Ownership, Liquidity, & NFTs #7/50
What the Billion Dollar Torrent full of right-click-saved NFTs fails to prove.
Last month, the NFT Bay opened with a torrent full of JPGs from every known NFTs.
All of them. Every single NFT secured on the ETH or SOL blockchain.
And anyone with Internet access can anonymously download the entire 18 Terabytes of images labeled “The Billion Dollar Torrent.”
NFT Bay hosted on Pirate Bay, uploaded from a camper van somewhere in Australia
Part programming flex — this was an unique technical challenge — and part artistic statement on the absurdity of the NFT craze, the Torrent has been downloaded by thousands.
All of it was good for a laugh at someone’s expense.
The joke here is that the underlying images behind NFTs are not technically on the blockchain at all. They are independent objects, which is why someone could download them and store them so easily.
As the release notes — well — noted:
Did you know that a NFT is just a hyperlink to an image thats usually hosted on Google Drive or another web2.0 webhost?
People are dropping millions on instructions on how to download images. That’s why you can right click save-as because they are standard images. The image is not stored in the blockhain contract.
What Mr. Huntley is pointing out is a technical fact: since the NFT images themselves are separate from the smart contract, people can interact with them separately.
(In a life becomes art moment, the website homepage was NFT’d by a second, unrelated party; then that tweet announcing the NFT was NFT’d in response by the Mr. Huntley, and it all got meta pretty quick.)
This project highlights a brittleness in the system often overlooked, namely if the underlying hosting infrastructure goes offline, NFTs cease to be visible.
So, then, what are we securing after all?
Gas Fees For What! - with apologies to Lil Jon
At the dawn of Cryptocurrency, there was a lot of concern about counterfeiting. It made sense, as one of the deterrents of counterfeiting in real life was the relative cost of production. It’s complicated to setup the infrastructure needed to make fake money not to mention the threat of jailtime and financial ruin.
But digital currency is pretend money, which exists entirely if someone thinks it does. If I can convince you I have pretend money, you might accept it in a real transaction.
This is why governments are quite useful in the issuance of currencies. Without a third-party to verify a unit of money, it becomes easier to fake it, even unintentionally.
Consider the “double spend” problem, where the same unit of money appears to be in two different wallets because of a technical spoof. Or a race attack, where a bad actor issues a transaction but messes with the network latency, such that transactions complete before they can be verified, taking the money back before its counted.
This kind of early fraud would be devastating to user adoption of cryptocurrency. The blockchain has continued to evolve to solve these types of problem, acting as a certifying entity.
The tokenization in NFTs includes a public ledger showing who bought or who sold an item. This history of transactions is analogous to what undergirds the art market, as we’ve discussed in previous editions, since proof of origin is critical in proving the authenticity of an object.
But as Mr. Huntley points out, when we buy NFTs, what is secured if the contracts don’t contain the assets?
What is it that buyers of NFTs own?
The Capitol Hill Baby Sitting Co-op Crisis
In the 1970s, if you lived in Washington, DC and were a young couple working in politics, there were a lot of evening events you could attend to further your career. But being relatively young and in politics, you didn’t necessarily have the money to spend on babysitting. In response, some inventive couples set up co-operative (free) sitting arrangements, in the same apartment buildings, to cover for each other.
A couple who wanted to go out on a date would trade in coupons good for a 30mins of sitting each; with enough couples, there was a good chance that someone would be home and available to watch your child any time you wanted. In turn, you would earn coupons back for every half hour you babysat for someone else.
These “scrip” coupons were, in essence, physical versions of bitcoin: tokens issued by a decentralized party, useful only if you had the right address. (Go with me here.)
One such entity, the Capitol Hill Baby Sitting Co-op, became famous because of an unusual economic crisis. Despite having been established for the purpose enjoying date nights, like other economies in the 70’s, the Co-op had fallen into a recession: no one was going out on dates anymore.
But why? What were these coupons for, in the end, if not to go out on dates? Why did the couples of the Capital Hill Baby Sitting Co-op have such trouble spending them?
One answer is that these coupons secured time: from a unit perspective, each unit of the scrip bought or sold 30 minutes each. The understanding was that these were no substitute for daycare, so one couldn’t amass 40 hours of time and use it in a single week, for example. Thus, the theoretical denomination of the coupons was spare time.
Did the recession start because couples in the Co-op suddenly faced a lack of things to do in their spare time?
A second possible answer is that they secured freedom: the units of the scrip were for a specific service, babysitting. They could not be redeemed for yard work or tax preparation; it was a barter economy of payments-in-kind. The coupons then only functioned as a single service to be rendered or consumed.
Did the recession start because couples in the Co-op suddenly dislike hiring babysitters?
The third, and most interesting answer, is that the scrip created a wholly new economy, where couples were both buyers and sellers and where they traded both goods and services. But the couples in the Co-op didn’t really understand this, having been thrust into the economy. When they moved in, they got 20 coupons and when they left, they needed to return 20 coupons. In short, it was a closed system.
Being in Washington, one of the couples included in the Co-op was Richard James Sweeney, the then deputy director, Office of International Monetary Research, United States Treasury. As he and his wife wrote later in the Journal of Money, Credit and Banking of the Great Recession of the Capital Hill Baby Sitting Co-op:
There was so little scrip to go around that holders were reluctant to squander it by going out. Those who wanted to go out but didn't have scrip were desperate to get sitting jobs. The scrip-price of baby sitting couldn't adjust, and the shortage worsened. The co-op even passed a rule that everyone must go out at least once every six months. The thinking was that some members were shirking, not going out enough, displaying the antisocial ways and bad morals that were destroying the co-op. Hence the bylaw to correct morals.
This tacky coercion naturally failed to solve the problem... In the end, despair forced resort to monetary policy-each current member was given ten more hours of scrip.
It turned out the issue was not that people didn’t have free time, or disliked hiring sitters, or even a moral issue, it was about liquidity.
It’s Liquidity, Stupid!
Economies are social-political agreements as much as monetary institutions. The Capital Hill Baby Sitting Co-op economy stalled because the actors within it failed to understand their roles. Without a consistent buying and selling of time, the economy seized up like a combustion engine without, um, gas (fees).
What Mr. Huntley and his massive Torrent fails to contain is liquidity.
The genius behind tokenization is that assets that were previously illiquid become liquid when placed in a system with enough money to make the economy work. This is why, despite the pain of gas fees, ETH is the premium blockchain for NFTs: it has a ton of liquidity.
For you to exchange an NFT with another person, you need to rely on not just the technical protocols but the monetary ones. The reason NFTs are worth so much has a lot to do with this fundamental liquidity. As the market capitalization of ETH grows, so does the liquidity for the NFT market. Both are expansionary when taken together, rather than inflationary.
As the price of ETH goes up, the volatility (buying and selling) in NFTs increases; as the volatility of NFT increases, the price of ETH goes up. It’s a positive feedback loop.
This is what the NFT Bay gets so wrong.
An economy is like a party and the images are the ticket into the NFT economy.
The right-click-save club is thinking they’ve stolen something of value, when all they’ve done is photocopied the receipts. They’re just mad because they’re on the outside while the party sounds like so much fun and it’s just getting started.
Next time:
Why brands matter to us so much
How Levi’s blue jeans brought down the Soviet Union
Emotionality and pricing
Tweet of the Moment
The tweet that became the NFT, of the tweet of the site posting all the NFTs, that became an NFT.
As always, I have so much more to tell you,
Paul
P.S. Getting shut down for a few weeks in October really messed up my production schedule. So sorry!
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