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