Show notes
NFTs are easy to understand if you examine their core utility. Unfortunately, there are thousands of NFT promoters spending millions of dollars to make sure you never look at that.
This episode is a departure from our standard format, but it's an important topic. I want to explain what NFTs actually are and how you can best make money with them -- if you really want to.
Our Japanese founders will be back next episode.
So let’s get right to it.
Transcript
This is it, gentlemen. This Queen of Hearts is the winning card. Watch it closely.
Follow her with your eye as she moves. Here she is, and now here, now here, and now—where?
The Queen of Hearts. My hand is quicker than your eye.
If you find the lady, you win, and I pay; if not, I win and take your money.
Who will go me twenty dollars?
Yes, this is in fact, Disrupting Japan. Straight talk from Japan’s most successful entrepreneurs, but today we are going to be talking about Three-Card Monte, or more specifically what Three-Card Monte teaches us about NFTs, or non-fungible tokens.
You all know three-card-monte. Even if you don’t know it by that name. The dealer places three cards on the table, flips over one to reveal the queen. He flips the queen back over and begins shuffling the three cards around the table. He does this quickly, but not too quickly. You can just follow his movements. You confidently point to your card, and the dealer flips over a seven.
You lose your money!
Of course, you never really had a chance. The dealer slipped the queen up his sleeve when he started the shuffle. All that patter and shuffling is just there to distract you. The three cards you see on the table are all decoys. The important card had already been taken off the table.
And you see, just like in three-card-monte, the key to understanding NFTs is looking at what’s missing. In this podcast we are going to grab the dealer by the wrist, dispose of the distracting patter and decoy cards, and take a hard look at exactly what’s been taken off the table.
And to be clear, I have absolutely no opinion as to whether you should invest in NFTs or if you personally will make money from them. Today we’ll just be talking about what they are; their reason for existence. In startup terms, we’ll be defining NFT’s true value proposition.
However, by the end of this episode it will make perfect sense to you why a jpg of a robot with a green mustache is worth $2 million, while the same robot with a red mustache is only worth $50. In fact, you’ll understand why NFTs could not possibly work any other way.
And before we dive in, I want to let you know that although I spent a lot of time checking my facts and making sure what I am about to explain to you is accurate. I am most emphatically not a lawyer or a financial advisor. I am a founder, podcaster, author, hacker, picker, grinner, lover, sinner, and if you are even thinking of taking legal or financial advice from me, you are being an idiot.
Stop it!
OK, with that out of the way, let’s flip over these decoy cards.
Misdirection & the NFT Decoy Cards
Card #1: NFTs Prove Ownership
NFTs are usually described as something like “digital certificate of ownership” or “a digital receipt” or “virtual goods with the blockchain providing proof of provenance and authenticity.” NFT promoters love to claim that they are a “permanent, distributed, publicly-auditable, tamper-proof record” of ownership.
But no. They are not any of that. That’s misdirection, that’s one of the decoy cards.
NFTs absolutely provide a “permanent, distributed, publicly-auditable, tamper-proof record” that you gave your money to a crypto promoter, but purchasing an NFT gives you absolutely no copyrights, usage rights, or ownership rights to the artwork. It’s not a receipt because you haven't actually bought anything but the receipt itself.
The terms of service a some NFT marketplaces hint at such rights, and some NFTs are sold with legal-sounding jargon that promises them. However, the whole idea that copyrights and usage rights can be transferred anonymously between wallets not tied to any specific legal entities is ... well, let’s just say it’s untested legal ground. Particularly when there is no way to know if an anonymous NFT creator owned the artwork in question and when there is no recourse if they are lying.
You’ll find that most promoters quickly toss aside the ownership card when you challenge them. They then fall back to the second decoy card.
Card #2: NFTs Provide Bragging Rights
“Well, they say, NFT buyers are not really interested in the legal minutiae of copyright law. To buyers NFTs are more about bragging rights. NFTs provide a “permanent, distributed, publicly-auditable, tamper-proof record” that they have bragging rights to a specific piece of art.”
OK, let’s flip over this decoy card as well.
Unlike copyrights, bragging rights don't seem to have any basis in law, so I can’t address that specifically. However, it’s important to realize that the artwork in question is not on the blockchain. It’s just a URL. So, once again, you find yourself with a "permanent, distributed, publicly-auditable, tamper-proof record" that you gave a crypto promoter your money, but you only get a URL in return.
Presumably, that URL resolved to something like a nice picture of a cat wearing sunglasses when you sent them your money, but after they have your money, there are no guarantees. Domain names can be sold or go dark. Someone could take your image down or replace it with another one. You have no control over any of that. You just have to take them at their word that they will maintain this site for you forever, and for free.
But hey, I’m sure it will be fine!
If you can’t trust the solemn promise of a crypto promoter, who can you trust?
Card #3: NFTs Help Artists
OK, let’s flip over the third and final card before we look up the dealer’s sleeve and see what’s there.
“NFTs are a way to ensure that artists and creators get paid for their hard work.”
No they are not. And as a former professional musician, this is the decoy card that annoys me the most.
This line of bull usually starts with the word “Imagine” as in “Imagine if artists could get paid every time their work is resold!” or “Image if you could take a unique digital item from game to game!” or “Imagine if musicians could be guaranteed to receive the royalties they are owed!”
Well, OK, I’m a fairly imaginative person, and I can imagine all kinds of wonderful things. But in reality NFTs are not enabling any of this. There are plenty of existing platforms and systems that do all that right now, and NFTs don’t seem to be improving or replacing any of them.
Honestly, even a casual glance at the NFT market will show you that most NFT art is algorithmically generated nonsense. But as we’ll see when we look up the dealer's sleeve, algorithmically generated nonsense is much, much better suited to NFTs’ true value proposition than actual art would be.
By the way, I have no intention of getting into a “But, what is art?” debate. If you find NFT art appealing, that’s cool and totally valid. My point is that the vast majority of NFT art is generated by programmers and crypto promoters for the purpose of creating NFTs. Very, very little is generated by struggling artists trying to reach a wider audience.
And that kind of gives the lie to how NFTs are really about helping artists.
Up the Dealer's Sleeve: Why Fungibility Matters
OK, so what do we have left? We’ve flipped over all three cards, and now there seems to be nothing left on the table.
Remember, the secret to understanding NFTs, just like the secret to understanding three-card monte, is figuring out what’s been taken off the table. So let’s have a look up the dealer’s sleeve and see what’s missing.
Let’s start with the name. We are talking about "non-fungible tokens", so obviously fungibility has been removed, but what does that mean exactly, and why is that important?
From a marketing perspective, “non-fungible tokens” is a really odd naming choice. They could have gone with “art tokens” or “creator tokens” or “collectors tokens”, but the creators and promoters went with an obscure (and difficult to pronounce) bit of financial jargon. “Non-fungible tokens.” But this makes perfect sense because, as you’ll see, NFTs have nothing to do with art and everything to do with fungibility.
NFT promoters usually explain that “non-fungible” means unique, but like everything else you hear about NFTs, that's not quite true. Not exactly.
Uniqueness and non-fungibility are related, but differ in one important way, and that difference is the reason NFTs exist.
If something is fungible it means that it is not legally distinct from any other instance of that thing. For example, commodities are not unique and they are fungible. If you buy or sell an ounce of gold or a barrel of WTI crude, the particular ounce of gold or barrel of oil doesn’t matter; only the quantity matters. So commodities are both fungible and non-unique.
Things like banknotes and stock certificates are unique, but they are also fungible. Banknotes and stock certificates have serial numbers that uniquely identify them, but that uniqueness is legally irrelevant.
It’s easy to tell two different $20 bills apart. They have different serial numbers, they might be worn differently. One might have marks on it. But legally none of that matters. Every $20 bill is legally identical to every other $20 bill. The same is true for every share of Apple common stock. You can’t legally demand that a bank return a specific $20 bill or that your broker provide you with a specific share of Apple stock. Financial securities are both unique and fungible.
The same holds true for cryptocurrencies. Tokens are both unique and fungible....
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