Speaker 1: This is Bloomberg Crypto, a daily Bloomberg I Heard podcast,
Speaker 1: and I'm Stacy Marie Ishmael, Managing editor of Crypto for
Speaker 1: Bloomberg News. Let me cut to the chase. Matt Levine,
Speaker 1: my colleague on the Bloomberg Opinion side of the house,
Speaker 1: is perhaps the greatest finance blogger ever to do it,
Speaker 1: and in what is both a flex and a service,
Speaker 1: He's just written tens of thousands of words on the
Speaker 1: subject of crypto for a special issue of Bloomberg Business Week.
Speaker 1: Matt's gone deep into the blockchain to break down its origins,
Speaker 1: it's possible, futures, and the current state of a technology
Speaker 1: that's showing up everywhere in industries ranging from finance to
Speaker 1: shipping too, of course video games. And we're going to
Speaker 1: be bringing his exploration to you in audio form thanks
Speaker 1: to the talents of Bloomberg editor and professional voice actor
Speaker 1: Mark Ledoff. You'll get weekly chapters of the special Crypto
Speaker 1: issue of Bloomberg Business Week. Welcome to the fourth chapter
Speaker 1: of the special audio edition of the Bloomberg Business Week
Speaker 1: Crypto issue, written by Matt Levine and narrated by Mark Leedoff.
Speaker 1: You can find previous episodes right here in the Bloomberg
Speaker 1: Crypto podcast Feed five an I c O. Here's another
Speaker 1: important difference between Ethereum and bitcoin. Bitcoin never raised money,
Speaker 1: Ethereum did. You can think of Bitcoin as more or
Speaker 1: less the open source passion product of one anonymous guy
Speaker 1: who really likes cryptography. The cost of building the basic
Speaker 1: system of bitcoin was Satoshi's time, which he donated. Then
Speaker 1: he mined the first bitcoins and got super rich, probably,
Speaker 1: but that came later. Ethereum was a bit more complicated
Speaker 1: to build. Vitalic bou Terran is the intellectual leader of Ethereum,
Speaker 1: but there were a bunch of co founders, there were
Speaker 1: legal entities, there were programmers. They spent a lot of
Speaker 1: time on it. They had to pay for food deliveries.
Speaker 1: You could imagine Vitalic saying, okay, we are a company.
Speaker 1: We're Ethereum Inc. We're going to start the ethereum blockchain
Speaker 1: and make money from it, and we'll sell shares in
Speaker 1: ethereum Ink to raise the money to build the blockchain.
Speaker 1: Sell ethereum ink for cash, get the cash, build the blockchain,
Speaker 1: and I don't know, collect royalties. Ethereum ink collects point
Speaker 1: zero one percent of every Ethereum transaction forever. Ethereum was
Speaker 1: a well known and much hyped project even before it launched,
Speaker 1: and they could easily have found investors. They didn't do
Speaker 1: that for philosophical and economic reasons. They wanted a decentralized
Speaker 1: blockchain ecosystem, and having it owned by a corporation would
Speaker 1: defeat the purpose. There is an Ethereum Foundation which works
Speaker 1: on Ethereum development and has a certain amount of moral authority,
Speaker 1: but it has no control over the blockchain itself, so
Speaker 1: they didn't sell shares. They sold tokens. In July, they
Speaker 1: sold ether at the price of one thousand to two
Speaker 1: thousand ether per BTC, a mechanism intended to fund the
Speaker 1: Ethereum organization and pay for development. In all, they sold
Speaker 1: about sixty million Ether for about eighteen point three million dollars,
Speaker 1: all before the technology itself went live. Ethereum's Genesis block
Speaker 1: was mined in July. Today, there is a total of
Speaker 1: about one twenty two million ether outstanding. Some of that,
Speaker 1: like bitcoin, comes from mining or now validating, but almost
Speaker 1: half of it was purchased before Ethereum was launched by
Speaker 1: people who wanted to bet on its success. Camilla Russo,
Speaker 1: in her book about Ethereum, wrote, a whole new financing
Speaker 1: model had been tested, one where a ragtag group of
Speaker 1: feuding hackers with no business plan and no live product,
Speaker 1: let alone users or revenue, could raise millions of dollars
Speaker 1: from thousands of people from all over the world. Before
Speaker 1: anyone who wanted to buy stock in big tech firms
Speaker 1: like Facebook or Google would need a US bank account.
Speaker 1: Things got even more complicated for those who wanted to
Speaker 1: invest in startups that hadn't gone to the public markets
Speaker 1: to raise funds. Now anyone could be an investor in
Speaker 1: one of the most cutting edge technology companies out there.
Speaker 1: All they needed was an Internet connection and at least
Speaker 1: point zero one bitcoin. It worked out well for those investors.
Speaker 1: That sixty million ether is worth billions of dollars today,
Speaker 1: But as a whole new financing model it's a mixed bag.
Speaker 1: Many people, particularly securities regulators, think it's good that startups
Speaker 1: usually can't raise money from the general public without at
Speaker 1: least a business a plan, and there's a sense in
Speaker 1: which this sale, the ether pre mine or initial coin
Speaker 1: offering i c O, was the original sin of crypto
Speaker 1: as a financing tool. A lot of other crypto teams
Speaker 1: copied Ethereum's approach, riding up vague plans to build some
Speaker 1: project and then raising money by pre selling tokens that
Speaker 1: would be useful if the project ever happened. The analogy
Speaker 1: I've tweeted is that I c o s are like
Speaker 1: if the Wright brothers sold air miles to finance inventing
Speaker 1: the airplane. Not everyone got around to inventing the airplane.
Speaker 1: There was a seventeen I c O boom in which
Speaker 1: a lot of projects raised a lot of money by
Speaker 1: selling tokens that never turned out to be useful. When
Speaker 1: rag tag groups of hackers with no business plan can
Speaker 1: raise millions of dollars from anyone with an Internet connection,
Speaker 1: they all will. The odds that any particular one of
Speaker 1: those non business plans will ever succeed are low. The
Speaker 1: odds that any particular one will be a scam are high.
Speaker 1: Six other chains one layers tried lemmas. The basic ideas
Speaker 1: of Ethereum, a distributed computer, smart contracts, depps, new tokens,
Speaker 1: etcetera caught on broadly within crypto. Ether is now the
Speaker 1: second biggest cryptocurrency, well behind Bitcoin, well ahead of everything else,
Speaker 1: but it has a lot of competition. If you're building
Speaker 1: smart contracts, there are a lot of other blockchains where
Speaker 1: you can run them, including B and B chain, so Lana, Avalanche, Cardano, Tesos,
Speaker 1: Polka Dot, algorand tron and Tara two point oh, Tara
Speaker 1: one point oh blew itself up oops. These platforms, like
Speaker 1: Bitcoin and Ethereum are called layer one block chains, meaning
Speaker 1: they're entirely separate from one another. Each layer one blockchain
Speaker 1: maintains its own ledger. They compete with one another much
Speaker 1: like other tech platforms do, arguing that they offer better performance,
Speaker 1: a better environment for developers, a different programming style, better tools.
Speaker 1: A famous problem in crypto is the blockchain tri lemma.
Speaker 1: Blockchains can be scalable, they can process a lot of
Speaker 1: transactions quickly, decentralized, they don't depend on a few trusted parties,
Speaker 1: and secure. A minority of computers on the network can't
Speaker 1: successfully attack it, But, says the tri lemma, you can
Speaker 1: only choose two of those three. Bitcoin and Ethereum chose
Speaker 1: decentralization and security, which makes them fairly slow computers. Other
Speaker 1: blockchains are faster, but more centralized. If your consensus mechanism
Speaker 1: is we trust six computers to verify all transactions. That's
Speaker 1: going to be faster than Bitcoin's proof of work algorithm.
Speaker 1: But if someone hacks those six computers, look out. People
Speaker 1: on the decentralized and secure blockchains spend a lot of
Speaker 1: time thinking about scaling. Often this involves so called layer
Speaker 1: two systems, which are built on top of layer one technology,
Speaker 1: such as Bitcoin and Ethereum. For instance, Bitcoin has the
Speaker 1: Lightning Network, a layer two payment system that basically lets
Speaker 1: people on the Bitcoin blockchain set up payments to each
Speaker 1: other without running all of them through the blockchain. This
Speaker 1: makes the payments faster and cheaper, and they periodically settle
Speaker 1: on the blockchain for security. Much of the thought in
Speaker 1: Ethereum these days is about how to scale it so
Speaker 1: that it can execute large numbers of transactions quickly and cheaply,
Speaker 1: a prerequisite for building a universal world computer, or frankly,
Speaker 1: even a payment system that can compete with credit cards.
Speaker 1: Much of the action here is about layer two systems
Speaker 1: that specialize in doing some sorts of transactions off the
Speaker 1: main Ethereum blockchain, where space is somewhat scarce and expensive,
Speaker 1: and then saving the results to that blockchain, where transactions
Speaker 1: are secure and immutable. A lot of the interesting cryptography
Speaker 1: in crypto is found here. People love talking about zero
Speaker 1: knowledge proofs in this context because in some broad sense
Speaker 1: there are problems of data compression. You want to be
Speaker 1: able to do a lot of transactions on a layer
Speaker 1: two and then write down those transactions in an abridged
Speaker 1: way on the Ethereum blockchain, while still being confident that
Speaker 1: the secure and immutable Ethereum blockchain keeps track of all
Speaker 1: of them two bridges wrapping. Some people in crypto are
Speaker 1: faithful to a single blockchain. They are Bitcoin maximalists or
Speaker 1: Ethereum or Avalanche or so Lana loyalists. Many people are
Speaker 1: generalist dabblers, though they like buying lots of tokens on
Speaker 1: lots of blockchains because they see merit in many blockchain platforms,
Speaker 1: or because they like it when lines go up. One
Speaker 1: result of this is that sometimes you will want to
Speaker 1: own the token of one blockchain on another blockchain. This
Speaker 1: comes up a lot in decentralized finance, or defy the
Speaker 1: system of crypto exchanges and financial products that live on blockchains.
Speaker 1: If you're writing smart contracts to trade tokens on the blockchain,
Speaker 1: those smart contracts. Computer programs will have to run on
Speaker 1: one particular blockchain, but you might not want to limit
Speaker 1: yourself to the tokens of that blockchain. You are, after all,
Speaker 1: building an exchange. You might want to write programs on
Speaker 1: the Ethereum blockchain that trade bitcoin, or write programs on
Speaker 1: Slana that trade ether. Say you want to write a
Speaker 1: smart contract on Solana to swap some ether for soul,
Speaker 1: the Salana token. How do you do that? You don't.
Speaker 1: Your ether lives on the Ethereum blockchain. You have Ether
Speaker 1: is a fact about the ledger on that blockchain. The
Speaker 1: Salana blockchain has no record of that, nor does Ethereum
Speaker 1: have any record of Salana tokens. It's all incompatible, separate systems.
Speaker 1: It's separate banks and property registers and d m vs
Speaker 1: all over again. That's an annoying answer and can't really
Speaker 1: be right. So there are workarounds. The principal one is
Speaker 1: called a bridge. A bridge is generally a smart contract
Speaker 1: on one blockchain, a smart contract on another blockchain, and
Speaker 1: some sort of trusted computer program that sits between them
Speaker 1: and passes messages. If you want to swap some ether
Speaker 1: for soul, you find a bridge. You send your ether
Speaker 1: to the bridge's smart contract and Ethereum, which locks it up.
Speaker 1: As far as the Ethereum blockchain is concerned, your ether
Speaker 1: belongs to the bridge. Now. The bridges off chain computer
Speaker 1: program sees this and alerts its Salana smart contract, which
Speaker 1: gives you the equivalent of the ether on the Salana blockchain.
Speaker 1: The equivalent of the ether could, I suppose, be some
Speaker 1: amount of soul at whatever the current ether soul exchange
Speaker 1: rate is. The bridge could also be in exchange, but
Speaker 1: the normal approach is to take ether on Ethereum and
Speaker 1: give you back wrapped ether sometimes w E on Salana.
Speaker 1: Wrapped ether is a token issued by the bridge's smart
Speaker 1: contract on the Salona blockchain, representing a claim on the
Speaker 1: bridges ether on the Ethereum blockchain. It is, as it were,
Speaker 1: ether on the Salona network. Bridges are notorious sites of
Speaker 1: risk in crypto. A big bridge contract will have a
Speaker 1: lot of crypto locked up in it, will need to
Speaker 1: regularly send and receive crypto from strangers, and will have
Speaker 1: to interoperate between different environments. If you can find a
Speaker 1: bug in a bridge, you can make a lot of money.
Speaker 1: People do that pretty regularly. An actual big Salona Ethereum
Speaker 1: Bridge is called wormhole. It was hacked this year for
Speaker 1: about three and twenty million dollars of w E see
Speaker 1: a slow database. Here's a slightly different generalization of bitcoin. One. Look,
Speaker 1: you've built a distributed database. Two. This database has some
Speaker 1: fascinating properties. It's distributed, decentralized, secure, trust less, and permissionless. Three.
Speaker 1: Your database happens to track the ownership of electronic coins.
Speaker 1: Four What if we built a database like that to
Speaker 1: track the ownership of other things? One Map and territory.
Speaker 1: Modern life consists in large part of entries in databases,
Speaker 1: I said, and then I listed a few, starting with money.
Speaker 1: There's a reason I started with money, and why Satoshi
Speaker 1: did too. A dollar is an entry on the list
Speaker 1: of dollars. If you have dollars, what you have is
Speaker 1: an entry in your banks database saying how many dollars
Speaker 1: you have? This entry is the dollars. The bank doesn't
Speaker 1: have sacks of gold or a big box of paper
Speaker 1: currency that the database refers to. It just has the database.
Speaker 1: This is even more true for bitcoin. There are no
Speaker 1: paper bitcoins at all. If the bitcoin ledger says you
Speaker 1: have a bitcoin, then you have a bitcoin. That's all
Speaker 1: a bitcoin is. Almost nothing else works quite that way, though.
Speaker 1: If you own a house, in some legal sense, the
Speaker 1: main thing that you own is an entry in a
Speaker 1: property register, but in some much more important sense, the
Speaker 1: main thing that you own is the house. If your
Speaker 1: house burned down, you could not sleep in your deed. Conversely,
Speaker 1: if someone snuck into the property registry at night and
Speaker 1: slipped in a new deed saying that they owned your house,
Speaker 1: and then they showed up at your house to kick
Speaker 1: you out, you might reasonably raise objections like, but all
Speaker 1: my stuff is here, or but I have the keys
Speaker 1: to the locks, or but all my neighbors know I
Speaker 1: live here, or but this is the address on my
Speaker 1: driver's license, and you might convince everyone, the sheriff, the courts,
Speaker 1: your mortgage lender, that in fact, you own the house
Speaker 1: and the deed is wrong. The property registry is not
Speaker 1: definitive for house ownership the way the bitcoin ledger is
Speaker 1: definitive for bitcoin ownership. But the idea of putting important
Speaker 1: databases of real world stuff on the blockchain. For some reason,
Speaker 1: the definite art coal is always used with this stuff,
Speaker 1: and one shouldn't worry too much about which blockchain has
Speaker 1: a lot of appeal. People are always talking about moving
Speaker 1: real estate registries, or cargo manifests or carbon emissions onto
Speaker 1: the blockchain. This is appealing because as a database, the
Speaker 1: blockchain has some nice properties. The important public blockchains, such
Speaker 1: as Bitcoin and Ethereum, are secure, open, and permissionless. Anyone
Speaker 1: can prove they own a Bitcoin and that ownership can't
Speaker 1: be reversed arbitrarily, and anyone can build on these systems.
Speaker 1: If you want to build an exchange for trading ethereum,
Speaker 1: you can just do it. The blockchain is public and
Speaker 1: the standards for building new Ethereum programs are open. Building
Speaker 1: a new system for buying houses is overwhelmingly difficult. You
Speaker 1: need to get lots of banks and county property registries
Speaker 1: and appraisers on board. But if somehow the houses were
Speaker 1: moved to the blockchain, that would permanently allow for permissionless innovation.
Speaker 1: Everyone could build programs and exchanges and derivatives and interfaces
Speaker 1: for house buying, and the best ones could win. The
Speaker 1: problem is that houses can't live on the blockchain. They
Speaker 1: live in the real world. They can burn down and
Speaker 1: stuff Connecting the electronic artifact on the blockchain the house
Speaker 1: token to its real world referent. The house is philosophically
Speaker 1: and practically tricky. How to make this connection is largely
Speaker 1: an unsolved problem, and quite possibly an unsolvable one, but
Speaker 1: also an important one. Crypto's financial system is well developed
Speaker 1: and has some advantages in openness and permissionless innovation over
Speaker 1: the traditional financial system. If you could ingest the physical
Speaker 1: world into that financial system, you'd have something cool two
Speaker 1: enterprise blockchain. A less ambitious version of this is look.
Speaker 1: Banks are already keeping lots of databases to track lots
Speaker 1: of things. Dollars in banking counts, but also loans, tradeable securities,
Speaker 1: derivative contracts, trade financing, all sorts of stuff. Some of
Speaker 1: those databases are slow, some are written in Kobal, and
Speaker 1: some require an exchange of facts is to settle transactions.
Speaker 1: It would be nice if those databases were faster, if
Speaker 1: they could talk to each other efficiently. It would be
Speaker 1: nice if JP Morgan Chases database could talk to Goldman
Speaker 1: Sachs's database, if there weren't a manual and contentious process
Speaker 1: of reconciling trades between banks. In if you were a
Speaker 1: loan trader at a bank and you thought, uh, our
Speaker 1: systems for trading loans are so slow and cludgy, and
Speaker 1: you walked into the c e o s office and said,
Speaker 1: we should spend tens of millions of dollars hiring top
Speaker 1: notch programmers to build a new loan trading system, and
Speaker 1: we should start a consortium with our competitors and clients
Speaker 1: where we all agree to use the same loan trading system,
Speaker 1: because that will make my life easier and eliminate a
Speaker 1: lot of back office costs. The CEO would probably say
Speaker 1: things like who are you and get out of my
Speaker 1: office and you're fired. But in twenty seventeen, if you
Speaker 1: were a lone trader at a bank, or a blockchain consultant,
Speaker 1: or frankly, a person off the street, and you walked
Speaker 1: into the office of a bank CEO and shouted the
Speaker 1: word block chain, the CEO would hand you a sack
Speaker 1: of money. Lots and lots and lots of people took
Speaker 1: advantage of this. Blockchain was for a while the sexiest
Speaker 1: word in finance, and banks were tripping over themselves to
Speaker 1: announce blockchain initiatives. And not just banks. This stuff had
Speaker 1: a particular vogue at banks, but e g. Shipping companies
Speaker 1: also got in on it. Maersk has a blockchain platform,
Speaker 1: trade Lens, built with IBM that it advertises for shipping
Speaker 1: and supply chain management. The Australian Securities Exchange announced that
Speaker 1: it will replace a trading system with the blockchain, though
Speaker 1: it keeps delaying that the idea here was sometimes vague
Speaker 1: to be honest, but broadly speaking, we're talking about permission
Speaker 1: to block chains or private blockchains. Big public blockchains are
Speaker 1: generally not something a banker is going to like. Having
Speaker 1: all transactions to be public is good for security, everyone
Speaker 1: can verify that everything is correct, but also bad if
Speaker 1: your transactions are meant to be secret. It's also just
Speaker 1: sort of ikey for regulation who make sure that your
Speaker 1: transaction records are correct. A bank regulator will ask and
Speaker 1: the bank will answer, well, we don't really know, but
Speaker 1: we think it's some mining pools in Russia, and the
Speaker 1: regulators will get nervous. But many of the basic ideas
Speaker 1: of a blockchain, a ledger of every transaction that's demonstrably
Speaker 1: shared by every computer on the network can be implemented privately.
Speaker 1: If you get together with eleven of your friends and
Speaker 1: agree that the twelve of you will do transactions with
Speaker 1: one another, keep a ledger, verify all the transactions, and
Speaker 1: use cryptographic hash functions to make sure the ledger isn't changed.
Speaker 1: Then you and just do that. If you all trust
Speaker 1: each other and don't let anyone else join the network,
Speaker 1: or if you let only people you trust join the network,
Speaker 1: then you don't have to worry about malicious miners taking
Speaker 1: over your network. It's just you and your friends. This
Speaker 1: has advantages for security, particularly for explaining security to bank regulators.
Speaker 1: You also don't have to make the blockchain public if
Speaker 1: you don't want to, and there are efficiency advantages. It's
Speaker 1: only twelve of you confirming transactions, so you can do
Speaker 1: it faster. Presumably you're doing this for a reason. You
Speaker 1: want the ability to do these transactions with each other,
Speaker 1: so you don't have to get paid for confirming transactions.
Speaker 1: You don't need mining or staking. Those are ways for
Speaker 1: public blockchains to reach a consensus among people who have
Speaker 1: to prove they have a commitment to the system. The
Speaker 1: twelve of you all know one another and build the system,
Speaker 1: so your consensus is good enough without any further proof,
Speaker 1: you can just vote on it. We'll be right back
Speaker 1: with more from Bloomberg Business Week Special Crypto issue written
Speaker 1: by Matt Levine a narrated by Mark Leadoff. D Web three.
Speaker 1: An important fact about bitcoin is that it's both a
Speaker 1: technological method of sending money and the money itself. That is,
Speaker 1: Bitcoin is a computer system for sending bitcoins, and a
Speaker 1: bitcoin is the thing that the bitcoin system sends. Some
Speaker 1: of what goes on in crypto is about the technology.
Speaker 1: People use the ideas of blockchains and smart contracts and
Speaker 1: so forth to build software. Some of what goes on
Speaker 1: in crypto is about the money. People call up their
Speaker 1: brokers to place bets on the prices of crypto tokens
Speaker 1: going up. But a lot of what goes on in
Speaker 1: crypto is about both crypto technology runs on crypto tokens
Speaker 1: and crypto tokens get their value from crypto technology. Brawly speaking,
Speaker 1: the name for this is web three. The idea is
Speaker 1: that the original web was the early development of the Internet,
Speaker 1: when people built decentralized, open, community controlled protocols for the Internet.
Speaker 1: Web two point oh or Web two was when big
Speaker 1: tech companies more or less took over the Internet. Now
Speaker 1: your experience of the Internet is largely mediated through Facebook
Speaker 1: and Google, and Apple and Amazon, and they make tons
Speaker 1: of money from controlling the Internet. No open decentralized project
Speaker 1: is going to compete with them. But Web three will
Speaker 1: be when people build decentralized, open, community controlled protocols for
Speaker 1: the Internet again and also make lots of money because
Speaker 1: the decentralized protocols won't be owned by big tech companies.
Speaker 1: But they won't be free and owned by no one either.
Speaker 1: They'll be owned by their users. Just kidding. They'll be
Speaker 1: owned by venture capitalists who buy tokens in these projects
Speaker 1: early on, and who are the biggest boosters of Web three,
Speaker 1: but all so by their users. One tokens and token omics.
Speaker 1: Think about what you get when you buy a bitcoin.
Speaker 1: One thing you get is a unit of digital cash.
Speaker 1: You can send the bitcoin to someone else to buy
Speaker 1: a sandwich or whatever. If this digital cash thing takes off,
Speaker 1: then lots of people will accept bitcoin for sandwiches, and
Speaker 1: this currency that you bought will be very useful. But
Speaker 1: another thing you get is a share in the bitcoin project,
Speaker 1: not a share of actual stock, but still a chance
Speaker 1: to profit from the success of bitcoin. If this digital
Speaker 1: cash thing takes off, then lots of people will want
Speaker 1: bitcoin to use to buy sandwiches, and there will be
Speaker 1: a lot of demand for bitcoin, but only twenty one
Speaker 1: million bitcoin will ever exist, so each bitcoin will be
Speaker 1: more valuable as more people decide to use bitcoin as
Speaker 1: their way to transfer digital cash. That logic never quite
Speaker 1: made sense. A convenient currency for digital cash transfer has
Speaker 1: a stable value, and the rising value of bitcoin makes
Speaker 1: it less useful as a currency. If your bitcoin keep
Speaker 1: going up in value, you should not spend them on sandwiches.
Speaker 1: Bitcoin as an appreciating asset will be a bad currency.
Speaker 1: There's a famous story of the guy who spent ten
Speaker 1: thousand bitcoin in May to buy two large pizzas as
Speaker 1: proof of the concept that you could use bitcoin to
Speaker 1: buy pizza. Today, those ten thousand bitcoin would be worth
Speaker 1: about two hundred million dollars. Still, it worked well enough.
Speaker 1: Bitcoin is used enough for digital transfers of value that
Speaker 1: it became valuable and early adopters got rich. This is
Speaker 1: a key financial innovation of crypto. Crypto built an efficient
Speaker 1: system to make the customers of a business also its shareholders.
Speaker 1: Lots of crypto projects have this basic structure. File Coin
Speaker 1: is a decentralized system for storing files where you can
Speaker 1: pay to store files or get paid for storing files
Speaker 1: for someone else. You pay or get paid in file coin.
Speaker 1: Helium is a decentralized system for wireless hotspots where you
Speaker 1: can get paid for running a hot spot or pay
Speaker 1: for access. You pay or get paid in Helium's tokens,
Speaker 1: and there are play to earn video games such as
Speaker 1: XI Infinity, where you pay for tokens to play the
Speaker 1: game and get rewarded in the game's tokens. Participating, storing files,
Speaker 1: providing WiFi, playing the game makes you an investor as
Speaker 1: well as a user. This is potentially powerful because crypto
Speaker 1: is in the network effects business. Many crypto projects are
Speaker 1: useful mainly if lots of other people use them. Bitcoin
Speaker 1: is a useful payment system if lots of people have
Speaker 1: Bitcoin and accept it for payments. Ethereum is a useful
Speaker 1: computing system if lots of people build apps on ethereum.
Speaker 1: If you build a decentralized financial exchange or appeer to peer, marketplace,
Speaker 1: or whatever else on ethereum, it's useful if lots of
Speaker 1: people use it. It's hard to build an network effects
Speaker 1: business from scratch. Early users of a network effects business
Speaker 1: won't get much out of it because there's no network yet,
Speaker 1: you might as well just wait until there are more users.
Speaker 1: The economics of crypto tokens reverse that early users of
Speaker 1: a crypto network get tokens cheap, and if the network
Speaker 1: takes off later, then their tokens will be worth a lot.
Speaker 1: Now there's an advantage to being early. Token effects people
Speaker 1: sometimes call this. Many claims made about Web three are
Speaker 1: just about taking this basic idea at face value, assuming
Speaker 1: that it's good, and applying it in vague, ambitious ways.
Speaker 1: One issue for web three is that for most consumers,
Speaker 1: the process of even signing up is going to be baffling.
Speaker 1: You generally don't just take out your credit card and
Speaker 1: start playing a game. You might need to buy ether
Speaker 1: on an exchange, then use a bridge to connect to
Speaker 1: the game's own special wallet, then trade your ether for
Speaker 1: another token you need to buy characters, or fight battles
Speaker 1: or whatever. Another problem is the urge to tokenize businesses
Speaker 1: with no obvious network effects. In July, Esquire published an
Speaker 1: article about how the crypto revolution wants to reimagine books.
Speaker 1: What if you could own a stake in Harry Potter?
Speaker 1: What if the book series functioned like a publicly traded
Speaker 1: company where individuals could buy stock in it, and as
Speaker 1: the franchise grows, those stocks become more valuable. If this
Speaker 1: were the case, someone who purchased just three percent of
Speaker 1: Harry Potter back when there was only one book would
Speaker 1: be a billionaire. Now just imagine how that would affect
Speaker 1: the reading experience. Suddenly a trip to Barnes and Noble
Speaker 1: becomes an investment opportunity. Early readers could spot the next
Speaker 1: big thing and make a hundred dollar contribution that becomes
Speaker 1: ten thousand dollars or even a hundred thousand dollars if
Speaker 1: the book's popularity grows. If readers could own a percentage
Speaker 1: of the franchise, they might then be incentivized to help
Speaker 1: that book succeed. They could start a TikTok account to
Speaker 1: promote the book via book talk, or use their talents
Speaker 1: as filmmakers to adapt it to the screen. All of
Speaker 1: this stands to increase the value of their original investment.
Speaker 1: You'd feel like a chump reading poetry, wouldn't you. The
Speaker 1: bad way to put this is that every Web three
Speaker 1: project is simultaneously a ponzi. Here, I'm using the word
Speaker 1: ponzi in the broad sense in which It's often used
Speaker 1: by people in markets investments, where most current investors are
Speaker 1: just betting on the price going up because new buyers
Speaker 1: pile in. The underlying businesses or projects may be legitimate
Speaker 1: and real, but the investment model is about new buyers
Speaker 1: paying off old ones. Why would you buy some tokens
Speaker 1: to join a Web three Facebook competitor. Well, if you
Speaker 1: like the product, go right ahead. But probably it's at
Speaker 1: least in part because you want to get rich off
Speaker 1: the tokens by selling them to someone else. Why do
Speaker 1: you think someone else will buy the tokens? Is it
Speaker 1: because you think they like the product? Or is it
Speaker 1: because you think they are planning to get rich by
Speaker 1: selling to a bigger sucker. Where does that end? Draw?
Speaker 1: Whole leg A writer on business and technology wrote a
Speaker 1: blog post about Web three that I think about all
Speaker 1: the time. The title is in praise of pond Zis.
Speaker 1: It goes like this, this is essentially a pyramid scheme,
Speaker 1: a ponzi, but it makes sense. It will be the
Speaker 1: dominant marketing method of the next decade. And beyond nonsense.
Speaker 1: You might say, at the end of the day, you
Speaker 1: need to sell something. Narratives aren't enough, But aren't they.
Speaker 1: Another difference between the old world and ours is that
Speaker 1: we no longer sell things. In the past, the content
Speaker 1: was used to sell stuff. Executives from manufacturing companies got
Speaker 1: their TV channel buddies to produce soap operas in order
Speaker 1: to sell more soap. But today content is not used
Speaker 1: to sell anything beyond itself. Everything is content, including your
Speaker 1: actions and behaviors. Why give them away for free? Two dows?
Speaker 1: I should mention some other Web three ish concepts here.
Speaker 1: One is a d a oh, usually pronounced dow, which
Speaker 1: stands for decentralized autonomous organization. Now's aren't decentralized autonomous organizations.
Speaker 1: In the early days, people sometimes thought that's what they were.
Speaker 1: This company runs automatically through smart contracts with no human intervention,
Speaker 1: they would say, it's never been seen before in human history.
Speaker 1: But no, the thing that runs automatically through smart contracts
Speaker 1: with no human intervention is a smart contract. A DOW
Speaker 1: is a way for people to get together to vote
Speaker 1: to control a pot of money or a protocol on
Speaker 1: the blockchain. In other words, a DOW is a company
Speaker 1: like just a regular company. It has shareholders who put
Speaker 1: in money and control it. Actually, they put in money
Speaker 1: and get back tokens that give them rights to govern
Speaker 1: the DOW and the shareholders can vote. Dows are unlike
Speaker 1: regular companies and that the shareholders token holders ten to
Speaker 1: vote on more stuff. Often there's a chat room on
Speaker 1: an app called Discord, and people can propose ideas for
Speaker 1: the DOW, and there are procedures for holding a vote.
Speaker 1: Whereas US public companies let shareholders vote in only very
Speaker 1: constrained and symbolic ways, dows tend to let token holders
Speaker 1: vote on all sorts of stuff and often give them
Speaker 1: a fair amount of real control of the company. In this,
Speaker 1: dows look more like partnerships than public corporations. That's bad,
Speaker 1: by the way. In US law, the partners of a
Speaker 1: general partnership have unlimited liability for the debts of the partnership.
Speaker 1: And if you set up a business without filing any
Speaker 1: incorporation paperwork, then oops, it's a general partnership. In May,
Speaker 1: a lawsuit was filed against the members of a DOO
Speaker 1: that ran a system for trading and lending crypto. The
Speaker 1: system was hacked, and the lawsuit argues that the DOW members,
Speaker 1: as general partners, are on the hook for the damage.
Speaker 1: There are efforts to set up dows using normal legal
Speaker 1: techniques and getting limited liability. But it's early. Crypto is
Speaker 1: painfully learning lessons. Incorporate your business to avoid huge personal
Speaker 1: legal trouble that traditional finance learned centuries ago. Some dows
Speaker 1: are the governance mechanisms for big decentralized finance or defy
Speaker 1: applications like crypto exchanges, and are responsible for setting policies
Speaker 1: and parameters for how they work. Other doos are just
Speaker 1: weird larks. Constitution Now made some headlines for raising a
Speaker 1: bunch of money from crypto investors to buy a copy
Speaker 1: of the U S Constitution. They failed to buy it,
Speaker 1: did some dow voting stuff on what to do next,
Speaker 1: and ultimately returned most of the money minus gas fees,
Speaker 1: and shut down. It was a quick way for people
Speaker 1: to pull their money online to have fun together. It
Speaker 1: was a discord chat with a pool of money. Three
Speaker 1: identity reputation credential tolls in the Bitcoin white paper, so
Speaker 1: Toshiy Knackamoto makes a privacy recommendation a new key pair
Speaker 1: should be used for each transaction to keep them from
Speaker 1: being linked to a common owner. It's free and easy
Speaker 1: to generate new bitcoin addresses, so every time you accept
Speaker 1: a payment in Bitcoin, you should do it in a
Speaker 1: different address. The Bitcoin blockchain is public, sure, so everyone
Speaker 1: can see every transaction, but the goal is for all
Speaker 1: of your Bitcoin transactions to be separate, unlinkable, so no
Speaker 1: one can ever get a full picture of what you're
Speaker 1: up to on the blockchain. Meanwhile, in Ethereum, there's the
Speaker 1: Ethereum Name Service or e n S, which we talked
Speaker 1: about earlier. This lets you register a domain name like
Speaker 1: Matthew Levine dot et h and use it across various
Speaker 1: Ethereum functions. Use your e n S name to store
Speaker 1: all of your addresses and receive any cryptocurrency token or
Speaker 1: n f T, says its homepage. Venture capitalists sometimes use
Speaker 1: their ean S domain as their Twitter to play name.
Speaker 1: These are very different philosophies about what you're doing in
Speaker 1: the crypto world. Bitcoin is philosophically digital cash, anonymous and transactional.
Speaker 1: Ethereum is philosophically something like an open source programming community,
Speaker 1: where reputation is what's valued, and to accumulate reputation you
Speaker 1: need a consistent identity. You do all your Ethereum stuff
Speaker 1: under your real name or at least your vanity plate.
Speaker 1: Many of the grand claims that people make about Web
Speaker 1: three are about reputation and identity. The idea is that
Speaker 1: you can keep your identity on the blockchain in some immutable, decentralized, transparent,
Speaker 1: provable form, and then do good stuff with it. You
Speaker 1: have some crypto wallet that contains not just tokens that
Speaker 1: you bought, but also tokens you received for doing things.
Speaker 1: When you graduate from college, your college sends you a
Speaker 1: bachelor's degree token or a series of token specifying the
Speaker 1: courses you took and your grades and maybe what you
Speaker 1: learn earned. When you pass your driving test, the d
Speaker 1: m V sends you a driver's license token. When you
Speaker 1: go to a professional conference, the conference organization send you
Speaker 1: unattended a conference token. When you get promoted at your job,
Speaker 1: your employer sends you a senior blockchain developer token. When
Speaker 1: you help out on an open source project, the leaders
Speaker 1: of the project sends you a thanks for helping with
Speaker 1: our open source project token. When you post a lot
Speaker 1: on Reddit, other Reddit users send you good post on
Speaker 1: Reddit tokens. These exist, and they're called community points. When
Speaker 1: you help your friends move, your friend sends you a
Speaker 1: thanks for helping me move token. All of these tokens
Speaker 1: are verifiably signed by their issuers, your college, the d
Speaker 1: m V, Reddit, your friend, and the issuers have varying
Speaker 1: degrees of credibility and importance. These tokens will also, in
Speaker 1: the general case, be non transferable. You can't sell your
Speaker 1: college degree to someone else. And then if you're looking
Speaker 1: for a job, you'll show perspective employer your degree tokens
Speaker 1: and conference tokens and Reddit tokens and whatever else seems relevant.
Speaker 1: And perhaps there will be bad tokens and I got
Speaker 1: fired token and I ran a crypto scam token, etcetera,
Speaker 1: that people can send you to undermine your reputation, and
Speaker 1: perspective employers will have to consider how much credibility those deserve, etcetera.
Speaker 1: I say you'll show perspective employers your tokens, And I
Speaker 1: suppose there are different ways to imagine the public accessibility
Speaker 1: of all these things. Perhaps the tokens are publicly associated
Speaker 1: with your name and anyone can see all of them.
Speaker 1: Perhaps employers see only what you voluntarily send them. And
Speaker 1: if you go on a decentralized dating app, perhaps you'll
Speaker 1: show perspective romantic partners, your degree tokens and your cool
Speaker 1: hobby tokens, and the I'm a good romantic partner in
Speaker 1: many ways tokens that your ex has sent you when
Speaker 1: you were together again. The possibility of bad tokens is
Speaker 1: interesting here. I don't know. These things are more often
Speaker 1: described as loose utopian sketches than specific programs. When I
Speaker 1: write them down, they sound extremely dystopian to me, but
Speaker 1: perhaps you disagree. Sometimes they're spelled out a bit more.
Speaker 1: In May, Metallic Baterian published a paper with Eglen Wile
Speaker 1: and Puja Oliver called Decentralized Society Finding Web Three's Soul.
Speaker 1: It called for a set of non transferable soul bound
Speaker 1: tokens spt s representing the commitments, credentials, and affiliations of souls.
Speaker 1: A soul in this terminology is not quite a person,
Speaker 1: though it is more like a person than it is
Speaker 1: like a Bitcoin address. A soul could be a person
Speaker 1: or an institution, a university, etcetera. But a person could
Speaker 1: also have multiple souls for multiple contexts. When issuing a
Speaker 1: tradeable n f T, an artist could issue the n
Speaker 1: f T from their soul, says the paper. Beautifully, it
Speaker 1: would be amazing if theology could be replaced or perhaps
Speaker 1: solved by cryptography. A person's soul is nothing more than
Speaker 1: the things and people that she loves, the people who
Speaker 1: love her, and the impact that she has in the world,
Speaker 1: and we've encoded it on the blockchain here it is.
Speaker 1: It would be a bummer to lose the private key
Speaker 1: to your soul. For what shall it profit a man
Speaker 1: to gain a lot of bitcoin and lose his own soul. Actually,
Speaker 1: a fascinating part of the Decentralized Society paper is about
Speaker 1: exactly this community based recovery of private keys. The idea
Speaker 1: is roughly that if your soul has a lot of
Speaker 1: connections to a lot of other souls and you lose
Speaker 1: the private keys for your crypto accounts, there should be
Speaker 1: a recovery mechanism where those other souls can vouch that
Speaker 1: you really are you, and then you get the keys
Speaker 1: back in a decentralized way e unsensorable ledgers. Here's another
Speaker 1: way to describe what Sutoshi did. He created a way
Speaker 1: to do irreversible transactions on computers one censorship resistance. Ordinarily,
Speaker 1: if there's some database on a computer somewhere, then it
Speaker 1: changes some data field it can just change that field
Speaker 1: back to what it was. Those are equivalent easy things
Speaker 1: for a computer to do, but the blockchain makes it
Speaker 1: hard to change things back. If a bitcoin moves from
Speaker 1: one address to another address, and that transaction is included
Speaker 1: in a block, and then a few more blocks are
Speaker 1: added afterward confirming the transaction, then it would take an
Speaker 1: unfathomable amount of computer work running hash functions trillions and
Speaker 1: trillions of times to rewind the blockchain to remove that transaction.
Speaker 1: Blockchain is one way It's ledger is permanent. This is
Speaker 1: nice if you want your ledger to be really secure,
Speaker 1: hard to hack, backed up in multiple places, though honestly
Speaker 1: it's probably an overkill for those purposes. But it's really
Speaker 1: nice if you want your or to be immune from
Speaker 1: government meddling or really anyone's meddling. Crypto people call any
Speaker 1: interference with transactions censorship. Bitcoin is censorship resistant. You might
Speaker 1: not trust the government because, for instance, you live in
Speaker 1: a repressive dictatorship that controls the banking system and will
Speaker 1: seize your money from you unjustly, or you might have
Speaker 1: other objections. U S banks, often though not always in
Speaker 1: conjunction with US government agencies, are very much in the
Speaker 1: business of blocking payments. They'll block payments to organizations designated
Speaker 1: as terrorists by the government or two countries sanctioned by
Speaker 1: the government, but they'll also block payments to pornographic websites
Speaker 1: in response to public pressure campaigns. If you'd like to
Speaker 1: finance terrorism, or do business in Iran, or consume Internet porn,
Speaker 1: this sort of thing might drive you to embrace crypto.
Speaker 1: But even if you don't like terrorism, or Iran or porn,
Speaker 1: this sort of thing might make you nervous. What other
Speaker 1: forms of commerce might be shut down by the government
Speaker 1: or by banks acting independently of the government. Firearms is
Speaker 1: one pretty obvious answer, but anything that creates strong feelings
Speaker 1: can be litigated through the payment system two or not.
Speaker 1: The practical problem with censorship resistance is that the crypto
Speaker 1: world touches the real world at various points, and those
Speaker 1: contacts make it hard to be totally free from the
Speaker 1: pressures of outside influence. A meme in crypto is the
Speaker 1: five dollar wrench attack, named for an x k c
Speaker 1: D web cartoon, pointing out that the way to steal
Speaker 1: someone's cryptocurrency isn't by using sophisticated methods to hack his laptop,
Speaker 1: but rather by hitting him with this five dollar wrench
Speaker 1: until he tells us the password. The other problem is
Speaker 1: that while crypto generally creates decentralized and irreversible transactions, it
Speaker 1: also creates a permanent public record of those transactions. The
Speaker 1: government can just look at that record. It can't reverse
Speaker 1: the transactions, but it can do its best to make
Speaker 1: life unpleasant for the recipients. You can send bitcoin to
Speaker 1: anyone without anyone's permission, but at some point you'll want
Speaker 1: to do something with bitcoin. You'll want to spend it.
Speaker 1: If you have a lot of it, you'll want to
Speaker 1: spend it on real estate or yachts, or jewelry or art.
Speaker 1: If you want to spend it on n f T s,
Speaker 1: then I suppose you can keep it in the cryptosystem forever.
Speaker 1: But what sort of life is that. A financial system
Speaker 1: cannot be entirely self contained. You have to be able
Speaker 1: to turn your money into actual stuff, and that's where
Speaker 1: they get you. The normal way to turn your bitcoin
Speaker 1: into dollars is through a centralized crypto exchange, such as
Speaker 1: the apps for buying and selling crypto that you saw
Speaker 1: advertise during the Super Bowl. They're the main FIAT off ramp,
Speaker 1: the place that lets you sell your bitcoin, which are
Speaker 1: hard to spend for dollars, which are easy to spend.
Speaker 1: Centralized crypto exchanges are extremely sensorable since they tend to
Speaker 1: be run by well the CEOs who would prefer to
Speaker 1: remain wealthy and not in prison, and so they'll do
Speaker 1: things like ask you for your driver's license before letting
Speaker 1: you open an account. If you're on the government's do
Speaker 1: not open an account list, they won't open an account
Speaker 1: for you. Also, if your bitcoin are on a bad list,
Speaker 1: they won't turn them into dollars for you. If you
Speaker 1: come by one hundred thousand bitcoin in the wrong way
Speaker 1: by hacking someone's bitcoin account, or by doing a ransomware attack,
Speaker 1: or by getting them from an address that the government
Speaker 1: has blacklisted for some other good or bad reason, and
Speaker 1: transfer them into an exchange, the exchange will ask you
Speaker 1: where they came from. Also, the government and the exchange
Speaker 1: can trace the providence of your bitcoin and see if
Speaker 1: any of them were involved in known bad transactions hacks, ransomware,
Speaker 1: et cetera. And if they were, the exchange can block
Speaker 1: you from taking your money out and call the police.
Speaker 1: Earlier this year, a couple were arrested and accused of
Speaker 1: trying to launder one nineteen thousand, seven hundred and fifty
Speaker 1: four bitcoin stolen from the bitfin x exchange in a hack.
Speaker 1: She was a YouTube rapper and a Forbes contributor colorful character.
Speaker 1: That's billions of dollars of bitcoin at today's prices. But
Speaker 1: these people were not living particularly large, because it turns
Speaker 1: out billions of dollars of stolen bitcoin can be extremely
Speaker 1: difficult to spend and extremely easy to track. Most of
Speaker 1: the allegedly stolen bitcoin never left the account where they
Speaker 1: first landed after the hack. Some were sent to crypto
Speaker 1: exchanges and converted into dollars, but the exchanges kept meticulous
Speaker 1: records of who was opening the accounts and withdrawing the money,
Speaker 1: and quickly froze withdrawals. Some were exchanged for gold at
Speaker 1: a precious metals dealer, but they had to show a
Speaker 1: driver's license and give a real home address for that transaction,
Speaker 1: so the FBI saw who got the gold. Some of
Speaker 1: the money was spent on a Walmart gift card, and
Speaker 1: if you're buying a Walmart gift card with your billions
Speaker 1: of dollars of stolen, censorship resistant currency, then your money
Speaker 1: laundering is not going well. Coming up next, you'll hear
Speaker 1: more from Matt Levine's special Crypto issue of Bloomberg Business Week,
Speaker 1: narrated by Mark Leadoff. F Digital scarcity. We've talked about
Speaker 1: how Satoshi's essential technological innovation was that he found a
Speaker 1: way to make numbers on computers scares, and a weirdly
Speaker 1: important generalization of bitcoin is that it is a way
Speaker 1: to create electronic scarcity. One wait, what is that good
Speaker 1: for digital cash? It is sure dollars are electronic ledger
Speaker 1: entries that are scarce because a complicated system of banking
Speaker 1: regulation makes them scarce. Banks can make new dollars just
Speaker 1: by changing a number in a database, but there's a
Speaker 1: lot of ceremony involved in making sure they do that
Speaker 1: in the right way. If you want to decentralize permissionless
Speaker 1: system of money without trust or regulation, you need some
Speaker 1: way to limit how much money there is, and bitcoin
Speaker 1: solved that problem. The broader idea of scarce digital assets
Speaker 1: is weirder, though. The normal condition of human existence is
Speaker 1: that good stuff is scarce and companies make money selling
Speaker 1: it to us because we can't get infinite amounts of
Speaker 1: it for free. This isn't always true of everything, but
Speaker 1: it's generally true of the things that you notice paying for.
Speaker 1: In general, you can breathe as much air as you
Speaker 1: want for free. Though science fiction occasionally has fun imagining
Speaker 1: dystopian worlds where air is scarce, expensive, and controlled by corporations.
Speaker 1: Crypto people sometimes have fun imagining those worlds, too, but
Speaker 1: thinking they're utopias. It's hard to mind coal or make
Speaker 1: a chair, or train a tax accountant. There isn't an
Speaker 1: unlimited supply of those things, so they cost money. Every
Speaker 1: so often, a scarce thing becomes abundant, a vast oil
Speaker 1: field is discovered, a robot is invented that can make
Speaker 1: a hundred chairs per hour, and prices drop and the
Speaker 1: people who were previously in the business go broke. So
Speaker 1: there's a natural intuition that scarcity creates value and abundance
Speaker 1: destroys it. This is, of course wrong. You'd rather have
Speaker 1: more stuff than less as a consumer. Abundance is good,
Speaker 1: but you can't get rich selling stuff that's infinitely available
Speaker 1: for free, and you want to get rich. The modern
Speaker 1: world has developed ways to get rich by selling stuff that,
Speaker 1: in theory is infinitely available because it's electronic. Microsoft Word
Speaker 1: is not really scarce. The amount of physical resources electricity,
Speaker 1: computing power, disk space involved in making one more copy
Speaker 1: of that computer program and putting it on my computer
Speaker 1: is tiny in the scheme of things. And when I
Speaker 1: pay for a copy of Word, I'm paying Microsoft Corps
Speaker 1: for the effort involved in coming up with Word in
Speaker 1: the first place, not for the marginal copy. And Microsoft
Speaker 1: is in part in the business of making those copies scarce,
Speaker 1: of making it not trivial to copy its programs with
Speaker 1: copy protection schemes and subscription plans so that it can
Speaker 1: charge for them. Or if you regularly read Bloomberg Online,
Speaker 1: thank you for paying to get past our paywall. Some
Speaker 1: of your money is going towards paying for our servers
Speaker 1: to deliver one more impression of an article to your browser.
Speaker 1: Not very much of it, though, Most of it is
Speaker 1: going to me, ha ha thanks. One possible future is
Speaker 1: that the world will be increasingly like that, at least
Speaker 1: for some people. Technological progress will make the basic necessities
Speaker 1: of life increasingly abundant and also less fun. The physical
Speaker 1: world will become more homogeneous and boring, and everyone will
Speaker 1: spend more of their time online. Their friendships and romances
Speaker 1: and family life will occur on computers. Their lives will
Speaker 1: get meaning from stuff that happens on computers. One possibility
Speaker 1: here is that this will just be nice and egalitarian.
Speaker 1: Everyone can find their own communities and live in the
Speaker 1: limitless abundance of the Internet. The other possibility is that
Speaker 1: in an Internet world, the essential goods will be positional.
Speaker 1: Being in the cool internet chat room will be desirable
Speaker 1: the way living in a fancy house in a good
Speaker 1: neighborhood is desirable now. Having a cool online avatar will
Speaker 1: be desirable in the way that wearing a nice watch
Speaker 1: is desirable now. And if crypto is a way to
Speaker 1: make those things scarce, to make the desirable avatars a
Speaker 1: limited edition available only to trend setting, early adopters and
Speaker 1: rich people, then you can make money selling them. This
Speaker 1: all seems bad to me, But what do I know?
Speaker 1: Two rare monkey JPEGs. I guess we have to talk
Speaker 1: about n f t s again. Remember, an n f
Speaker 1: T is just a token with a number. If you
Speaker 1: buy a bitcoin, your bitcoin is identical to anyone else's bitcoin.
Speaker 1: If you buy in an f T it has a number,
Speaker 1: there will be some series of n f T s,
Speaker 1: some E r C token series with a name. Let's
Speaker 1: call them tedious Tamarinds, and each n f T in
Speaker 1: that series will have a number, and tedious Tamarin number
Speaker 1: sixty three will be distinguished from tedious Tamarin number sixty
Speaker 1: four by having a different number. I'm being as trivial
Speaker 1: as possible, but of course everything on the Internet is
Speaker 1: distinguished from everything else on the Internet by having a
Speaker 1: different series of numbers. That's all Internet culture is numbers,
Speaker 1: encoding pictures and sounds and text and arguments. There's no
Speaker 1: reason in principle why the number sixty three should not
Speaker 1: encode a Tamarin who looks bored but really cool, while
Speaker 1: the number sixty four encodes a Tamarin who looks bored
Speaker 1: and kind of schlubby, and so you might pay more
Speaker 1: for number sixty three because he looks cooler. What this
Speaker 1: means technically is interesting. The paradigmatic n f T is
Speaker 1: some piece of digital art. Tedious Tamarinds is a series
Speaker 1: of one thousand digital drawings of slightly different monkeys with
Speaker 1: board expressions, and different tamarinds will be worth more depending
Speaker 1: on how cool they look. Commonly, an n f T
Speaker 1: series will have a handful of possible attributes. A tamarin
Speaker 1: might be smoking a cigarette or wearing a funny hat,
Speaker 1: or yawning or closing its eyes, and tamarinds will be
Speaker 1: worth more depending on how many attributes they have and
Speaker 1: how rare those attributes are. You can imagine the value
Speaker 1: of different n f T s within a series being
Speaker 1: based on purely esthetic considerations, but mostly not. But what
Speaker 1: does it mean to say that the n f T
Speaker 1: is a piece of digital art. The art does not
Speaker 1: live on the blockchain. As the well known software engineer
Speaker 1: and hacker who goes by the name Maxi Marlin Spike
Speaker 1: wrote in a blog post, instead of storing the data
Speaker 1: on chain, n f T s instead contain a u
Speaker 1: r L that points to the data. What surprised me
Speaker 1: about the standards was that there's no hash commitment for
Speaker 1: the data located at the u r L. Looking at
Speaker 1: many of the n f T s on popular market
Speaker 1: places being sold for tens, hundreds or millions of dollars,
Speaker 1: that u r L often just points to some vps
Speaker 1: running Apache somewhere. Anyone with access to that machine, anyone
Speaker 1: who buys that domain name in the future, or anyone
Speaker 1: who compromises that machine can change the image, title, description,
Speaker 1: etcetera for the n f T to whatever they'd like
Speaker 1: at any time, regardless of whether or not they own
Speaker 1: the token. There's nothing in the n f T spec
Speaker 1: that tells you what the image should be or even
Speaker 1: allows you to confirm whether something is the correct image.
Speaker 1: If you buy an n f T, what you own
Speaker 1: is a notation on the blockchain that says you own
Speaker 1: a pointer to some web server. On that web server,
Speaker 1: there's probably a picture of a monkey, but that's none
Speaker 1: of the blockchain's business. Meanwhile, the intellectual property rights to
Speaker 1: that picture of a monkey are certainly none of the
Speaker 1: blockchain's business. It's not uncommon for the person or companies
Speaker 1: selling the n f T series to one own the
Speaker 1: IP rights to the pictures of the monkeys and to
Speaker 1: promise to transfer those rights or some of them to
Speaker 1: individual holders of the n f T s. But if
Speaker 1: that happens, it happens off the blockchain. Those promises are
Speaker 1: or aren't enforceable through the normal legal system, and it's
Speaker 1: not all that uncommon for the person selling the n
Speaker 1: f T series not to own the I P rights.
Speaker 1: Early in the n f T boom, it was common
Speaker 1: for people to make n f T s of the
Speaker 1: Mona Lisa or the Brooklyn Bridge. It's just a token
Speaker 1: with a number. Why can't that number refer to the
Speaker 1: Brooklyn Bridge. In some ways, this technical silliness makes n
Speaker 1: f T s more culturally interesting. If you buy an
Speaker 1: n f T, all you're getting is a very thin signifier,
Speaker 1: some fragile pointer to some piece of digital art. And
Speaker 1: yet people do pay a lot of money for n
Speaker 1: f T s the right sort of monkey picture. These
Speaker 1: n f t s may not represent ownership in any
Speaker 1: particularly binding sense, but they represent a feeling of ownership,
Speaker 1: and they also represent a form of community. The most
Speaker 1: famous n f T collection is, of course, the board
Speaker 1: Ape Yacht Club, a series of ten thousand jpeg images
Speaker 1: of monkeys on ethereum, some of which sell for millions
Speaker 1: of dollars. There's no physical yacht club, but there are
Speaker 1: I r L parties for board Ape owners. Various celebrities,
Speaker 1: art dealers, and venture capitalists own apes, and owning an
Speaker 1: ape is a way to join an exclusive club, and
Speaker 1: that club has its norms, and those norms include it
Speaker 1: is cool to use a picture of your ape as
Speaker 1: your Twitter profile picture, and it is not cool to
Speaker 1: use a picture of an ape you don't own as
Speaker 1: your Twitter profile picture. The technological and legal connections between
Speaker 1: blockchain and jpeg and ownership are a bit thin, but
Speaker 1: the connections are enforced cultural Lee Three, the metaverse. I
Speaker 1: plan to go to my grave not knowing what the
Speaker 1: metaverse is, so I'm certainly not going to explain it
Speaker 1: to you. But one thing it is is that you
Speaker 1: can buy some real estate on the Internet. Like there
Speaker 1: will be a picture of a house on the Internet,
Speaker 1: and you can have an avatar on the Internet that
Speaker 1: lives in the house, and the avatar can walk from
Speaker 1: your Internet house to the Internet store where it can
Speaker 1: buy some Internet groceries. It will be like a computer game,
Speaker 1: but more all consuming and much more boring. How much
Speaker 1: should your house in the metaverse cost? Two plausible answers
Speaker 1: might be it should cost as much as a house
Speaker 1: it's a house, or it should be basically free. It's
Speaker 1: just a file on a computer. There's essentially infinite space
Speaker 1: in the metaverse, and nobody has to actually nail together
Speaker 1: the house. The second answer strikes me as correct, but
Speaker 1: that's no fun for the people selling houses on the Internet.
Speaker 1: So scarcity. The Internet houses are in f t s.
Speaker 1: The goal is to make some of them scarce and prestigious.
Speaker 1: Having an Internet house next door to Elon Musk's Internet
Speaker 1: house is desirable. Let's assume and only a couple of
Speaker 1: Internet houses can be next door to Elon Musk's Internet house.
Speaker 1: Why they're all on computers. You could put a million
Speaker 1: Internet houses next door to Elon's Internet house, but you don't.
Speaker 1: You make the positional goods scarce. This is dumb, but
Speaker 1: I mean, look at Facebook Meta Now, what are the
Speaker 1: odds that fifty years from now the center of the
Speaker 1: world economy will be digital goods? What are the odds
Speaker 1: that we will all spend most of our time and
Speaker 1: money seeking status and romance and connection and entertainment on
Speaker 1: the Internet. If most goods end up being digital, if
Speaker 1: most people make their money by producing digital goods, then
Speaker 1: monitoring and mertoring the distribution of those goods will be
Speaker 1: an important economic function. Digital scarcity. I'm sorry to be
Speaker 1: this type of guy, but it's hard not to think
Speaker 1: of the movie The Matrix. You know, the premise everyone
Speaker 1: is a sack of meat in a bath of nutrients
Speaker 1: with their brains plugged into a remarkably realistic simulation of
Speaker 1: late nineties America. Why a remarkably realistic simulation of late
Speaker 1: nineties America? Why does Neo, the main character, have to
Speaker 1: go to work at a boring desk job if he's
Speaker 1: just a brain in a vat being fed a soothing
Speaker 1: simulation by the machines? Agent Smith explains, did you know
Speaker 1: that the first Matrix was designed to be a perfect
Speaker 1: human world where none suffered, where everyone would be happy.
Speaker 1: It was a disaster. No one would accept the program.
Speaker 1: Entire crops were lost. Some believed that we lacked the
Speaker 1: programming language to describe your perfect world. But I believe
Speaker 1: that as a species, human beings define their reality through
Speaker 1: misery and suffering. So the perfect world was a dream
Speaker 1: that you're primitive cerebrum kept trying to wake up from.
Speaker 1: So they simulated late capitalism instead. Even in a world
Speaker 1: where all the goods are digital and available in limitless abundance,
Speaker 1: you still have to have a simulated desk job to
Speaker 1: pay for them. Digital scarcity. Thank you Matt Levine, and
Speaker 1: thank you Mark Ledoff. As a reminder, if you're looking
Speaker 1: for these episodes in the Crypto Feed will be publishing
Speaker 1: them every Sunday through December. If you'd like to read
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Speaker 1: Vicky Vergolina. Our senior producer is Janet Babin. Our producers
Speaker 1: are Mohammed Faruk and Sharon Verriro. Our associate producers are
Speaker 1: Ty Butler and Moses on Them. Desta wonder At is
Speaker 1: our engineer. Original music by Leo Sidrn. I'm Stacy Maria Shmael.
Speaker 1: We'll be back tomorrow