Non-fungible tokens for dummies

The Register has a report on Bill Gate’s views on Non-fungible tokens (NFTs) and the related cryptocurrencies. The short version is that both are “100 percent based on the greater fool theory.”

Nothing surprising there: they are. But the article also includes a handy explainer as to what Non-fungible tokens actually are. It is such a superb piece of writing that I am posting it here so that I can refer back to it as and when necessary.

Want to buy nothing? You’d probably say no. That’s because people don’t like nothing, they like scarcity and status. In the digital world, scarcity doesn’t work because data can be infinitely replicated.

But what if I faked digital scarcity? A database with limited spaces, each identified by a unique number. Think a line of people queuing for nothing. There’s no value inherent in one spot over another, but I sell you a position in the queue. I’m not selling you the queue, or its destination (there isn’t one), just the right to stand in this particular position.

You give me a dollar, and I give you some paper work, signed by yours truly, that says you have the right to stand there. Your position in the queue combined with my paper is a token that can’t be recreated. There is only one of each position. It is, therefore, “non-fungible.” The blockchain checks every single sale of a queue position and once you’ve bought your spot, it’s listed on the blockchain. Want to sell your position to someone else? You can, and that transaction will be listed on the blockchain too.

Why would anyone want a spot in my queue? Well, what if I put up a poster next to your position? Every spot now has a unique poster, and buying a place in the queue means you can now stand next to that poster. You don’t own the poster, you don’t own the image on the poster, you can’t reproduce the image, or sell copies, or claim any other type of ownership. What you’ve bought is the right to stand next to that poster – that’s it. You can show your friends the receipt that says you can stand there. They might even think it’s cool.

Congratulations, you now understand NFTs. Yes, it really is that stupid.

Dopamine Coins

Cryptocurrencies, such as bitcoin, as well as the underlying blockchain technology, are things about which I have long been cynical. As far as I can see, they have no value, no purpose and no point other than providing yet another economic bubble, profitable for those that get out fast enough but disastrous for the schmucks left holding the things when prices crash.

Then again, I’m quite cynical about most new things — I thought podcasts were a stupid idea when I first saw someone attach an audio file to a blog, and look at how popular podcasts are now. So I have largely ignored all of the cryptohype on the grounds that, if my cynicism turns out to be misplaced I’m sure I’ll find out soon enough.

However, as the reporting around these things increases, the more sure I am becoming that my cynicism was not misplaced. Indeed, if anything I probably haven’t been cynical enough.

Let’s start with the news that triggered this post, that One bitcoin transaction emits as much CO2 as a household in 3 weeks. I have long been aware that the cost of generating cryptoassets is eye-wateringly high, but it is useful to have some sense of just how much of an energy cost we are talking about. And it needs to kept in mind that this cost is in pursuit of generating something that has no use and no intrinsic value.

But you can trade them. In fact, the only thing you can do with these things is trade them. Which brings me to the second article I stumbled across recently: ‘Trading is gambling, no doubt about it’ – how cryptocurrency dealing fuels addiction.

I don’t have a very high opinion of financial trades or financial traders, but the exchanges that support this do have to comply with various regulations which — in theory, at least — provide some protection. Even casinos have to deal with a level of regulatory oversight, but not cryptoassets:

While some trading platforms that offer digital assets are regulated – because they also offer more traditional financial instruments – crypto coins and tokens are not.

Cryptoasset executives do not have to prove that they are fit and proper people to take people’s money. The companies they run are not required to hold enough cash to repay investors if they go bust. Nor must they worry about the FCA’s stipulation that financial promotions, such as those splashed across public transport in London, are fair, clear and not misleading.

If you get involved in cryptotrading, you are essentially handing large sums of money over to someone who, even if they aren’t actively trying to defraud you, will often prove to be unable to provide anything close to adequate protection. These exchanges are, all too often, being run by amateurs who lack necessary knowledge or skills and who wouldn’t be allowed anywhere near your money if real assets were involved.

Of course, the supporters of blockchain technologies will respond to these issues by claiming that these are just teething issues to be resolved, or some handwavy stuff about new or “disruptive” technologies needing time to prove themselves. But, as Molly White points out, It’s not still the early days.

Bitcoin has been around since 2009, other blockchain-based currencies and applications have similarly long pedigrees. This is plenty of time for any issues to have been worked out and plenty of time, if these things did have any value, for that value to become apparent.

The more you think about it, the more “it’s early days!” begins to sound like the desperate protestations of people with too much money sunk into a pyramid scheme, hoping they can bag a few more suckers and get out with their cash before the whole thing comes crashing down.

Blockchain is a solution in search of a problem. It’s had long enough, and it’s now safe to assume that there are no problems for which blockchain is solution. It’s a technology that needs to be abandoned, sooner rather than later.