NFTs: Not Fully Thought-out
By now you have certainly heard about platforms like Rarible and NBA Top Shot and stories like the one published on the front page of the Wall Street Journal about the $69 million digital artwork purchase. These rely on a technology being referred to as NFTs, or Non-Fungible Tokens, that represent such collectibles.
Though my focus is almost solely on Bitcoin these days, the deep technical dive into NFTs done by Jonty Wareing caught my eye and took my feelings around NFTs to a whole new level of shock. From his analysis it seems that the NFT situation is actually far worse than I thought. The bottom line is that an artist who is willing to produce for a confused, though, indisputably, currently existing market has no downside in trying to monetize by selling artwork as NFTs. However, rather than finding comfort in owning and possessing an “immutable and indelible blockchain asset”, a buyer of NFTs should be aware of the details regarding the custody of his NFT, its authenticator and the associated risks.
NFTs?
For those unfamiliar with NFTs, they are tokenized, digital certificates attesting to ownership of a digitized collectible. That definition is pretty packed with nuance and we’ll unpack it below. But for those who would like a less “digital” description: Imagine that I had a collectible, such as a sketch created by Gary Larson. Imagine, further, that Gary Larson provided me with a certificate of ownership over the sketch. It is this certificate of authenticity that is the “NFT”. If we now carry this over into the digital realm, that digitized sketch can be copied and used by many, several times over. However, the information on the certificate attesting to my ownership remains the same and is the object of value in the world of NFTs. It can be traded and broken up into fractions.
Are Collectibles and Certificates Valuable? Yes!
I want to make clear from the outset that both collectibles and certificates of authenticity/ownership can have value — even digital ones. I am the last one to argue that value is objective and I believe that proponents of NFTs spend much time arguing against a giant strawman when they argue in favor of NFTs by making a case for the value of intangibles and “digital art”. Indeed, I have spent much time and energy using Subjective Value Theory to explain to “intrinsic value” folks why Bitcoin has value. There is no doubt in my mind that Michael Jordan’s signature has value, a certificate of ownership for The Mona Lisa has value, a fraction of such a certificate has value and — yes — even a certificate from the artist of a digital work that can be endlessly replicated can have value. Any object of human action has value and any such object that constitutes a “rivalrous good” (as explained here, by Stephan Kinsella) can be traded and, thus, also have a market price attached to it.
“Blockchain” Means Trusting Nobody
So what’s the problem?
Through use of the word “blockchain”, a buyer of an NFT might be under the impression that she is in custody of a “digital asset” that will be forever, immutably and indelibly embedded in “The Blockchain” and that she, therefore, relies on no third-party in order to utilize her purchase. (If not, then perhaps there are larger confusions that need to be cleared up first).
My objection centers around what a “blockchain” can and can’t do and where the technology does and doesn’t apply. (For a deeper understanding, I highly recommend that you watch my Intro to Bitcoin — Part 1 — it will make things a lot clearer). Satoshi Nakamoto, the pseudonymous architect of Bitcoin, incorporated a blockchain (along with several other ingredients) into his design of Bitcoin solely as a mechanism by which the participants (or peers) in his decentralized, “no-single-participant-is-‘more-equal’-than-any -other”-system (or peer-to-peer network) could come to a consensus on the ordering of transactions on the Bitcoin ledger without having to compromise the peer-to-peer nature of the network by creating a situation where one or a group of network participants would be given a special status or role. (How exactly this works is the subject of my video).
The problem is that an NFT scenario — or any “collectible” scenario, for that matter — is not a peer-to-peer, “no-single-participant-is-‘more-equal’-than-any-other”-system. In an NFT scenario, it is impossible to eliminate the need for an external, trusted party — nor would one want eliminate such a third party. The NFT ecosystem relies on the designation of trusted third parties because the buyer of an NFT requires a party she trusts — most likely a reputable party with a widely recognized track record for honesty within society — to authenticate the certificate, as with any other, traditional collectible.
In more concrete terms, if I am buying a digital certificate of ownership of a digitized Gary Larson sketch, it is impossible to remove the need for a trusted authority that can authenticate the ownership certificate as such (or authenticate/appraise the physical object, which doesn’t apply in the digital realm) — even if we use a magical “blockchain”. Indeed, this is exactly where platforms like Rarible and NBA Top Shot enter the picture, in their roles as issuer, authenticator and (surprisingly!) custodian in the NFT ecosystem. The nature of collectibles is such that there must be some widely trusted party acting as a “root of trust” who can validate the authenticity of Gary Larson’s digital signature, by affixing their digital signature to it.
Imagine if this were not the case. Let’s step through it: Perhaps a thief can create a digital token for your home, sign it with his private key and upload it to “the blockchain”. Why can’t he sell that token (i.e. your home!)? Well, any prospective buyer will want to know that the token is authentic — that it was indeed signed by you. For that, the buyer will want to see some sort of certificate signed by an authenticator, Root-of-Trust Inc., that he trusts. Or, perhaps, a certificate signed by Mom-and-Pop-Validators Inc., that possesses a certificate from Root-of-Trust Inc. for being a reliable authority on signatures in a particular jurisdiction. In other words, without a trusted authority, anything goes and nothing is credibly valuable.
Since we cannot (nor do we want to) eliminate the requirement for a trusted, authenticating party, then why use a “blockchain” in the first place?! Let’s simply rely on plain, old digital certificate technology alone (which has existed for decades) and use it to create a simple, centralized platform. For example, imagine a centralized platform, run by Sotheby’s, in which Sotheby’s issues, authenticates and signs certificates for digital collectibles. They can even provide a platform on which to trade and transfer the certificates (though, that can even be done by third-party exchange platforms) and we can do this without a “blockchain”. Further, there would be nothing stopping them from allowing even fractions of certificates to trade.
The central point is that a “blockchain” is not a magical ingredient that one can mix into to an application to transform it from being centralized to decentralized. The application first has to fundamentally require no central points of trust and then, perhaps, a “blockchain” can help keep it from requiring points of centralization in its implementation.
So, we can take some art, digitize it, tokenize it, put it onto a “blockchain” and pretend that it is now “trustless”, but the company that acts as the issuer and authenticator of the NFT, perhaps Rarible, is actually acting in the capacity of a trusted, central intermediary. So the whole “trustless blockchain” thing is a charade (albeit a wonderful marketing buzzword).
Alas, people are confused so it works… for now.
This Is Why We Can’t Have Nice Things
All of the above conclusions are a given without requiring any examination of how most NFTs are actually implemented. However, the implementation is where things get worse.
If someone were to hold a gun to my head and force me to come up with an implementation of NFTs using a “blockchain”, despite the absurdity, I would at least try to make it look like I removed the trust by giving custody of the certificate to the buyer. I would have the platform issue a certificate for the work (still acting as an authenticator) but I would have that certificate reside on “The Blockchain” as the NFT itself. I blindly assumed that this was how it worked, but the implementations examined by Jonty don’t even try to make it look trustless. Users of such platforms are issued NFTs which are essentially documents that say: “Hey, if you want to validate/authenticate this NFT, go to XYZ website, run by ABC Corp. and you’ll find a certificate there”.
What?!
Is this how “Blockchain Technology” helps me remove my dependence on trusted intermediaries?! By referring me to a website hosted by ABC Corp., in an Amazon (for example) datacenter?! What if XYZ website goes down? Or Amazon decides to de-platform them (that could never happen, could it)? Or ABC Corp. ceases to exist or is sold? Is this the kind of service-level that users of “Blockchain Technology” expect and are being sold? I would think that, at the very least, the owner of an NFT would want full custody of the digital certificate itself and for it to “live autonomously on a Blockchain”. Indeed, then there would at least be some pretense for using one.
So a “blockchain” is not required in order to build this application. However, this crosses over from being a matter of semantics to an issue of practical importance, because using terms like “blockchain” only serve to obfuscate, complicate and confuse… and that makes it easier to hide more devils in the details, for example…
“Move Over Sotheby’s! I Want a Certificate from THAT Startup!”
Michael Jordan’s autograph is valuable in it’s own right. Why would I want its value to be dependent on the ability of some fly-by-night tech platform — as opposed to, say, Sotheby’s — to produce a certificate of authenticity? Wouldn’t that only introduce risk/cost and actually reduce its value? What could I possibly stand to gain by doing that?
This is a concern that is especially real in this frothy, “Blockchain”-tech environment.
To illustrate: years ago, when I was a lot less thoughtful about the space than I am now, I am ashamed to say that I bought some Ripple (XRP) token. I largely wrote them off and I wasn’t planning on accessing them or dealing with them anytime soon, but circumstances forced me to make an attempt recently. So I took the private keys to the Ripple holdings and went to create a wallet, only to find that the original Ripple wallet isn’t “a thing” anymore. Apparently, this doesn’t necessarily mean that I can’t access the Ripple. It seems that there are now some new, web-based platforms that support both the “new” and “old” versions of Ripple (or something like that — I didn’t dig too deep)… something called gatehub.com, or something like that, where I enter the old private keys and they will pull my holdings into that newly created account (or so they claim).
Do I trust “Gatehub”? Who knows? Do I want to risk, perhaps, going an alternative route by installing untrusted software potentially containing malware on my computer for this? No.
Such is the state of the “Blockchain Technology” world outside of Bitcoin. Even if your chosen Blockchain Technology startup manages to stay afloat, the specific technology you used might no longer be supported.
Good luck to the guy who bought the Beeple piece for $69M. I hope that when he goes to sell it, the NFT startup he used to issue it still exists, has a working website and is able to produce the certificate (and Amazon is cool with it).
The Hope Diamond: A Killer Bar Mitzva Gift
Yes, fractional pieces of ownership are a total game changer. The ability to digitize and then endlessly divide a physical object, like The Hope Diamond or the Michael Jordan Rookie Card, allows anyone to own a piece of it and benefit from an increase in its price.
But what prevents shares of a piece of digital artwork from being created and sold without a “blockchain”? And, more specifically to the point, why does the invention of a “blockchain” suddenly enable this to happen? What is stopping Sotheby’s from creating a section on their website that allows participants from all over the world to collectively deposit funds and buy a piece of artwork to which they will attest ownership?
100% agreed! A fraction of The Mona Lisa would make a Killer Bar Mitzva Gift!
But wouldn’t it be a much more compelling gift if the certificate was digitally signed by Sotheby’s than by superrare.co?
…and, in reality, (and this is the part that completely blows my mind) when you buy an NFT, you are NOT even getting an actual certificate signed by superrare.co, rather, you are getting a piece of data that says “For a certificate, visit http://superrare.co/somethingsomethingsomething" (!!!), which is just… well… we’ll say that it is a surprising implementation detail.
Sandcastles of Demand
But you continue to protest:
Alright, purist, armchair philosopher! I’m just interested in making money and it’s clear that you’re about as entrepreneurial as a career academic! You are hung up on semantics and The Market will move forward without you!
You have managed to convince me that none of this NFT business has anything to do with “Blockchain Technology” and that it wasn’t impossible to do before, but here we are! For better or worse, this is the platform that is taking off and it seems an easier, faster, more transparent way of doing something than has ever been possible without NFTs! Nobody thinks about or cares about your fancy “trust models”! Who cares if it’s a charade?!
Clearly the buyers of today are not concerned! There is demand!
I’m going to tell you right now, loudly and clearly, that I fully expect the NFT market to get hotter than it currently is and even persist for a while… but only in the short term. A market confused about a complicated, paradigm-changing technology, such as Bitcoin, can last for years… but, eventually, the confusion fades away as a new generation moves in, consumers learn lessons the hard way and applications that utilize and showcase the technology in productive ways evolve. The demand resulting from a confused market is not long-term sustainable.
The evolution of the Internet into the mainstream is a great example of this. As an early-adopter of the Internet, I was taken by the promise of a free and open “Information Superhighway”, the apps that would evolve in an open ecosystem and the changes it would bring to the world. I would talk to anyone who would listen about packet-switched networks and IP addresses (this audience pretty much consisted of my parents and my grandmother). But then I watched with confusion as my friends and family members signed up with “walled-garden” online services, such as CompuServ, Prodigy and AOL. When I tried to challenge any of them on the sense of that decision, I was branded a “purist” and told that the Internet wasn’t user-friendly and there was no good reason not to use an online service — especially when The AOL Browser launched and one could access The Web through it. Absolute fortunes were made in the space and AOL merged with Time Warner!
However, we find ourselves 20 years later without a trace of any of the online services. If I were to suggest to a VC that I were launching an online service or that I had a great app idea and was planning to launch my own Internet to power it, I would be laughed out the room and down the block. Why? Because, eventually, everyone began to understand the Internet through generational attrition and by example, without even requiring a lecture about packet-switched networks and IP addresses.
This “online services period” is where we stand today with Bitcoin. There is a tremendous amount of confusion in the Bitcoin space around “blockchain” and “trust”, by both regulators and consumers (and even programmers). This confusion creates new and exciting markets, like the ICO market (RIP). It is very hard for people to wrap their heads around “blockchain” and “trust” now and it makes a lot of sense to me that this is the case. These concepts are new and difficult to understand and I watched my friends and family refer to AOL as “The Internet” for the better part of a decade. But as the confusion fades over time, so will those new, confusion-based markets.
This is not necessarily bad news for the entrepreneurs creating businesses catering to this confused market, but it’s not great news for buyers. It is true that no consumer was hurt by the fading away of the online services, yet no consumer had decided to tie the value of a long-term investment to one of them. So the question for an NFT buyer is: would you have wanted to purchase such an asset if it were 20+ years ago and depended on the AOL ecosystem in order to retain it’s value?
So, if you are an artist in the space — enjoy!
Buyers, beware!
