NFTs are Here to Stay
Hardware is Hard is hands down one of my favorite medium publications. While I am not good at hardware, I love building and designing things and learning about the process and knowing what is involved in hardware.
One of my favorite story is Hardware and the Military-Industrial Complex. The major takeaway I have from it is just how complex (pun intended) it is and how it doesn’t just represent a single entity that’s either good or bad. The Department of Defense (DoD) and the Military-Industrial Complex affects many areas of American lives that highly benefits the society—like roads, fire departments, or the mentioned SBIR program in the post. At the same time, it may fund things that exacerbates the negative effects of war in other countries—not necessarily a good thing. That is to say, all the funding that the DoD gets is not necessarily a bad thing—it’s more of a matter of what it does with it and what consequences those actions have on society.
While I may not be a hardware guy, I am definitely a software guy, and trust me, software is also hard.
The most recent blog post from Hardware is Hard is laughing_at_NFTs.txt. There are many things I agree about on that post, but overall that post is essentially a criticism of NFT, and it claims the following (quoting directly from the article):
- “if the ethos of blockchain is democratization and decentralization, NFTs are the exact opposite of what blockchain was build for”, “the philosophy of blockchain is the opposite of exclusivity, rather it is radical inclusivity of everyone to manage their own data and agreements.” 🤔
- “Blockchain creates a ‘digital twin’ so to speak of real currency, or can help track the management of a real project like Sela attempted to. Blockchain assists in removing the need for an authority, so that everyone can be their own authority and verify agreements with each other.” ✅
- “NFTs are an attempt to use one facet of blockchain — the fact that blockchain typically relies on little, immutable components such as individual bitcoins — to try and do the exact opposite of what blockchain was made for. Rather than taking something exclusive and turning it into something inclusive, it takes something already inclusive and tries to turn it into something exclusive.” 🤔
I’ve put a ✅ on the one thing that I kind of agree with, but in this post I will focus the other two because those are places where based on my software understanding of Blockchain and NFTs, I believe that they are misguided.
The Ethos of Blockchain
While democratization and decentralization are a huge core of blockchain, they are NOT what blockchains were built for.
I want to make a distinction here. There are three concepts at play that might be used interchangeably. There’s the concept of blockchain, then there’s the concept of digital currency, and finally there’s a concept of cryptocurrency. All of these concepts are different and must be treated differently.
Blockchain is a system that essentially gets rid of the need to have trust. That is the sole focus and objective of the blockchain technology. Blockchains achieve this lack of need of trust by making use of decentralization and democratization. At a high level, it works this way:
- Multiple entities (computers in the blockchain networks) keep copies of the entire chain of blocks, and all entities keep the same exact chain. This is the “decentralized” part of blockchain.
- There is a rule for how to add new blocks in the chain. That rule is based on the concept of “proof of work”. In order to add a block to the chain, one of these entities will broadcast to all other entities to say “hey, here’s a new block to add, and here’s my proof of work”.
- In order to produce that proof of work, the computer must do computational work by solving a cryptographic problem. Think of this as a problem that is very difficult to solve—i.e., guaranteed to take time to solve—but that is very easy to check for validity—can be checked instantly.
- In addition, an important part of proof of work is that it depends on the previous block. The validation check takes as inputs proof of work, previous block, and the new block and checks whether it’s valid. If you tweak the previous block in any way (big or small), the validation check will fail. This is the “chain” part of blockchain.
- Finally, greater than 50% of the entities in the network must approve of this new block, and they all do so by running the same program that checks the proof of work. Once greater that 50% of the entities approve of it, the new block officially becomes part of the block chain. This is the “democratization” part of blockchain.
Because of those two decentralized and democratized components, we are able to achieve a trust-less system. That is, if you were skeptical of some new block in the chain, you have access to the validation program that checks each proof of work for every block in the chain. You also have the guarantee that every entities in the network share the same block. If one computer wanted to modify some previous blocks, they will have to modify every single block after that and every newly added blocks—all of which takes time and is practically impossible to do because they then have to convince the rest of the networks that they are wrong. This means that you do not have to have “faith” in the system like you’d have to in some central authority. It just works and you can trust it. That, is the ethos of blockchain.
Here’s a video that is my go-to for someone who wants to understand blockchains better: But how does bitcoin actually work? This will dive into the details of proof of work and decentralization in an easy to understand but still detailed enough that you have a solid grasp of the technology.
To use a definition from Hardware is Hard, a digital currency is simply a “‘digital twin’ so to speak of real currency”. That is absolutely it—nothing more, nothing less. It’s just cash but digital cash. To give an example, I play this car racing game called Asphalt 9, and this game has digital currencies in it:
That game currency is digital currency.
Let me give another example: in apartments, some tenants (me included) have to purchase a laundry card in which you put money inside that you’ll eventually use for laundry within the apartment. That is also digital currency.
The point I want to make is that digital currency doesn’t have to be actual currency that you can use in everyday life. Heck, even real life money isn’t necessarily useful all the time—e.g., Zimbabwe’s recent hyperinflation caused their currency to be practically useless just like my Asphalt 9 coins are useless to me in the real world.
At the same time, some currencies can be traded for other currencies. In this case, while I can’t trade my Asphalt 9 currencies with other people who have Asphalt 9 currencies, I could trade Zimbabwe’s currency if I had it.
Finally, cryptocurrencies are a subset of digital coins that usually you can trade and that always make use of some form of cryptography to make themselves safe to use. Usually, cryptocurrencies like Bitcoin or Etherium make the use of a blockchain. The fact that they use a blockchain is what allows you and I to trust the system (as explained in the Blockchain section).
With that said, there are solid criticism of cryptocurrencies, like this one (which I may respond to in the future—in the meantime the comment section has solid rebuttals to it too). The way I see it is that while cryptocurrencies have problems, those problems usually are illegitimate (e.g., “they’re not valuable”), common to all or most currencies (e.g., “unstable” or “unsafe”), or legitimate (e.g., how they hurt the environment which I agree is a serious issue). These problems, to me, are much smaller problems than those of government fiat currencies (e.g., government can just print money which inherently tax holders of those currencies via inflation). At least with cryptocurrencies, no one needs to have faith in some central authority whose incentives often benefits either themselves or some other groups (like big banks in 2008) at the expense of other people.
I want to respond to the criticism of NFT as well. There was a lot of things said about NFTs in laughing_at_NFTs.txt:
- “Rather than taking something exclusive and turning it into something inclusive, [an NFT] takes something already inclusive and tries to turn it into something exclusive.”
- “But so far the NFTs that have been sold at significant prices are mostly produced by people who are already successful artists or celebrities.”
- “Finally, NFTs feel meaningless to me.”
These criticisms of NFTs aren’t necessarily false or wrong—they are all mostly true actually. However, they kind of are expressing a sentiment that NFTs are bad or dumb or useless, to which I disagree and I hope to demonstrate why.
First, what is an NFT?
NFT stands for Non-Fungible Token. What this means is very simple: something fungible is something that is replaceable. Something non-fungible is something unique.
- For instance, each human being is non-fungible; there exists only one me—despite the fact that there are over 7 billions people on earth today.
- At the same time, each grain of salt is extremely fungible. That is, when you are cooking, you don’t care which grain of salt you use because they are all interchangeable in how they are used.
That is the “non-fungible” part of NFT. The token part means that this thing that is non-fungible is digital. This is practically the same concept as regular currency vs. digital currency. Examples of practically non-fungible things in real life are: baseball cards, New York Taxi Medallions, various artwork, your driver’s license, your passport, etc. All of these are non-fungible things because there exist only one of each at any given time and you can’t just go around replacing them or copying them. In a similar fashion, an NFT is the exact same concept but in a digital infrastructure.
Currently, NFTs are built on top of various blockchain networks—the Etherium network being the most popular one. So, yes, you can create two NFTs of a given token (an image per-se) in two different networks, which sort of disproves that whole “fungibility” claim, but that’s not necessarily proof that it’s bad. For the examples we hear about in the media, the people involved know which market the entity is in and therefore they know not to buy it in the wrong network. Also, it turns out companies can be in two different stock exchanges, so it’s not like NFTs are unique in this matter.
Are NFTs Bad or Dumb or Useless?
When evaluating whether something is bad or not, we have to evaluate it based on what it is and not based on how it is used! Earlier, I mentioned the article Hardware and the Military-Industrial Complex which shows that the Department of Defense is not necessarily good or bad—it’s what it does that tells us whether it’s good or bad. In a way, “Defense” is really just a label.
What NFTs are and try to achieve is essentially creating one of a kind. Is it bad to have one of a kind of anything? It depends. Driver’s licenses are one of a kind, and they are useful because someone who has a license is someone who in theory has learned the rules of the road—which is a good thing because ownership of one when driving makes everyone safer. On the other hand, I personally don’t like the idea of New York Taxi Medallions because they limit the number of Taxi drivers—which makes it difficult to have more taxi drivers and raises the cost of taxi for everyone by limiting the supply.
As a concept, thinking that NFTs are bad or good is not the point. It doesn’t matter. The concept of NFT is just a tool to prove ownership, and proof of ownership is something that can be highly valuable to society.
The NFT Bubble
The NFT blog laughing_at_NFTs.txt mentioned how people claim that NFTs are a new way to pay artists and use that as a supporting reason for using NFTs. In practice—at least today—it doesn’t work like that. Most artists won’t be benefitting from this. Like the blog mentioned, it’s the artists that are already good that are able to capitalize on this—similar to how only artists in the pasts that were recognized were able to sell their art at a high price. The way I see the artwork topic is that it’s a net positive. I’m of the opinion that if some of us are better off while most of us stay the same, why not? Good for them!
However, ask anyone and they will tell you that NFTs are a bubble right now—me included. No one knows for sure until it pops, but I do think it’s a bubble. I would never buy a baseball card today, and for the same reason, I would never buy an NFT of a video highlight of a basketball sense. Both use-cases to me seem absolutely ridiculous because it’s unclear whether they add any value to the world. Also, I wouldn’t buy art NFT because—why would I? That sounds like a dumb use-case of NFTs. So, I don’t understand how someone can spent millions of dollars on the ownership of a digital image or video that everyone on the internet can download.
I believe that in the future, these use-cases will be the same as today’s baseball card use cases—and only a minority of people will trade in them. Despite that, it doesn’t mean that NFTs are bad. It just means that these uses-cases—at least to me and I believe to most sensible folks—is dumb.
So, what are the good use cases of NFTs?
While this is still theory, I believe NFT used as proof of ownership will become common place in the future. They don’t have to be traded for money—they can be just that: traded or given. For instance, instead of having to hold a physical card of your driver’s license, maybe in the future you might just pull out your phone and show your NFT ownership (in such a way that the police officer can easily verify that information given the secure architecture NFTs are built on).
Another use-case: Not long ago, I became a patron of one of my favorite Youtube channel on Patreon. In the future, maybe Youtube creators will issue NFTs for which the owners have exclusive access and voting rights to their content. This can also be traded. It’d be similar to today’s stock market or similar to shareholders of a company. The good thing about this is that the creator has the freedom to issue their NFTs however they want on the blockchain network they are built on without the approval of or compliance to some central authority (like the NYSE).
Finally, other use cases might be ownership of land (or even virtual land). What I imagine here is that it cuts the red tape because the transfer of ownership is all done via software technology.
In summary, what I really wanted to show is that:
- Blockchain is not about decentralization and democratization, it’s about having a system that doesn’t rely on trust. And it uses decentralization and democratization to achieve that.
- NFTs are simply ownership of a digital token for which there is one of a kind. They are not good nor bad; it’s more about how they are used and whether those use cases provide real life benefits.
I felt like the article laughing_at_NFTs.txt missed these two concepts so I wanted to point them out and hope to offer a different perspectives on these matters. I’ll end this by sharing some Videos that have helped me understand NFTs better (check out especially the Jake Tran video—that one shows the parallels between the Internet and NFTs):
With all of that said, I value and welcome criticism. If you have thoughts, please leave a comment!