WEBVTT - What the NFT is this? 0:00:04.400 --> 0:00:07.800 Welcome to tex Stuff, a production from I Heart Radio. 0:00:12.080 --> 0:00:14.720 Hey there, and welcome to tex Stuff. I'm your host, 0:00:14.840 --> 0:00:17.880 Jonathan Strickland. I'm an executive producer with I Heart Radio 0:00:18.040 --> 0:00:21.560 and I love all things tech. And there's been a 0:00:21.560 --> 0:00:25.720 lot of talk recently about n f t s, which 0:00:25.800 --> 0:00:28.280 of course made me think I should probably do an 0:00:28.280 --> 0:00:31.440 episode about them to help explain what they are and 0:00:31.520 --> 0:00:36.040 why they are and how they work. And in some 0:00:36.080 --> 0:00:39.680 ways it's a pretty simple concept but tries to get 0:00:39.720 --> 0:00:44.400 around some really tricky elements about digital goods um and 0:00:44.440 --> 0:00:48.240 in other ways it's just incredibly confusing and at least 0:00:48.320 --> 0:00:51.560 in my case, frustrating. But we'll get there. So let's 0:00:51.560 --> 0:00:55.320 get some definitions out of the way. First. N f 0:00:55.360 --> 0:01:00.280 T stands for non fungible token, which is irritated eating 0:01:00.320 --> 0:01:02.000 because I bet a lot of people don't know what 0:01:02.160 --> 0:01:05.399 fungible means. I mean, I'm gonna be honest here. I 0:01:05.440 --> 0:01:09.080 had heard the word before, but if there had been 0:01:09.160 --> 0:01:13.040 space in my brain that held that definition at some point, 0:01:13.880 --> 0:01:18.199 it was empty until recently. So does it have something 0:01:18.240 --> 0:01:21.120 to do with mushrooms? I thought, no, it does not. 0:01:21.840 --> 0:01:24.240 My brain is a bit slow, So my apologies and 0:01:24.280 --> 0:01:26.240 for all of those of you out there who already 0:01:26.240 --> 0:01:29.120 know what fungible means, and you've known it since you 0:01:29.160 --> 0:01:32.000 were three days old, My hats off to you. You 0:01:32.080 --> 0:01:36.040 are very smart. Just don't go gloating at me, because 0:01:36.880 --> 0:01:41.959 we're not all you. Okay. Now, the word derives from 0:01:42.160 --> 0:01:48.280 the Latin fun guy to perform, So again, nothing to 0:01:48.320 --> 0:01:51.160 do with mushrooms. But you see why I got confused. 0:01:51.680 --> 0:01:55.880 Since about sixty nine, which is when Miriam Webster says 0:01:55.920 --> 0:01:59.600 the earliest found example of the word being used in 0:01:59.640 --> 0:02:06.800 this particular way, fungible means essentially interchangeable. Something is fungible 0:02:07.000 --> 0:02:10.880 if there are lots of it, and one version or 0:02:10.919 --> 0:02:13.840 one instance or one example of it is just as 0:02:13.919 --> 0:02:18.960 good as any other of equal amount, or even if 0:02:18.960 --> 0:02:21.560 you look at parts of a thing, if one part 0:02:21.680 --> 0:02:24.919 of a thing can be exchanged for an equal part 0:02:25.320 --> 0:02:30.079 of that same thing, then it's fungible. So the simplest 0:02:30.080 --> 0:02:32.480 example I can think of is a unit of currency. 0:02:32.840 --> 0:02:36.080 And since I'm American, I'm gonna go with the dollar bill. 0:02:37.080 --> 0:02:41.200 So a dollar bill is worth one dollar or four 0:02:41.280 --> 0:02:44.600 quarters or twenty nickels, or will you get it? So 0:02:44.639 --> 0:02:46.880 if I have a dollar bill and you have a 0:02:46.919 --> 0:02:50.360 dollar bill. We could trade those dollar bills and nothing 0:02:50.360 --> 0:02:53.880 else really changes. We would each still possess a thing 0:02:54.080 --> 0:02:57.560 of the same value as what we had previously. We 0:02:57.600 --> 0:03:01.760 could spend either version of that dollar bill the same way. 0:03:01.840 --> 0:03:04.000 So if we didn't make the trade, if I kept 0:03:04.040 --> 0:03:06.640 my dollar and you kept yours, we could use our 0:03:06.639 --> 0:03:10.639 respective dollars to buy something like chewing gum or something. 0:03:11.280 --> 0:03:15.360 But if instead we had swapped dollars, well, then we 0:03:15.440 --> 0:03:19.760 could still use those swapped dollars to buy our chewing gum. Heck, 0:03:19.800 --> 0:03:22.160 if I had a dollar bill and you had four quarters, 0:03:22.560 --> 0:03:25.200 we could still do this right. We could interchange my 0:03:25.280 --> 0:03:29.360 currency for yours, because from a value perspective, there is 0:03:29.440 --> 0:03:33.919 no difference between my dollar bill and your four coins, 0:03:33.960 --> 0:03:38.280 each worth twenty five cents. And one last example, Let's 0:03:38.320 --> 0:03:41.160 say that I'm a little short on cash and you 0:03:41.320 --> 0:03:45.200 generously lend me five bucks. The next day, I've got 0:03:45.280 --> 0:03:48.600 cash to repay you. Now, you don't care if the 0:03:48.680 --> 0:03:53.080 five dollar bill that you gave me is the same 0:03:53.120 --> 0:03:55.200 as the five dollar bill I give back to you. 0:03:55.200 --> 0:03:57.320 You don't care. If it's the exact same five dollar bill. 0:03:57.720 --> 0:04:00.240 You don't care if I pay you back with five 0:04:00.480 --> 0:04:03.560 one dollar bills. Now, you might be irritated if I 0:04:03.640 --> 0:04:06.280 tried to pay you back and change, but as long 0:04:06.320 --> 0:04:08.800 as the change adds up to five dollars, the actual 0:04:08.920 --> 0:04:12.880 value of the transaction would be the same. The convenience 0:04:13.000 --> 0:04:15.400 it becomes an issue, but let's ignore that for now. 0:04:15.800 --> 0:04:18.080 I mean, heck, if all I had was a ten 0:04:18.120 --> 0:04:21.880 dollar bill, but you happen to have another five dollar bill, 0:04:22.360 --> 0:04:25.000 I could give you the ten dollars that I had, 0:04:25.480 --> 0:04:27.960 you'd give me the five dollar bill you had. And 0:04:28.000 --> 0:04:31.640 now we're square, right, because I returned the five dollars 0:04:31.680 --> 0:04:34.640 I owed you, and then you squared off the extra 0:04:34.760 --> 0:04:36.800 five dollars I gave you in the form of that 0:04:36.839 --> 0:04:40.359 ten dollar bill. The fungibility of currency means that any 0:04:40.560 --> 0:04:44.400 version of this transaction is fine because the value of 0:04:44.440 --> 0:04:48.080 the exchange remains the same. Other stuff that can count 0:04:48.120 --> 0:04:52.320 as fungible includes commodities, you know, like lumber. Barring any 0:04:52.320 --> 0:04:55.640 clear differences in quality, one amount of a commodity is 0:04:55.720 --> 0:04:59.160 roughly equal to the same amount of that commodity. Usually, 0:05:00.000 --> 0:05:02.600 even if the samples were taken from totally different sources, 0:05:02.640 --> 0:05:06.240 there's no practical difference between them. So it's a very 0:05:06.279 --> 0:05:09.480 pragmatic way to go about things. You know, that pile 0:05:09.520 --> 0:05:11.960 of lumber is just as good as that other pile 0:05:12.040 --> 0:05:14.200 of lumber, you might think. Now, sure, if you were 0:05:14.240 --> 0:05:17.719 to get down to details, like the really fine stuff, 0:05:17.960 --> 0:05:21.039 there's going to be differences. But at scale it sort 0:05:21.040 --> 0:05:24.880 of is a wash from a pragmatic standpoint. So what 0:05:25.080 --> 0:05:28.880 does non fungible mean. Well, as the non tells us, 0:05:28.960 --> 0:05:32.200 it's the opposite of fungible. So it's something that is 0:05:32.240 --> 0:05:37.000 not interchangeable with something else, like a car, for example. 0:05:37.440 --> 0:05:40.680 So let's say you own a nineteen fifty nine Cadillac 0:05:40.800 --> 0:05:44.960 Fleetwood Series and I also happened to own one of 0:05:45.000 --> 0:05:48.040 those as well. Now, first of all, you've got yourself 0:05:48.080 --> 0:05:51.159 a sweet ride that you probably can't park anywhere because 0:05:51.160 --> 0:05:54.159 it's not so much a car, it's really a space station. 0:05:54.720 --> 0:05:57.480 I mean, that sucker is huge. But I'm getting off track. 0:05:58.279 --> 0:06:02.040 Our respective cars are non fungible. Even though they are 0:06:02.160 --> 0:06:05.400 the same year, the same make, the same model. We 0:06:05.440 --> 0:06:08.680 wouldn't just interchange them. We wouldn't just swap them back 0:06:08.720 --> 0:06:11.039 and forth. I mean, there are many other factors that 0:06:11.080 --> 0:06:14.560 determine the actual value of a car. How much has 0:06:14.560 --> 0:06:17.760 each car been driven how many parts are original to 0:06:17.800 --> 0:06:20.920 the car, what condition is the car in and its parts? 0:06:21.560 --> 0:06:25.000 Has either of those cars been in any accidents? Did 0:06:25.040 --> 0:06:27.200 one of them serve as the vehicle for Doc Hopper, 0:06:27.320 --> 0:06:29.440 the bad guy in the Muppet movie. All of these 0:06:29.440 --> 0:06:31.880 sort of things affect the value of the car, and 0:06:31.920 --> 0:06:35.680 so these two cars, while possessing lots of similarities, are 0:06:35.800 --> 0:06:39.560 not interchangeable. And to go back to the lending example, 0:06:39.920 --> 0:06:42.600 let's say you are a very kind person and you 0:06:42.680 --> 0:06:45.120 lend me your car, despite the fact that you know 0:06:45.160 --> 0:06:48.200 I don't actually drive, But for this example, we'll say 0:06:48.320 --> 0:06:51.240 that I do so for a week you lend me 0:06:51.320 --> 0:06:54.240 your car. It would not be acceptable for me to 0:06:54.320 --> 0:06:57.400 return a car that was different from the one you 0:06:57.520 --> 0:07:00.719 lent me. Even if the car I brought back was 0:07:00.800 --> 0:07:03.480 the same year, the same make, and the same model 0:07:03.600 --> 0:07:07.040 as the car you lent me. It's not your car. 0:07:07.720 --> 0:07:10.680 That's a problem. You would probably have some choice words 0:07:10.720 --> 0:07:12.160 for me if I tried to pull that kind of 0:07:12.200 --> 0:07:15.720 stunt and me, well, I'd be like, huh, you know 0:07:16.720 --> 0:07:19.840 that is weird. Where did I even get this car? 0:07:20.360 --> 0:07:24.760 And fungibility does admittedly get a bit fuzzy because the 0:07:24.800 --> 0:07:30.000 line between fungibility and non fungibility isn't always easily distinguishable. 0:07:30.160 --> 0:07:34.120 For example, let's take gold. Now, in general, gold is 0:07:34.160 --> 0:07:38.640 considered a fungible commodity. If you pan for gold and 0:07:38.680 --> 0:07:41.680 you end up with half an ounce of gold, that way, 0:07:41.720 --> 0:07:44.480 that's worth the same as a half ounce of gold 0:07:44.600 --> 0:07:48.600 in any other format, whether it's a nugget or dust 0:07:49.120 --> 0:07:51.840 or a teeny tiny piece off a gold bar or whatever. 0:07:52.360 --> 0:07:54.680 One bit of gold is worth the same as an 0:07:54.680 --> 0:07:58.720 equivalent amount of that gold, assuming that other things are 0:07:58.800 --> 0:08:01.640 the same, like the pure pity of the gold is 0:08:01.680 --> 0:08:05.520 the same. That does account for differences in value. But 0:08:05.600 --> 0:08:08.920 let's say that you go to the Federal Reserve Bank 0:08:09.040 --> 0:08:12.600 in New York City. Maybe you're the sibling of a 0:08:12.640 --> 0:08:15.840 thief who had a really unsuccessful run at Nakatomi Plaza 0:08:16.240 --> 0:08:19.640 and you want to clear out the Federal Reserve. Now, 0:08:19.680 --> 0:08:22.640 this bank stores gold in an underground vault, and it 0:08:22.680 --> 0:08:25.960 holds it on behalf of financial institutions from all over 0:08:26.000 --> 0:08:29.840 the world. Each gold bar has a serial number that 0:08:29.920 --> 0:08:33.720 identifies that gold bar and to whom that gold bar belongs. 0:08:34.320 --> 0:08:38.000 These serial numbers correspond with ledgers, and those ledgers are 0:08:38.040 --> 0:08:41.720 a complete record of which gold bars belong to which 0:08:41.760 --> 0:08:44.880 financial institutions, and in this case, the gold bars are 0:08:44.880 --> 0:08:48.640 measured with incredible precision to determine their weight and purity, 0:08:48.800 --> 0:08:52.000 which means each gold bar has its own distinct value. 0:08:52.360 --> 0:08:55.400 And it also means you can't just swap the bars around. 0:08:55.520 --> 0:08:58.240 You couldn't turn to Liechtenstein and say, okay, so you 0:08:58.280 --> 0:09:00.520 want five gold bars and you just grab any five 0:09:00.600 --> 0:09:03.200 off the vault shelves. You would have to retrieve the 0:09:03.280 --> 0:09:07.920 specific bars indicated by whichever client you're talking to, because 0:09:07.960 --> 0:09:11.320 each bar would have a specific value that could vary 0:09:11.360 --> 0:09:14.000 a little bit or maybe even a lot from other 0:09:14.080 --> 0:09:16.440 bars that are in the vault. So this type of 0:09:16.559 --> 0:09:21.240 gold bar is not fungible. Okay, but what does all 0:09:21.280 --> 0:09:24.160 this have to do with digital goods. Let's consider the 0:09:24.280 --> 0:09:28.000 nature of digital stuff for a bit. One of the 0:09:28.120 --> 0:09:31.800 big differences between digital and physical goods is the ease 0:09:31.880 --> 0:09:35.680 of replication and distribution. This is something that has been 0:09:35.760 --> 0:09:39.200 an enormous issue in the business world, and it's something 0:09:39.240 --> 0:09:42.440 that we see prompting big companies to overreact in ways 0:09:42.480 --> 0:09:47.400 that range from bewildering, too, incredibly negligent and beyond. So 0:09:47.480 --> 0:09:51.760 let's consider a few examples. Essentially, whenever a technology comes 0:09:51.800 --> 0:09:55.079 along that allows the common folk you know, like me, 0:09:55.720 --> 0:09:59.120 to copy stuff, well, big companies get ants in their bridges. 0:09:59.520 --> 0:10:01.559 If you want to go all economic thought on this, 0:10:01.920 --> 0:10:04.839 it's all about the means of production and who has 0:10:04.920 --> 0:10:08.080 access to them. In a capitalist society, the means of 0:10:08.080 --> 0:10:10.800 production are in the hands of private individuals and companies 0:10:11.000 --> 0:10:13.880 who then may profit off the stuff that they produce. 0:10:14.200 --> 0:10:17.440 And that totally makes sense, right you make something, you 0:10:17.440 --> 0:10:20.160 can profit off of that something if someone else wants 0:10:20.200 --> 0:10:22.040 to buy it. And of course, in the world we 0:10:22.080 --> 0:10:23.960 live in, a lot of the stuff we can buy 0:10:24.080 --> 0:10:27.000 comes from really big companies that are churning out products 0:10:27.040 --> 0:10:31.120 at an enormous scale. So when tech comes around that 0:10:31.160 --> 0:10:35.520 can make copies of stuff, that scares these companies. One 0:10:35.600 --> 0:10:38.199 thing big companies do not like to see for some 0:10:38.280 --> 0:10:41.600 reason are things that can make their numbers next to 0:10:41.679 --> 0:10:45.880 profit go down on a spreadsheet. And if a technology 0:10:45.920 --> 0:10:50.040 allows people to copy stuff rather than buy things from 0:10:50.080 --> 0:10:53.199 a company, that's a potential hit to the bottom line. 0:10:53.440 --> 0:10:56.040 And we've seen this over and over from the first 0:10:56.080 --> 0:10:58.920 cassette tape and audio recorders that made it possible to 0:10:59.000 --> 0:11:03.800 duplicate music abums, to VCRs that created a home theater industry, 0:11:04.080 --> 0:11:07.200 to the MP three format, to peer to peer networks 0:11:07.200 --> 0:11:11.000 that facilitated file transfers. In each of these cases, big 0:11:11.160 --> 0:11:15.360 established industries like movie studios, television studios, and music labels 0:11:15.600 --> 0:11:19.280 have lobbied governments to come up with increasingly harsh penalties 0:11:19.280 --> 0:11:23.400 that target people who are creating unauthorized copies of work, 0:11:23.679 --> 0:11:27.600 so in other words, making copies of stuff without permission. Now, 0:11:27.640 --> 0:11:29.920 in most of these cases, it turned out that the 0:11:29.960 --> 0:11:34.000 concerns were largely unwarranted. Yes, the ability to copy stuff 0:11:34.040 --> 0:11:37.120 can be scary, but the real issue was that these 0:11:37.200 --> 0:11:40.280 very big companies that got accustomed to the industry working 0:11:40.320 --> 0:11:44.280 a certain way, we're not ready for changes. When those 0:11:44.360 --> 0:11:48.640 changes happened, eventually, these same companies found new ways to 0:11:48.720 --> 0:11:51.880 do business that were just as if not more profitable, 0:11:51.920 --> 0:11:55.800 than previous methods. Movie and TV studios hated the idea 0:11:55.880 --> 0:11:58.439 of VCRs when they first came out when VCRs had 0:11:58.440 --> 0:12:02.400 home recording capabilities, but this eventually gave birth to the 0:12:02.440 --> 0:12:05.880 home video industry, and those same companies found out that 0:12:05.920 --> 0:12:08.680 the properties they owned, many of which had laid dormant 0:12:08.720 --> 0:12:11.960 in storage because there was no place to exhibit them. 0:12:12.080 --> 0:12:15.800 Suddenly that represented a new stream of revenue. Music labels 0:12:15.800 --> 0:12:19.280 discovered first the lucrative market of MP three stores, and 0:12:19.360 --> 0:12:22.840 later the potentially even more lucrative market of streaming audio, 0:12:23.240 --> 0:12:27.080 which hey represented the best of all worlds because with streaming, 0:12:27.120 --> 0:12:30.319 the end customer never actually owns a copy of the work, 0:12:30.640 --> 0:12:34.080 They just have permission to experience the work by streaming 0:12:34.080 --> 0:12:36.200 it to wherever they happened to be in a given moment. 0:12:36.800 --> 0:12:39.959 On top of all that, the entertainment industry would claim 0:12:40.040 --> 0:12:44.200 that any unauthorized download represents a monetary loss, which was 0:12:44.280 --> 0:12:47.959 something that just wasn't supportable. Here's how the argument goes. 0:12:48.360 --> 0:12:52.400 Company A produces some form of digital entertainment. Let's say 0:12:52.480 --> 0:12:57.320 it's an album from a popular performer. Pirate B decides 0:12:57.360 --> 0:13:01.840 to download an unauthorized copy of that album. Now, Company 0:13:01.880 --> 0:13:04.840 A claims that they have experienced a loss, that Pirate 0:13:04.920 --> 0:13:09.320 B has stolen something from Company A. But here's the thing. 0:13:09.760 --> 0:13:13.480 It's a digital copy. The original file is still with 0:13:13.559 --> 0:13:17.160 Company A. It's not like pirate be hacked into the 0:13:17.160 --> 0:13:21.040 company's database and removed a file so that that file 0:13:21.200 --> 0:13:24.960 is no longer there. The original file still exists, the 0:13:25.120 --> 0:13:28.800 Company A can still sell copies of that file off 0:13:28.800 --> 0:13:32.840 to customers, so Company A hasn't lost a product. If 0:13:32.880 --> 0:13:36.199 we contrast this with a physical store, a shoplifter does 0:13:36.480 --> 0:13:40.640 cost people money because that shoplifter has taken a physical 0:13:40.679 --> 0:13:44.640 item from the store. The store can't magically reproduce that 0:13:44.679 --> 0:13:47.920 physical item and then sell it off to a legitimate customer. 0:13:48.040 --> 0:13:51.160 That's an actual loss. But with the digital model, the 0:13:51.240 --> 0:13:54.800 same thing doesn't apply. Further, there's no way to argue 0:13:54.800 --> 0:13:58.480 that Pirate B would have ever purchased that album legitimately, 0:13:58.840 --> 0:14:01.839 so Company A can't even really claimed that they lost 0:14:01.880 --> 0:14:05.240 out on a sale because it's entirely possible that if 0:14:05.280 --> 0:14:09.240 Pirate B had never copied the album, that pra B 0:14:09.440 --> 0:14:11.480 just never would have listened to the album at all. 0:14:12.000 --> 0:14:15.320 And someone not buying something is not the same thing 0:14:15.720 --> 0:14:18.640 as someone stealing something. If I walk into a store 0:14:19.120 --> 0:14:21.600 and I look at a new computer, but I decide 0:14:21.880 --> 0:14:24.440 I don't really need this right now, and I walk out, 0:14:24.720 --> 0:14:29.400 I haven't stolen anything. I haven't cost the company a sale. 0:14:29.800 --> 0:14:32.600 I just didn't decide to buy it. So even the 0:14:32.720 --> 0:14:36.920 US government's Accountability Office concluded that media companies were going 0:14:37.000 --> 0:14:40.400 way too far, with various claims of loss in numerous 0:14:40.440 --> 0:14:44.680 lawsuits filed against people who had downloaded music without authorization. 0:14:45.240 --> 0:14:49.600 Some of those cases were ludicrously vengeful, with studios seeking 0:14:49.760 --> 0:14:53.440 hundreds of thousands of dollars and damages against folks who 0:14:53.440 --> 0:14:56.760 had maybe downloaded a few songs. And the point is 0:14:57.080 --> 0:14:59.800 that these arguments that the studios were making just weren't 0:14:59.840 --> 0:15:02.760 so portable. But even though the arguments didn't hold water, 0:15:03.360 --> 0:15:07.920 they do point to a problem. Digital goods have value, 0:15:08.280 --> 0:15:12.360 that is clear. I mean people want them, so there 0:15:12.520 --> 0:15:16.120 is value to those digital goods. And digital goods are 0:15:16.160 --> 0:15:20.760 also replicable. It's easy to make copies of files. But 0:15:21.000 --> 0:15:23.520 what if you wanted to buy the equivalent of an 0:15:23.520 --> 0:15:26.520 autographed version of a digital piece of art. Maybe you 0:15:26.560 --> 0:15:30.320 want to support a specific artist, maybe you're kind of 0:15:30.320 --> 0:15:34.560 a digital collector. How would you even go about doing that? 0:15:34.640 --> 0:15:37.240 I mean, what does that mean? In a world where 0:15:37.280 --> 0:15:41.760 these files can just be replicated in too infinity? I mean, 0:15:43.440 --> 0:15:45.320 how would you do it? Well? N f T s 0:15:45.600 --> 0:15:49.640 are a way to establish who ultimately has ownership of 0:15:49.680 --> 0:15:54.760 a unique, but not necessarily the original digital item, even 0:15:54.800 --> 0:15:57.880 if there are millions of copies of that digital item 0:15:57.960 --> 0:16:01.720 floating around. When we come back, will explain the backbone 0:16:01.840 --> 0:16:05.200 of what makes this possible. But first, let's take a 0:16:05.280 --> 0:16:16.040 quick break. All right, so we've covered how digital goods 0:16:16.160 --> 0:16:19.320 present a challenge or a few challenges. How do you 0:16:19.360 --> 0:16:22.120 control supply of a digital good? And sure, the thought 0:16:22.120 --> 0:16:24.720 of controlling supply sounds a bit gross because you could 0:16:24.720 --> 0:16:26.800 flip that on its head and say, how do you 0:16:26.880 --> 0:16:30.600 limit access to something? But we have to remember that 0:16:30.680 --> 0:16:35.080 creating stuff requires effort and skill. Creating something means that 0:16:35.280 --> 0:16:40.000 someone somewhere spent time and utilize their talent in order 0:16:40.040 --> 0:16:43.640 to do it. Presumably they should receive something in return 0:16:43.960 --> 0:16:47.800 if other people want to access that work. Now, if 0:16:47.840 --> 0:16:50.000 we all lived in the start Trek universe, where we 0:16:50.120 --> 0:16:53.440 learned that money is no longer a concern because scarcity 0:16:53.560 --> 0:16:56.640 doesn't exist, and so everyone can do whatever they want 0:16:56.680 --> 0:16:59.960 whenever they want because they like to do it, well, 0:17:00.000 --> 0:17:02.560 we would be having a different conversation. But instead, we 0:17:02.600 --> 0:17:04.400 live in a world where we need to be able 0:17:04.440 --> 0:17:07.960 to pay for stuff like rent, food, and medical bills 0:17:07.960 --> 0:17:10.640 and whatnot, and we have a limited number of hours 0:17:10.680 --> 0:17:13.920 in our lifetimes and being able to earn money from 0:17:13.960 --> 0:17:17.240 spending some of those hours in our lives in ways that, 0:17:17.400 --> 0:17:21.040 if we're lucky, are both fulfilling and profitable. That's a 0:17:21.080 --> 0:17:25.720 big deal. But the digital world makes this challenging. It's 0:17:25.760 --> 0:17:29.080 why we have processes like d m c A takedowns, 0:17:29.119 --> 0:17:33.440 which can also sometimes get more than a bit overreactive. Ideally, 0:17:33.680 --> 0:17:35.680 you would use a d m c A takedown to 0:17:35.760 --> 0:17:39.879 stop someone from publishing or sharing your work without your authorization, 0:17:40.200 --> 0:17:43.560 but of course some rights holders overstepped and will issue 0:17:43.600 --> 0:17:46.639 takedown notices when someone is making fair use of work. 0:17:47.040 --> 0:17:50.679 But that's a topic for another episode. Another approach to 0:17:50.680 --> 0:17:54.760 protecting digital works is the dreaded digital rights management or 0:17:54.840 --> 0:17:58.800 DRM category. The purpose of DRM is to limit how 0:17:58.840 --> 0:18:02.640 a work can be copy and or distribute it. Sometimes 0:18:02.880 --> 0:18:06.479 it involves including code in a digital product that limits 0:18:06.520 --> 0:18:09.280 the number of devices that can have access to that 0:18:09.400 --> 0:18:13.160 digital work. For example, you might purchase a game from 0:18:13.160 --> 0:18:16.040 an online store and then see that you are authorized 0:18:16.040 --> 0:18:19.240 to install that game on up to say three devices, 0:18:19.680 --> 0:18:22.560 and furthermore, you might be limited on how many devices 0:18:22.560 --> 0:18:25.440 can access that digital work at a given time, so 0:18:25.480 --> 0:18:28.240 that if you are running an instance of a game 0:18:28.520 --> 0:18:32.880 on one machine, you cannot launch that same game on 0:18:32.960 --> 0:18:36.960 another machine while that first instance is still going. But 0:18:37.040 --> 0:18:39.960 DRM can lead to a lot of problems. For one thing, 0:18:40.119 --> 0:18:43.040 sometimes companies will employ measures that make it really hard 0:18:43.240 --> 0:18:47.040 for legitimate customers to actually consume the digital work that 0:18:47.080 --> 0:18:50.480 they have purchased. So let's say I've made a legitimate 0:18:50.480 --> 0:18:53.680 purchase of a music album using my phone, and now 0:18:53.720 --> 0:18:55.679 I've decided I want to listen to this album on 0:18:55.720 --> 0:18:58.199 my digital sound system so that I can enjoy it 0:18:58.240 --> 0:19:01.040 on a really good audio system. I want to transfer 0:19:01.160 --> 0:19:03.280 the file to the sound system. I don't want to 0:19:03.320 --> 0:19:06.560 just cast it from my phone. I might find that 0:19:06.600 --> 0:19:08.960 transferring the file over so that I can listen to 0:19:09.040 --> 0:19:11.639 it on the sound system is a huge hassle. I 0:19:11.720 --> 0:19:14.200 might have to jump through numerous hoops just to get 0:19:14.200 --> 0:19:17.240 it to work. Now, this is incredibly frustrating, and it 0:19:17.280 --> 0:19:19.919 often leads to old fogies like me saying, you know what, 0:19:20.160 --> 0:19:22.600 in the old days, we just take a Vinyl album. 0:19:22.760 --> 0:19:24.600 It didn't matter if you played it on one turn 0:19:24.640 --> 0:19:28.520 table or the other. It's not fair to compare digital 0:19:28.560 --> 0:19:31.440 and physical media to one another this way, because it's 0:19:31.480 --> 0:19:34.720 not apples to apples. I swear that's not an iPod reference, 0:19:34.880 --> 0:19:37.560 but you get the point. Beyond that, some companies have 0:19:37.600 --> 0:19:41.160 taken DRM to do really stupid stuff. There's the famous 0:19:41.160 --> 0:19:45.480 example of Sony that introduced DRM on c d s, 0:19:45.600 --> 0:19:48.480 and if you inserted the CD into a CD ROM 0:19:48.560 --> 0:19:52.560 drive on a computer, it created a potential back door 0:19:52.720 --> 0:19:56.119 for someone else to gain access to your computer. Sony 0:19:56.200 --> 0:20:00.679 ended up paying dearly for that mistake. So DRM can 0:20:00.720 --> 0:20:04.280 actually push some people who would be legitimate customers of 0:20:04.320 --> 0:20:07.760 a product into piracy because one of the things we 0:20:07.800 --> 0:20:11.560 frequently see in online piracy is that hackers will find 0:20:11.640 --> 0:20:15.719 ways to strip DRM from digital works. Now, this streamlines 0:20:15.760 --> 0:20:19.080 the experience of actually using the digital works, and so 0:20:19.160 --> 0:20:22.000 there's a case to be made that using certain strategies 0:20:22.040 --> 0:20:26.480 to protect digital works actually creates the incentive that pushes 0:20:26.520 --> 0:20:30.879 people towards piracy. It's complicated stuff beyond that, how do 0:20:30.920 --> 0:20:35.720 you determine who owns a specific instance of a digital work? 0:20:36.080 --> 0:20:40.119 If it's something that's replicable and easily distributable, how do 0:20:40.160 --> 0:20:43.240 you ascertain who owns it? And how do you have 0:20:43.640 --> 0:20:46.640 a tracking system to track the transfer of ownership from 0:20:46.640 --> 0:20:49.359 one party to another. Well, there is a solution to 0:20:49.400 --> 0:20:52.960 that problem, and it depends upon a system that was 0:20:53.040 --> 0:20:57.560 developed largely in tune with cryptocurrency. So let's go back 0:20:57.600 --> 0:21:00.399 to the world of physical currency first. If we're talking 0:21:00.480 --> 0:21:04.920 actual physical currency of notes and coins and whatnot, we've 0:21:04.960 --> 0:21:08.240 got a big requirement to make that currency work. Actually, 0:21:08.240 --> 0:21:10.600 we've got a lot of requirements, but one of the 0:21:10.640 --> 0:21:12.359 big ones is that we need to make sure that 0:21:12.400 --> 0:21:17.199 the average person cannot easily duplicate currency. We need that 0:21:17.280 --> 0:21:21.520 currency protected against counterfeiting. Otherwise, someone with the means would 0:21:21.520 --> 0:21:23.560 just create a whole bunch of fake cash and use 0:21:23.600 --> 0:21:25.879 it to stand in for the real thing. This causes 0:21:26.080 --> 0:21:29.080 all sorts of huge problems, from leading to losses at 0:21:29.080 --> 0:21:31.680 the point of purchase all the way to undermining confidence 0:21:31.720 --> 0:21:36.440 in the financial systems that support an entire economic system 0:21:36.680 --> 0:21:38.879 like a country. And there are a lot of different 0:21:38.920 --> 0:21:41.919 protections that go into physical currency. There are special inks, 0:21:42.280 --> 0:21:47.639 special materials for notes, they're special water marks, serial numbers, 0:21:47.680 --> 0:21:50.120 all these kind of things. These are all elements that 0:21:50.240 --> 0:21:53.440 help protect against counterfeiting and make it easier for people 0:21:53.480 --> 0:21:56.280 to spot a fake before someone can pass it off 0:21:56.280 --> 0:21:59.439 as the real thing. And obviously we've gotten better at 0:21:59.480 --> 0:22:03.680 creating or sophisticated protections. These don't guarantee that someone won't 0:22:03.680 --> 0:22:06.359 come up with a counterfeiting process, but they raise the 0:22:06.480 --> 0:22:09.080 level of difficulty to a point where it's really, really 0:22:09.080 --> 0:22:12.040 hard to do. And if you make something hard enough, 0:22:12.440 --> 0:22:15.080 that means that if you do want to do it, 0:22:15.080 --> 0:22:18.120 it's going to be really expensive. So if it's so 0:22:18.160 --> 0:22:20.560 expensive that you're not likely to be able to pay 0:22:20.600 --> 0:22:23.760 off the method you used to do the illegal thing, 0:22:24.200 --> 0:22:25.760 you're not going to do the illegal thing. It just 0:22:25.800 --> 0:22:29.080 doesn't make It's a it's a bad return on investment, right. 0:22:29.400 --> 0:22:32.879 So that's one way to protect against counterfeiting. Just make 0:22:32.920 --> 0:22:38.040 it super hard to do. Well. That's physical money. Cryptocurrency, 0:22:38.280 --> 0:22:42.080 being digital, needs some similar protections. It needs the digital 0:22:42.080 --> 0:22:45.720 equivalent of that special blend of paper and cloth that 0:22:45.840 --> 0:22:49.080 dollar bills have, or the serial number, or the ink 0:22:49.200 --> 0:22:52.040 or transparent pains within the note, or whatever it might be. 0:22:52.280 --> 0:22:57.399 It needs a way to protect against duplication. Otherwise you 0:22:57.480 --> 0:23:00.920 might grab a bitcoin through some means, maybe you've purchased one, 0:23:01.040 --> 0:23:04.080 maybe you mind it, whatever, Then you might copy it 0:23:04.160 --> 0:23:07.879 a billion times and either become a billionaire or more likely, 0:23:07.960 --> 0:23:11.320 crash the value of the cryptocurrency beyond repair. If you 0:23:11.320 --> 0:23:14.240 could find a way to duplicate bitcoin, then the entire 0:23:14.280 --> 0:23:16.959 system falls apart because no one would ever know if 0:23:17.000 --> 0:23:20.320 a bitcoin is quote unquote real or a duplicate. It's 0:23:20.320 --> 0:23:22.600 already digital, which gives people a sense that it's not 0:23:22.680 --> 0:23:26.040 quote unquote real to start off with. But digital goods 0:23:26.080 --> 0:23:28.560 do have value as long as people have a desire 0:23:28.760 --> 0:23:32.800 for those digital goods. A digital good is only worthless 0:23:33.000 --> 0:23:35.879