Saturday, July 30, 2022

Blockchains and Crypto and NFTs, Oh My!

I mentioned in my last post that I've been playing in the NFT world and learning lots of new stuff.  Thought I'd share some of what I've learned here.  It's an incredibly complex and ever-changing rabbit-warren of technology, community, written and unwritten rules, and potential.

We'll start with blockchains because that's what underlies all of this.  A blockchain is essentially a system that verifies that something else exists and belongs to somebody.  Think of it like a ledger.  You enter the information that you own some digital asset (a photo, a music file, some crypto currency, whatever).  It's recorded in an encrypted block of data.  If you transfer the digital asset to somebody else, the "ledger" creates another encrypted block of data that records who now has it, what date and time the transfer occurred, and some other information.  The first and second blocks of data are now "chained" together.  Their information is stored in the cloud on computers around the world.  Neither block can ever be altered except by adding additional blocks because altering them would require altering vast amounts of information on vast numbers of dispersed computers simultaneously.  So blockchains are incredibly secure.

The first workable blockchain was Bitcoin, created in 2009.  Since then, there have been something like 3,000 different blockchains created.  Some have taken off, like Ethereum, as they targeted specific niches, while most others haven't.  

One of the major concerns about blockchains is their environmental impact.  Bitcoin, Ethereum, and most others use the "proof of work" (POW) verification system.  I have no idea how that works, but this system requires huge amounts of energy to operate.  To create a single NFT (we'll get into that in a bit) can require as much energy as running a typical American household for over two weeks.  There are, literally, entire coal-fired power plants whose output is used exclusively for blockchain operations.  That sucks.  In response, a newer type of verification system, the "proof of stake" (POS) system, was created.  It uses an tiny fraction of the energy that POW systems do.  The Tezos blockchain uses the POS system and says it uses 1/200,000,000th the energy of Bitcoin.  All this energy has to be paid for by the users and can be expensive.  As a comparison, it can cost about $70 to create an NFT on the Ethereum chain.  It cost me about 15 cents on the Tezos chain.  That reflects a huge reduction in energy useage.

So blockchains give us a way to verify ownership.  Crypto currency gives us a medium of exchange.  Each blockchain has its own crypto currency.  Bitcoin, of course, is the oldest.  For traditional artists, the most common blockchains and crypto are the Ethereum chain (using Ether) and Tezos (using Tez).  They are not interoperable: you can't use Tezos on the Ethereum chain.  They're comparable to existing currencies: you go to Japan, you use yen; you go to France, you use euros, and you can't use euros in Japan.  You can exchange them, though, just like you do with national currencies.  

Lots of attention is being paid to the volatility of crypto currencies, and with good reason.  Just recently, the values of almost all crypto currencies collapsed.  Bitcoin dropped by about 70%, for example.  Why?  Lots of reasons, but primarily it's due to the state of the world economy and the fact that crypto currencies are naturally more susceptible to mood changes.  I think that a lot of people bought crypto as an "investment", like stocks, especially over the last couple of years when everything was going up up up.  Well, they can go down down down, too.  Volatility doesn't necessarily mean the chains are bad, just that it's a new technology and people are still figuring them out.

Okay, now that we have blockchains and crypto currencies, what about NFTs?  NFTs are basically some kind of digital file that is attached to the blockchain.  It can be anything: a jpeg, mpeg, PDF, whatever you want.  You take the file, "mint" it by creating a record of it and attaching it to the blockchain, and now you have an NFT.  You can trade it or sell it as you wish.  If you have some crypto, you can buy somebody else's NFT.  I have taken several of my artworks and made NFTs of them.  The first was Natalie #5.  I took my best-quality digital photo, went on the site, minted 15 copies of it, and listed them on my page on the website.  Since then, I've minted other artworks, sold some, and bought some.  There's some really good NFT art out there.

So why would you pay good crypto for something that is essentially a jpeg image that you could copy/paste for free?  Because you can be sure that it came directly from the artist and is exactly the way they wanted it to look.  And it has the bonus of being "signed" by the artist.  You can pick up a New York Yankees ballcap for $5, but a Yankees ballcap signed by Derick Jeter may set you back $50.  It's a collectible, which is pretty much the same concept.

Going forward, I think NFTs will be a big part of business operations, but it won't happen for a while.  Right now, there are artists playing around with the concept, and some businesses are buying and selling using crypto currencies, but there's nothing large scale.  A big reason is that the whole system is so difficult to learn, and convoluted, that relatively few people want to spend the time and effort to learn it.  But eventually, the tech geeks will figure out ways to make it as easy and simple as using a credit card.  And when that happens, you'll see NFTs everywhere.  Car titles, concert tickets, receipts for new refrigerators, your Amazon orders, all that and much much more could eventually be done with NFTs.  In the meantime, I'll play around with NFTs of artworks and watch how it all develops.