Tesla Model three and I make
the purchase. But then I quickly switched tabs to a
different shopping window. And in that window, let's say I've
(26:23):
got a Chevrolet Camaro, and this one's not totally tricked out,
because those can get upwards of around seventy dollars with
all the options, So I hit purchase on that as well.
Now I only have one bitcoin to my name, but
I've just tried to spend it twice, and the process
to verify a transaction can take about ten minutes. So
(26:43):
what happens, Well, each of those transactions gets submitted to
the ledger, which announces the transaction to all the nodes
that connect to the blockchain system. The nodes then work
out the order of transactions, and a majority of the
nodes have to agree on which came first. That will
invalidate the other transaction, because I cannot say, spend the
same bitcoin twice. So does that mean I'm going to
(27:06):
end up with the Tesla? Probably, but not necessarily. The
majority of notes could conclude that I actually ordered the
Camaro first, But even so, that would mean that the
Camaro transaction will be authorized and the Tesla one would
be null and void. Each bitcoin is in effect a
series of digital signatures that if you were to trace
them back from most recent to oldest, it would lead
(27:30):
back to the original creation of the bitcoin and every
transaction it had been through since that point. Each signature
is a record of a transaction, which means a bitcoin
effectively has a memory of every single time someone used
it in some form of transaction. In addition, bitcoin relies
on the cryptographic practice of maintaining a public key, that is,
(27:52):
a cryptographic key that everyone has access to, as well
as a private key for each user. Only the user
has access to the their own personal private key. So
when I make this transaction, my public key and the
most recent of the transactions that was on the bitcoin,
the one the most recent transaction before the one I'm
(28:12):
making that is, those get hashed together, and my digital
signature adds on to that Bitcoin hash. By the way,
as a process by which I can feed a string
of characters into an algorithm and it produces a fixed
size output based on whatever my input was. So let's
say the hash creates a string that's twenty characters long.
(28:33):
That's going to be the output. It does not matter
how long of a string of data I feed to
this algorithm. I might feed a one string one character
string into it, or a thousand character string into it.
The output is going to be twenty characters long. However,
the actual characters in that string, you know, there's gonna
(28:53):
be twenty of them, but the specific ones that appear
in that string are going to depend on whatever I
used as the in put. The hashes created on bitcoin
show the chain of ownership. It's this paired with the
time stamped transactions from the server and the nodes that
are agreeing on transaction order that I'll prevent bitcoins from
being double spent. Oh and blockchain groups transactions together into
(29:17):
blocks of data. That's why it's called block chain. You
have a chain of blocks of transactions. Each block is
cryptographically hashed to the previous blocks. Now that also means
there's no way to change the record. So let's say
that this chain is ten blocks long. If you tried
to change the record of a transaction that was back
(29:38):
in block number four, it would force everything from block
five onward to change as well. And since the ledger
is universal, meaning every computer or node on the system
can see it, no one would be able to get
away with those changes because everyone would see that the
ledger was changing. That's the basics of blockchain and bitcoin.
Now there's more to it than that, and it gets
(30:00):
really technical, but now we have the basis of what
makes n f t s work. When we come back,
we'll learn a bit more about n f t s
in particular. But first let's take another quick break so
I can breathe. And now we're up to non fungible
(30:22):
tokens like bitcoin. N f t s are tied to
block chains. Ethereum is one of the most common ones.
Ethereum has the built in support for things that are
not just cryptocurrency to work on that block chain. So
and if a lot of n f T s are
built on the Ethereum system, so a blockchain doesn't have
(30:44):
to be connected to cryptocurrency. It can be a way
to track any type of transaction. Some companies are using
blockchain to create a way to track different components in
supply chains. So using a block chain, it would be
possible to maintain a record of stuff ranging from fruit
that has picked hundreds of miles away and all the
stops that made before it finally got to your kitchen table,
(31:05):
or tracking authentic designer handbags from the point of origin
to the point of sale so that you know you're
not looking at a counterfeit. The blockchain gives insight and
peace of mind. You know exactly where that thing has
been because there's an unalterable digital record of every transaction
involving that thing. So, an n f T is a
(31:27):
token that connects to a digital item that has a
unique I D. This is different from bitcoins. A bitcoin
technically doesn't have its own I D. Bitcoins are associated
with specific transaction outputs, so the transaction has an I D,
but technically speaking, the bitcoin itself does not n f
T s have to have an I D. This is
(31:48):
how you identify which instance of a digital something is
in fact the one that is up for purchase, And
in a way, it's like saying, how can you tell
who owns a specific in stance of a unique digital item,
and the n f T is the way of doing that.
With physical goods, like a book, you can have a
lot of ways of differentiating them, right, they could be
(32:11):
hard bag, they could be paperback, they could be an
original edition, they could be autographed. All of this is
easily verifiable. With digital goods, it's a lot more challenging
because they're digital, they're ephemeral. So really what an n
f T ends up being is a digital signature, much
like what we see with cryptocurrencies like bitcoin, and just
(32:31):
like cryptocurrencies, and n f T can be part of
a transaction and making that transaction means that the n
f T goes through a very similar process as a
bitcoin or other cryptocurrency. There's a time stamped transaction and
a cryptographic hash that records the transfer of the n
f T, so it moves from one party's ownership to another.
(32:52):
The transaction enters into a universal ledger, and every node
within that system can see that universal ledger, and then
odes verified the block of transactions that the n f
T was part of, and thus ownership has changed hands
and everybody knows about it. Now. Nothing physical has actually
changed hands. It's not like a painting at an auction,
(33:12):
where you might go to an auction, you bid truckloads
of money for a money and at the end of
the auction, assuming that you won the bid, you could
take that painting home, or you can put in a
museum or whatever. But with an n f T, what
has happened is that there is a record of digital
ownership that has changed hands. You own the n f
(33:35):
T instance of whatever digital item you were buying, but
because it's digital, it's still ephemeral. What's more, there might
be many many copies of that digital thing out in
the wild. In fact, if it's a popular piece of
digital art, there could be countless copies out there. And
(33:56):
an n f T is not the same thing as
owning the original instance of something. It's not like going
to an art auction and buying the original canvas painting
of a moon Ai. It might be like going to
an art auction and buying a print of a mon
Ai that happens to be autographed by somebody, presumably not
(34:16):
mon Ai. I don't think Mona's around signing prints of
Monai's work. But n f T doesn't even mean that
the owner of that n f T tokened digital item
has any copyright to that work. If I purchase an
n f T connected version of, say, the keyboard Cat video,
(34:37):
all that means is that specific n f T instance
of keyboard Cat is what I own. The actual creator
of the keyboard Cat video could make as many n
f T s based off that video as they liked.
They could have a different n f t uh version
of the keyboard Cat video for like twenty fifty thousand
(34:58):
different people if they wanted to. Each n f T
would be digitally unique from a signature standpoint, but they
would all represent the same source of digital work, which
is kind of weird right now. If we go back
to thinking about books, you can start to grock this
a little better, at least I can. So. An author
writes a book, the author auctions off the chance for
(35:19):
someone to buy an autographed, personalized copy of the book.
The person who wins that auction Obviously, they don't get
the copyright to the book itself. They can't break in
the royalties for sales of that book. The author still
retains the copyright and can continue to make a living
off that book. What you have is a specific instance
(35:41):
of that book that is autographed and personalized. There's also
nothing stopping the author from doing more auctions to offer
more chances for autographed copies personalized to other people. These
instances are all unique in of themselves, but they all
come from the same source material. Now, there have been
several extremely high profile n f T transactions recently. For example,
(36:06):
Jack Dorsey, the CEO of Twitter, auctioned off and n
f T representing his first tweet ever, which just said
quote just setting up my Twitter end quote. Twitter was
spelled without vowels, so as t W T t R.
He posted that back on March twenty one, two thousand six,
and he auctioned off an n f T token representing
(36:30):
the tweet. The winning bid came in at more than
two point nine million dollars. And you know, this doesn't
mean that the tweet has disappeared from everybody else's view, right,
So what does ownership even mean? I'm not sure I
could even tell you. We're getting into some fuzzy territory here,
(36:50):
because clearly everyone can still see the tweet. Everyone knows
what that tweet is. Where is the value? What is
the point of ownership? I'm not sure I know I
can tell you. However, the Dorsey donated the proceeds of
that auction to a charity, which was pretty awesome. Or
take the work of the artist people whose real name
(37:13):
is Mike Winkelman. He's been making digital art for more
than a decade and he began to experiment with n
f T s a few months ago. This led to
an n f T representing a collection of his works
going on auction at Christie's, the company that oversees like
really big, real legit art auctions, and this brought in
(37:34):
a lot of money, as in sixty nine million dollars.
But these works of art exist on the Internet, which
means you can actually look at them, you can copy them,
you could store them on your home device, on your phone, whatever.
You can make as many copies as you liked. So again,
what does n f T ownership actually mean? Because you
(37:54):
don't own the original, It's not like purchasing that painting
that an artist has created. Personally, you don't own the copyright.
What do you own? Well, you own a record of
a transaction. YEA. N f T S can be a
way that let you support an artist, and that I
think is totally cool. Digital art is very hard to
(38:16):
monetize because of this replicability and easy to distribute nature
of digital goods. It's Harvard digital artists to make money
off their work because it's so easy to just lift
it for free, you know, unless it's part of an
established commercial endeavor. A lot of digital artists struggle to
make money from their work. So maybe there's an artist
(38:39):
that you like who creates really cool digital art. Purchasing
a work connected to n f T might be a
way to show your support. And because that transaction happens
on a publicly viewable blockchain, or at least publicly viewable
to any node connected to that blockchain, that support that
you gave is public, and public support can be a
(38:59):
huge which helped to an artist. If more people see
that a certain artist's work is moving, like people are
buying in a T tokens representing pieces of work from
this particular artist, then maybe they go and help support
that artist, and that artist flourishes as a result. That's great,
but a lot of the reporting on n f t
s right now isn't so much about supporting artists as
(39:22):
it is about speculation. Like speculation from an economic standpoint,
this means that n f t s are kind of
in a way, being treated sort of like cryptocurrency is.
You've likely heard me say on many occasions that cryptocurrency
really comes across more as a commodity than as a currency.
(39:42):
The value of cryptocurrencies tends to be, let's say, fluid,
and thus it's hard to treat cryptocurrency as a real
means of exchange. More people treat it as a way
to invest and increase their money, and n f t
s seem to be headed in at general direction right now.
Owning the digital signature of a transaction for a specific
(40:05):
instance of art is sort of like having bragging rights,
and as long as people ascribe value to those bragging rights,
it will be worth something. In fact, at least in
the short term, the value will likely go up because
lots of people are hearing about n f t s,
they're curious about it, they want to get in on it,
especially the cryptocurrency fans, they really want to jump on
(40:28):
this this bandwagon. But a lot of people, including people,
it turns out, have expressed some concern that what we're
seeing is sort of a speculative bubble that could collapse
at any moment. All right, but how do you store
n f T S. I mean, if you were to
buy a physical work of art, you would have to
put that in some physical location. But if an n
(40:50):
f T is a digital signature, where does it go.
The answer to that is a digital wallet. Though it
has to be a digital wallet, it's also compatible within
f T S. This is the same way that cryptocurrencies work.
That digital wallet would exist on a physical piece of
hardware like a computer, preferably one that is a prey
(41:11):
secure location and has password protection. But it also means
that if you were to ever lose that hardware or
lose the password to access it, you would also lose
all access to the n f T. Now you would
still own it, but you would never be able to
transfer that n f T to anyone else. So let's
say you bought an n f T for a dollar
(41:33):
and now, according to the market, it's worth like a
gazillion dollars, but you no longer have access to the
computer that holds the that digital wallet. You would be
up the creek. Oh and one other thing we have
to talk about. While we've been chatting about digital processes,
it's time to talk about environmental impact of n f
t s because there is one. And that's because the
(41:56):
process of proof of work cryptographic approaches, which is what
underlies n f t s and the cryptocurrencies that they
work on top of. Bitcoin is of an example ethereum
as an example, That approach is tied to how much
computer processing power is dedicated toward that system. So see
(42:16):
the way those blocks get formed on a blockchain and
bitcoin is that you've got these bitcoin miners and what
they're trying to do, essentially is to solve a very
hard math problem with their computer systems. The more computational
power that is applied to those problems, the harder those
problems get. This is a dynamic that's inherent in the
(42:39):
way the system works. It's geared towards having blocks of
transactions solved every ten minutes or so. But that's that's
the goal, is to keep that ten minutes pretty standard,
to keep that timeline steady. The system has to adjust
the difficulty of the problems that the different miners have
to solve in order to you you know, verify a
(43:01):
block and have them added to the chain. Because the
problems are too easy, then the blocks would be solved
in less than ten minutes. And if it's too hard,
then it would take too long. So every so often
the system readjusts how difficult these problems are, and it's
essentially guessing a really big number. It's it's that's hard
(43:22):
to do. It's hard to guess a very specific, very
big number. And the reward for solving these problems, which
again ultimately verifies a block of transactions so that it
can join the blockchain. The reward are a certain number
of bitcoins. At least in the case of bitcoin, uh
that number of bitcoins actually goes down over time, like
(43:44):
the longer Bitcoin is in action, the fewer coins you
get when you solve a block. Right now, if you
were to be running a computer system, or more likely
a computer network system that solved that problem that guests
that very hard number, you would get a reward of
six point to five bitcoins that would be worth around
(44:07):
thousand dollars. As I record this. But again, remember that
you know, the value of bitcoin dropped two thousand dollars
since I started researching this episode, which, um fun fact
means that over the course of one day, we've seen
the value of bitcoin fluctuate by two thousand dollars. Still,
(44:28):
that's a huge payout, right. I mean, if you have
that computer system and it solves the problem to validate
a block of transactions and you get six point two
five bitcoin, that's more than a quarter of a million dollars.
So that is an enormous incentive for bitcoin miners who
spend ridiculous amounts of money to create very fast, very
(44:52):
sophisticated networks of computers that are just dedicated to tackling
these problems. That's all these computers are doing. They're trying
to guess that number. And it also means the average
person running a typical computer has next to zero chance
when it comes to mining. It would be kind of
like if you were given a pick axe that was
covered in rust, and the person next to you is
(45:14):
running a one hundred ton high tech, high speed drill,
and you're both given the task to try and find
a specific gym somewhere in a mountain of stone. You're
not going to be able to keep up. But it
also means that bitcoin mining requires a lot of electricity
to power all these computers all over the world, and
(45:35):
the same is true for other cryptocurrencies, and it's also
true for n f T transactions. They all kind of
are wrapped up with each other. In fact, n f
T transactions are typically overlaid on top of an existing
cryptocurrency system. The n f T transactions become parts of
blocks representing also cryptocurrency transactions, and all this relies upon
(45:56):
that massive computer power that's just chugging away a racing
against other similarly powerful networks of computers, all trying to
be the first to guess that very big number to
validate a block and thus reap the rewards. Memo Acting
on Medium wrote up a pretty exhaustive series of blog
posts that really went into detail about the energy requirements
(46:20):
that are needed just to verify n f T transactions,
and the estimates are really daunting. Acting specifically focused on
Ethereum because the Ethereum cryptocurrency system allows for n f
T transactions and is a very popular option, and a
single Ethereum transaction has an estimated electricity requirement of thirty
(46:42):
five kilowatt hours of electricity, or about the same amount
of electricity that a resident in the European Union would
use over the course of four days for just one transaction.
In turn, Acting states that this generates an estimated twenty
ms of carbon diets emissions once you trace back the
origin point for electricity generation like where your where's your
(47:05):
electricity coming from? So, in other words, the fundamental process
used by cryptocurrencies like bitcoin and ethereum, as well as
n f t s, feeds into a system of eye
popping amounts of energy consumption, which of course feeds back
to the need for greater amounts of energy production and
(47:25):
then in turn creates a big ecological impact, particularly with
carbon emissions. Now, I think I might hate n f
t s for a couple of reasons. I do like
the ability to support artists who work in digital media.
That part I think is really awesome. I really like that.
But just about everything else either kind of irritates me
(47:46):
in that grumpy old man kind of way, or it
legitimately worries me. But I'm curious to hear what you think.
Don't let my bias affect you. I come at this
admitting that I have a specific point of view, and
I also admit that my point of view does not
necessarily reflect what is right or what is wrong. Oh,
(48:07):
bi Wan would be so proud of me. And that
wraps up our episode to explain what n f T
s are and how they work. I hope you found
this episode useful. I covered a lot of different topics here,
but they all do tie into the general systems that
make n f T s what they are, and I
felt like leaving any of it out would have meant
(48:30):
that I would have been lacking some context for you.
If any of you folks have suggestions for topics I
should tackle in future episodes of tech Stuff, I welcome
you to send them to me. The best way to
do that is on Twitter. Please don't make me buy
an n f T token version of your tweet. I
don't have that kind of cheddar on me right now,
(48:52):
but otherwise send it to me the handles text stuff
H s W and I'll talk to you again really
you soon. Y. Text Stuff is an I Heart Radio production.
For more podcasts from I Heart Radio, visit the i
Heart Radio app, Apple Podcasts, or wherever you listen to
(49:14):
your favorite shows,
TechStuff News
Hosts And Creators
Oz Woloshyn
Karah Preiss
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