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A Beginner's Guide to NFTs (linda.mirror.xyz)
84 points by donohoe on Feb 9, 2021 | hide | past | favorite | 52 comments

Best explanation of NFTs and virtual goods I heard was from pmarca and bhorowitz on Clubhouse yesterday:

- The Honus Wagner baseball card is $0.50 of physical goods (cardboard/ink) and $3M of virtual goods

- A Basquiat painting is $100 of physical goods (paint and canvas) and $1M of virtual goods

- A rare Nike sneaker is $5 of physical goods (plastic/rubber) and $500 of virtual goods

NFTs are going to take this phenomenon to Internet scale.

We made the conceptual leap from physical gold to digital gold with Bitcoin. We will do the same for all other objects with cultural value with NFTs.

This sounds like "crypto-babble" to me (sorry, but if I had a bitcoin for every time I've heard "take this phenomenon to Internet scale" I'd be a bitcoin billionaire, which I guess would either make me very rich or bankrupt depending on one's point of view).

I fully understand how the value of highly in-demand assets are a function of their restricted supply. And yes, at present, that can apply to crypto as well. I see nothing in your post to make the leap from how rare physical goods are valued that somehow NFTs can replace that.

What you are missing is authenticity. The point Denis is making is it has nothing to do with the atoms but the sanctity of the item. Topps and MLB issued a piece of cardboard when now they could issue a token verifiable on Ethereum.

Let’s suppose you are a huge Justin Bieber fan. Justin sends you a Signal message. You’d feel a frisson of excitement, wouldn't you? But why? He didn’t shake your hand. He didn’t sign your copy of Justin Bieber: Never Say Never. No, it was just some text that appeared on your screen. And that’s the point: it was sent from Bieber himself. That moment is precious, and when an artist puts their work on the blockchain they capture that same kind of moment.

Was this directed at my or the original poster?

I use the term Provenance rather than Authenticity just to be more specific in terminology. However, Authenticity is a very very important subset of Provenance. I'd define Authenticity as "having verifiable facts to support claims of some special provenance".

If you can accept that the Honus Wagner rookie card is worth some ridiculous sum, then I think I can explain the NFT version.

Context: Professional gamer-investor for 10+ years, formerly collectible card dealer.

The Wagner baseball card is iconic in our culture, and humans seem to have an irrational attachment to otherwise-worthless physical objects that seem to preserve some relic of our cultures. We can all agree that a worthless 100 year old slice of paper is an irrational thing to value at a price that exceeds most houses. Note that this is not judgment, as I work in this industry - we all accept how ridiculous the whole thing is.

So now let's move to the next most ridiculous example, CryptoPunks, founded in 2017. It was the first NFT, very basic and simple, a barely-functional proof of concept (as compared to the NFT games we have today). In the Crypto world, four years might as well be forty. As context, four years after Magic the Gathering was released in 1993, the original most scarce first-edition cards were already worth an incredible multiple of their original value around release date.

What I'm saying is, four years in a traditional physical game world is a long time. In Crypto-Blockchain-Hightech, four years is an eternity. Therefore, the "oldest" asset in the industry - the silly pixel art Crypto Punks - has intrinsic collectible value as being "first edition" within an -entire genre-.

I should note that the Punk nfts are literally useless, they have no utility whatsoever. Their only value stems from being, essentially, SUPER First Editions of the entire NFT world. Whether you realize this or not, the NFT world is booming and has been for 4 years.

So there are many many many people who "FEEL" about the old original NFTS, the same way traditional collectors feel about baseball cards and magic cards. Why? They didn't grow up in an era where cardboard was a desirable thing. They grew up on games where these collectible items had Utility and were also attached to memories.

I played World of Warcraft semi-competitively and was very focused on economics; my automations dominated our server's auction houses (not in a predatory way - think market-maker, not scalper). I had some items in my characters which I would equip and use to go slay dragons or what-not. Others would remind me of a fun time with my friends where we got a super-lucky treasure chest in a dungeon. Maybe such an item isn't "great" in the game, however the item has sentimental value. A 100% digital item.

The best contemporary example is Mystic Axies in Axie Infinity. [disclosure, i own some. not shilling my bags, they're not for sale, etc] These were special drops from the First Edition of Axies ever created, and the very rare ones can also be quite stunningly beautiful. These are the Honus Wagner Black Lotus Charizards of Axie Infinity - Axie has been around for more than two years and has grown steadily since Day One. It's got an established player base, economy, and metagame. Thus, it has crossed the threshold where the original super-rare stuff is now "old and rare" in the eyes of a new player, and rightfully so! Venture funds and private investors are snapping up physical rarities _AND_ digital rarities.

In short, there is literally no difference between an NFT and a Physical Collectible other than the laws of physics they obey - You own a Honus Wagner card because you possess the physical cardboard. Atoms. You own a Mystic Axie because the blockchain says so; it asserts this by forcing you to verify you own the "password", the private key, and matching it to the "account", the public 0x address.

To trace the logic a bit, the blockchain states that Address 0x123...789 is the owner of Axie #42069. Anyone who can prove that they are the owner of the address 0x...789 is therefore the owner of that Axie.

This is why Private Keys need to be kept secure. With a baseball card, you would know if someone smashed your window and stole the card, right? But you wouldn't know if someone had stolen and replicated your spare key to your vault. Therefore that person can be understood to "have" your card without physically possessing it. Their ownership of the key acts as a proxy for the card, because the key implies immutable access to any assets owned by that account (0x..whatever).

Basically, the Ethereum network (or whichever protocol the NFT is built upon) acts as the Laws of Physics for digital collectibles. It replaces the concept of "I have this collection of Atoms" with "I can assert access to this resource, which therefore makes me its Owner". However, unlike a physical card which cannot be jointly held by two parties (you can't rip it in half, that kind of undermines the objective...) an NFT can be simultaneously owned by multiple people. If I have a rare Monster and I give you the Private Key, then we both own that monster. In a sense that monster's ownership is in Quantum Superposition until one of the key-holders takes action to move it to a new 0x address (therefore associating the Monster with a new Private Key, which is presumably owned by a single entity and not shared/compromised). At this point, the owner of the NFT is once again a single defined entity until that private key is shared again.

The thing that seems missing from this explanation is that without the physical goods the virtual goods are worthless.

Two reasons this is not likely to succeed:

1. Reality is a schelling point. Owning a physically, globally unique version of an object is more universally appreciable than owning a virtual title that only has significance insofar as the NFT shitcoin platform you "own" it on has significance. There are probably going to be dozens of these NFT platforms, and I don't see many natural dynamics that would cause one to come out ahead (unlike with money).

2. Owning the physical version of something gives you a meaningful monopoly over certain uses of the item (exhibiting the painting, wearing the shoes, etc.) whereas NFTs only give you access to one monopoly (bragging rights). It's not nothing, but it's not much either.

see my post above to understand why I think you need to adjust your definition of Reality. There are entire swaths of society (especially when you get to the under-25 demographic - which I am most certainly _NOT_ a part of) that grew up on Digital, not Physical.

Sincere question, are you old enough to have grown up in an era where, as kids, we coveted cool baseball cards? That industry died some time in my early 20s (I'm well over 30 right now) and that's part of what led me to shift digital.

The real key is that there are a huge quantity of people who care about digital goods more than physical.

The one thing I think you've got quite wrong is about "shitcoin platforms". That just doesn't really apply to NFTs as broadly as you've used it. There are a load of validated, good NFT products, and there are heaps more that are total shit. I would say that painting the entire ecosystem of NFTs as "shitcoin platforms" represents a major blind spot in your evaluation.

I have nothing to sell or convince, just a point of view from someone who's been in this world for a long time trying to fill in gaps in knowledge where I can.

Regarding 2: Rights might very well be tied to owning the token. Just because you can obtain a digital file doesn't give you full license rights to it. Neither law nor the Art world are stranger to non-physical artworks with licenses.

Remember when Martin Shkreli had that unreleased Wu Tang album? Yes he still has it.

Well, if he had it on blockchain and we all could have the digital copy of the album and listen to it, and he would only have the bragging right represented by his ownership of the token, it wouldn't be the same, would it?

I prefer to think of this as a trillion dollar capital allocation problem being solved.

There's $1T+ of cryptocurrency held doing mostly nothing, and investors rightly want to put it to work. That is what spawned NFTs, crypto art, DeFi, and basically revitalized the crypto economy.

NFTs specifically are interesting: it's a new class of asset that allows digital work be allocated significant crypto capital essentially out of thin air, where it otherwise would have none.

As an artist, entrepreneur, or entertainer, you have a new way to make money that is not paid for by users or advertisers, which is the way it usually goes. Instead it is paid for by crypto investors and newly minted millionaires who have capital to allocate and will allocate it to your work.

Combine this with social signaling, FOMO, and a general lack of regulation and the result is innovation.

Seeing NFTs through the lens of DRM is completely missing the point.

Could this be used to, say, collect a "royalty" on a work of art or good sold in perpetuity? In other words I create a painting that sells at a garage sale for $5. Then it is picked up by a local art collective and sells for $5,000. Later it is sold at Christies for $5,000,000. All the while my portfolio has benefited from this work but if I can collect forthcoming royalty of the sale of my work it too would be a nuanced stream of income.

Likewise some other thoughts: - Embedding an NFT in music so other platforms outside of Spotify can grow and each time your song is played you receive a small token? - A generator I bought from The Home Depot and sold to someone, who then sells it do someone, who then sells it as scrap metal? (incorporating diminishing returns as well?)

Yes, I've seen this on Zora Protocol. They have a creator share X%. Every time the work is sold to a new party, the creator gets X%

> I can collect forthcoming royalty of the sale of my work it too would be a nuanced stream of income

Physical artwork is supposed to work this way. And yes, there are smart contracts that operate this way today.

The amount of fiat money spent on NBA Top Shot should help indicate there's more to the story than allocation of crypto. But yeah, that crypto can help get a heck of a flywheel spinning.

It feels like these NFT evangelists are shooting themselves in the foot by using "paintings" as an example. I don't know why that is the go-to example. It's so outlandish to most people since digital images are the poster children for the transcendence of ownership in the digital age. To most people, owning a JPEG just doesn't make sense.

Is it just me or does everything in the DeFi space these days sound like a really flimsy response to a money laundering investigation?

No really, officer, I wasn't laundering those drug proceeds, I was just buying a non-fungible token from Pablo Escobar in order to resell it to El Chapo. NFTs are just like artwork, officer. You know, the kind of artwork that billionaires use to launder money? We're just doing the same thing they do, but on the blockchain!

Come on folks. It's getting ridiculous. I'm as critical of the AML/KYC insanity as anybody else, but the answer definitely is not to invent new ways to make cryptocurrencies attractive to real money launderers. The latest goofiness is pretty transparent.

The idea of an NFT has been around for a couple of years, isn't that basically why ethereum was created? I do see the value in creating digitaly verifieable unique things, like skins for a game tied to a specific user while not being tied to a specific platform. It'll be interesting to see how this plays out.

One oft-overlooked aspect of NFTs is their scarcity and authenticity by virtue of license rights. For instance, NBATopShot moments are desirable because they are licensed by the NBA. So if you were to clone great basketball moments and create an alternate, it would neither be authentic nor legal.

If NFTs gave you copyright, that would be something. Even owning part of the copyright would be valuable, you (with your co-owner) would be able to decide how that piece gets used, sub-licensed, adapted, and maybe even collect royalty.

Cryptographically-verifyable bragging rights attached to a JPEG don't sound as interesting.

Gamblers who have never actually bought real art, magically, start appreciating .jpgs when they can gamble on them. NFT's are where some make a .jpg, but try and figure out some way to sell it for 100's of thousands of dollars. So some buy it from themselves so people think it's valuable. Then some rube might actually buy it and the .jpg creator "gets" his money. NFT for me means No F**** Thanks.

There is a small edge case of useful NFT's that abstract contract functions into another form so a normal "send" can be used to do something more complicated. They're nearly never used in this useful way.

In the bear market, these price of these tokens is annihilated quite rapidly. Also, I'm biased.

NFTs are intriguing to me, but I empathize with the comments that there is no compelling reason to spend more for a 1:1 copy of a digital file...

I often daydream about each digital copy being slightly or significantly different from the "original", adjacent to what Jai Paul did with https://jaipaul.bronze.ai/, though it doesn't solve the replica issue, as people could continue passing around copies of the respective "version"

An NFT is authentic, traceable, has a history/provenance, and is different from any other NFT. There is no 1:1 copy, which is the point. That's essentially the same thing that makes a baseball from a world series game more interesting than one from batting practice. Same physical good, different history. Except on the blockchain that history is provable and can't be faked. Pretty cool stuff.

One thing I don't understand about NFT for art and game item is that, the renderer/displayer of that particular art or game item is still a company right? So that means when that company goes bust, then the NFT will be useless?

Say I buy an UberOmegaSwordUltimate from GigaRPGCompany, and GigaRPGCompany goes bust, then that token will be useless?

Contrary to a real painting. Maybe an exotic guitar maker only make a particular guitars for 100 items in the world, and the guitar company goes bust, but those guitars are still existing.

If GigaCorp. goes Busto then the NFT object still exists on-chain, which means the "game effects" are set in stone and the chain-of-custody remains intact.

This allows a "community bailout", whereby the players and any volunteer Devs can continue utilizing the existing smart-contracts to perform game functions.

Further, this allows the rescue-squad to launch a new modified version of the game in a hard-fork - if the Devs abandoned the original game, then the players would largely be in favour of such a hard-fork. This should address your question of the "Renderer", because all the game-piece's metadata and visual data are stored permanently on-chain. As such, it cannot be lost.

An art-piece NFT can be displayed regardless of whether the original minter of the token exists; once it hits the chain, its forever. I should note that _ALL_ of this depends on whether the contracts are truly decentralized. Many games, especially in early dev, have Admin backdoors of some sort; this is not intrinsically "bad", however it is a risk. Some NFT games right now have the capability to lock the entire contract, rendering 100% of the assets functionally un-usable. In this case, we loop back to see-above; community rescue and hard-fork in the case that the original devs just bounce.

in contrast, if Giga Corp had an internal database of assets, the entire chain-of-custody (who owns what, how they got it, what the thing does in-game) is lost forever, the users have _NO_ recourse in this case.

In your guitar example, I would say that another expert guitar-maker could repair and maintain such a guitar. Or, if desired, could attempt a replica. Is it the "original"? No, however it too has intrinsic value as a high quality replica. Further, imagine that this replica improves on some weaknesses in the original 100. These replicas become an homage to the original creators and serve as useful, potentially superior, musical tools.

I'm definitely not convinced at all, quite the contrary. But thanks for the perspective.

It would be cool if the NFT boom also brings us a rouge bittorrent tracker dedicated to digital art.

I have a lot of respect for the artists and hope they make a lot of money, but if this comes with blockchain based DRM for viewing the art that’s not great.

I don’t know if most artists would have a problem with it or not, since the NFT has all-ready completely unbundled the value from the piece.

From the cursory glance I've given the topic I think most platforms make the files available publicly (e.g. through IPFS).

Another use for NFTs not mentioned: digital ownership certificates for physical goods. A Rolex’s certificate of authenticity or the deed to a house can be transformed into a token on the blockchain, which helps with liquidity and provenance.

Then the question is how do you associate a certificate to a specific physical item. For Rolex it's very difficult. A perfect counterfeit can have some almost identical outlook to a real one. Only physical items with unique features served as fingerprints are viable for the solution. Like diamond.

NFTs are the liquid IP rights

> A common skepticism is that someone can just take a screenshot of the image or get a digital file so it’s not really scarce. However, the same argument could apply to physical items as well. Anyone can take a photo of the Mona Lisa or create a replica of it, but it isn’t the real item from the artist. People are willing to pay a premium for the original work. Another interesting aspect of digital art or collectibles is that you can easily verify the item’s ownership history. Some digital items might be worth more depending on who owned it in the past.

The copy of a digital image is 1:1 with the original.

A print of the Mona Lisa wasn't painted by Leonardo da Vinci. It's a completely different painting.

It's possible to take their argument even farther though. You don't actually own the original digital image unless you have the hard drive it was originally saved on in your possession.

Like all DRM, DRM on the blockchain is pretty terrible. I think having access to a digital asset while not being able to copy that asset is basically impossible.

Although I think there's one place this makes sense and that's as official loot in a game. In that case, it really is not about accessing the data but more about the ownership of the item the data describes. Something like that allows for a federated game that (perhaps ironically) supports an "official" loot economy managed by a single authority.

NFTs aren't usually "DRM" in the sense that they are intended to (or even try to) stop you from accessing the file.

DRM in that its digital rights management.

I have heard the NFT art narrative many times and I still can't understand how it makes sense except in the one exception where the platform for displaying the art is a walled garden (yes, permissioned). For example, maybe there are a few virtual world platforms that agree they will accept NFTs that adhere to a specific protocol, or the digital picture frame is authorized to display the art.

The flex is displaying the artwork you own. A CryptoPunk avatar is now the digital equivalent to wearing a Rolex. Setting your avatar to someone else's CryptoPunk is like wearing a fake Rolex, or posting a selfie wearing someone else's watch.

Paintings are not the best example (although even there: plenty of paintings that can be forged perfectly, and some where the originals have not actually been painted by "the artist"), but lots of Art can be perfectly reproduced and the generally accepted value is still in "the original(s)", not any of the reproduction. Some installation pieces literally only exist as instructions on how to create them - and still the right to make "the one" is a valuable thing sold. Film works might exist as a limited set of perfectly copyable DVDs - pretty much the hard drive concept you propose. That it works like that is in many ways convention - and copyright law.

NFTs are pretty much the same: of course you can copy the pixels or source code, but the presumed value is in holding the token that has been defined as representing ownership of it - with the additional argument that that is harder to fake.

If that is something you consider valuable and want to spend on is a personal thing (I personally don't), but it works as long as enough people agree that that's how it works. And blockchain stuff has right now lots of money floating around, and Art can even provide additional perceived legitimacy, so the market of people to agree on that is there.

Isn't the distinction that da Vinci put his brush to wood on the original Mona Lisa? How do you duplicate that?

Right, you can't. But you can make (in principle, again, a classic painting like the Mona Lisa is not the best example, it's more obvious for e.g. a print) an indistinguishable copy - and that copy does not have the distinction of da Vinci's touch and thus is not equal to the original. And similarly, you can define an equivalent of the "creators touch" for a digital file and agree with others that that's what makes it an original and valuable over a mere bit-identical copy.

And the examples in between do the same to varying degrees, to show that the idea of not actually requiring a direct "touch" is not new in the Art world, with originality more treated as what in software we'd call a "license": rules the artist decided.

> A print of the Mona Lisa wasn't painted by Leonardo da Vinci. It's a completely different painting.

Are you saying that if we were able to do an atom by atom copy of Mona Lisa (by a Replicator from Star Wars) then nobody would be interested in seeing the actual painting where the hands of Leornado da Vinci touched the canvas himself, which 'object' has millions of people have laid their eyes on?

How about an even simpler example, you can deploy the open source copy of wikipedia on your own domain name 'wikipaydiya.com' (or any domain), populate it with the database dump which wikipedia provides, and connect it with a script which will update the database in real time from wikipedia itself (So all updates on wikipedia by people will be reflected on this clone website.

Do you think now this 'clone wikipedia' has the same value in the market as wikipedia.org because its a complete copy?

Maybe the value of Mona Lisa comes from the fact that far more people are willing to see it than an atom level copy of it?

Turn that on its head, would you be unwilling to buy the Mona Lisa after it has been teleported once (by a transporter from Star Trek)?

We're both pretty far out from reality though, but they are similar arguments.

As for your wikipedia point, I don't get it. The domain name 'wikipedia.org' has value, and not owning the domain does not get you the value of the domain. Obviously.

> As for your wikipedia point, I don't get it. The domain name 'wikipedia.org' has value, and not owning the domain does not get you the value of the domain. Obviously.

That's the point, the domain Wikipedia has value, and that value is nontransferable even if someone else copies and puts the whole data somewhere else, because its the traffic which comes to it.

Similarly, if a museum in Atlanta purchases Mona Lisa, they know that they will get the traffic coming for Mona Lisa at Louvre, to this museum in Georgia. This means sale of tickets, and other revenue. SO the price of real Mona Lisa carries that value appreciation with it.

Now I can answer this question: > Turn that on its head, would you be unwilling to buy the Mona Lisa after it has been teleported once (by a transporter from Star Trek)?

It would depend, would people be willing to pay to see that Mona Lisa? If yes then the answer to your question is similar.

Finally, the most important thing most people don't understand. With the NFT (in almost all the cases) people are purchasing the licensing rights of an object too.

Buy the NFT [1] of Andrew Jones' "Dharma Dragon"[2] and get the licensing rights to all prints, and other usage of the image.

1. https://superrare.co/artwork-v2/dharma-dragon-14834

2. https://androidjones-obtain.com/products/dharma-dragon

> replicator from Star Wars

"juice; jabba, chilled"

I think it's easier to understand in the analogy of signed vs unsigned baseball cards. The images on the baseball cards are identical, but the only difference is the baseball player's signature is on one and not the other. This is just the digital equivalent.

Perhaps I'm a total boomer, but I just can't imagine feeling that way about an "original" JPEG. A signed baseball card is truly unique, and the signature is an almost (albeit weak) physical connection with the signee.

I cannot fully describe why a digital proof seems less valuable. It's like comparing an email signed by someones crypto cert vs a printed letter with a signature. It's just ... different.

I feel similarly about the JPG, and there are a few (IMHO) interesting variations to think about:

How do you feel about a a printed digital photo or printed digital painting?

How if there's more than one print, but e.g. a limited edition of 50?

How about "30$ for the JPG and the right to print it for yourself"?

About "there's only 10 copies of this artsy computer game"?

> The copy of a digital image is 1:1 with the original.

Not in the case of an NFT. Accompanying the image data is a cryptographically-enforced means to assign control to a user / key holder.

This control is either over a single, unique art piece or over a certain number in a limited set of duplicates of the art piece.

While the image data can be seen as non-unique, the user can be confident that the copy which they control represents ownership of a unique asset with the ability to trace provenance back to the artist.

Are NFT's actually desirable when not paired to a major platform?

Sometimes, yes!

Having been in cryptocurrency since 2010

I can't wait to start selling virtual bridges to all of these people who so eagerly want to give away their money.

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