After the second family conversation yesterday, the Kingstons are anxious to talk more about NFT after doing their homework reading of the “NFT Bible” by the co-founder of OpenSea (the largest NFT marketplace in the world), Devin Finzer.
Emily: I’m glad dad recommended this reading; I feel I know so much more now about NFTs than before.
Greg: So what is the number one thing that impressed you guys the most?
Kimberly: I would have to say it is the point of “non-fungible assets are the norm; fungible assets are the exceptions.” The more I think of it the more I agree. We have seen far more unique things in the world than identical things.
Greg: I would be careful about calling fungible things “identical.” In the business world “fungible” essentially means “interchangeable” or “tradable” — even though two things may not be identical in every possible way. To borrow Lily’s term, things are “commonsense fungible” enough to be interchangeable or tradable.
Joy: I wonder if we should put “interchangeable” and “tradable” together, even though they sound similar. It seems to me that being identical is the least forgiven and most strict. Even identical twins are not exactly identical to the extent they expose to different environments. Being interchangeable is more forgiven because similar things are interchangeable even though they may or may not be identical, like two apples from the same tree in the same season. Tradable is most forgiven because we can arrange to trade so many different things, some of them not deemed interchangeable at all, like Russia exports oil and natural gas and imports iPhones and iPads.
Greg: Anexcellent point! Yes, many fungible things are interchangeable, but both fungible and non-fungible things are tradable. Perhaps international trading involves more non-fungible stuff given the different levels of development.
Lily: One advantage of focusing on “tradeable” things is that trading always involves negotiation. I think many things have fungibility that is also subject to negotiation.
Kimberly: An interesting thought that’s in line with Devin Finzer, who also emphasizes the relative and subjective nature of non-fungibility. Here it says “fungibility is relative; it really only applies when comparing multiple things.” And he goes on by saying two business class sets on an airplane is more fungible than a “first class” and an “economy class” tickets.
Greg: I agree fungibility is relative but disagree that it is only useful for comparing multiple things. You can compare two things meaningfully for fungibility, just remember their fungibility is not fixed or absolute but changeable or conditional, depending on scenarios, contexts, time, people and history.
Emily: In theexample used by Devin Finzer you can see he is thinking of the same way. He talks about someone preferring a window seat would not trade his window seat with an aisle seat. But for someone else who does not care as much, the two seats are more fungible.
Lily: Yeah, the same goes to the idea of “semi-fungible”: Items within the same class are more fungible than items between classes, like two box seats in a football stadium are more fungible than one ordinary and one box seat, just like two Teslas are more tradable than one Tesla and one Ford.
Emily: Oh, that’s what “semi-fungible” means? I was wondering about that. What about the name of non-fungible tokens? I was thinking that if non-fungible was the norm, then non-fungible tokens literally mean “normal tokens,” not really an exciting name.
Lily: “Normal tokens” are not exciting I agree, but if we switch to the other side of the same coin and just call tokens “unique” that should be more appealing, as we all like things that are unique.
Emily: That’s true and in that sense, the name “non-fungible tokens” defines the nature of things pretty well because all tokens are unique in the NFT world, and each is different from others.
Greg: Yes, you may even say being unique is the only common feature shared by all NFT items on a blockchain.
Joy: Speaking of uniqueness, it just hits me that the whole idea for companies to develop brands is to make their products or services unique, not interchangeable with non-brands or other brands, even from the same category of goods or services.
Kimberly: Good point. And companies are not the only ones doing that, buyers do, too. I have a Chinese friend who once told me that the Chinese prefer the number “8” because it sounds similar to “Fortune” in Chinese. If that’s true, a Chinese customer may think a gold bar with the ending serial number of “8” is more valuable than an otherwise identical gold bar with a different ending number. I bet she would refuse to trade her “8” numbered gold bar with another.
Greg: Interesting points you’ve all brought up. We have been told in schools that commodities, money and gold are textbook examples of fungible or interchangeable things. Now we know even textbook examples do not always hold and are subject to negotiation. Both sellers and buyers have the power to turn interchangeable things into non-interchangeable.
Emily: What about the opposite direction? Like can we turn non-interchangeable into interchangeable?
Joy: Your question sends us back to the “tradable things” I said earlier. T-Shirts and airplanes are normally not interchangeable, right? But international trade did just that: Developing countries export T-shirts, tea, coffee, banana, raw materials so they afford to import airplanes from developed countries.
Kimberly: That happens every day. The fungible money plays a crucial role here: Anything can be tradable as long as they all have values measurable by money.
Lily: I’m thinking that the reason non-fungible becomes the norm is because we all want to be unique, like I won’t trade my pants, jackets, skirts and shoes with Emily or Kimberly, even if they were the same brand, size or color. All my stuff has my name on it, and I don’t want to trade them with others.
Kimberly: I think it also depends on level of economic development. My Chinese friend told me that in the days before China opened its door to the world, some families in the rural area of China were so poor that the entire family had only one pant or one jacket. Whoever needed to get out of the bed got to wear that pant, others all hided under a family comforter. These people had no choice but to share the same “family pant.” Non-fungibility was not even on the agenda.
Emily: Shocking and sad story but good for China to put those days behind! I was wondering if and how the blockchain has changed things around.
Lily: Yeah, I was wondering about that, too. We should expect at least some changes, right?
Joy: We do, one big change has been pointed out by Devin Finzer that although we’ve had digital assets since the internet age, we’ve never really owned them like in the sense of physical world. That digital ownership story is changed by the blockchain technology.
Kimberly: That’s right. Devin talked about how blockchain makes it possible not only to prove who owns what in the digital world, but also for owners to move their digital assets around, like we do in the physical world.
Emily: Iwish there were more details, like how does blockchain make things different in the digital world?
Greg: There are many discussions on advantages and usages of blockchain, like Bitcoin, digital ownership, immutability or unchangeable, enhanced security, distributed ledgers. But all these I believe are based on non-fungibility of things. Digital ownership, digital credential, immutability, security, these things are baseless without digital assets being unique.
Emily: How does blockchain ensure non-fungibility then?
Greg: We can look at it at two levels. The first is at the block level. We all know blockchain is a chain of blocks. Each block of information has a unique timestamp and more importantly a unique “hash function,” which according to this Wikipedia page, is “any function that can be used to map data of arbitrary size to fixed-size values.” This guy named Haseeb Qureshi has a better way to put it: The hash function is a “fingerprint machine.”
Joy: Yeah, I remember reading that piece. He has a neat cartoon picture to show how different inputs to the hash function come out as a fixed sized “fingerprints.” So if the input is “Hello!” the output will be some combination of letters and numbers. But if the input is “I love dogs!” then the output will be something different. They all will have the same size, like 256 bits. If the NFT is your passport, it will come out uniquely, never the same as someone else’s passport.
Lily: So a hash function is as unique as a fingerprint.
Greg: More accurately a hash function produces unique fingerprints, depending on unique input data. This is how each block in a blockchain will be earmarked by its own unique fingerprint.
Joy: The article compares “normal” hash functions with “cryptographic” hash functions. The latter come with more security features and more robust than the former. It adds three more features like one-way function, avalanche effect and collision resistant.
Greg: That’s right. But even a normal hash function is nice and powerful. One of its features is deterministic, which ensures that if you give the same input, the hash function will always produce the same output. Fungibility in the physical world is retained in the digital world.
Kimberly: But there are numerous records, transactions or NFT pieces within each block. How do they remain unique?
Greg: Let’s get the name straight first. In the physical world things are three dimensional existences, but in the digital world I believe everything becomes a token, whether you have Bitcoin, transaction records, personal credentials, driver’s licenses or passports, deeds, contracts, NFT artworks, games or cartoons.
Kimberly: Okey, so how do we keep tokens unique?
Greg: Simple, they all belong to different owners, creators or developers, and they have public and private keys in digital wallets. You can check out more information for the keypairs and how they work online. Essentially you can send transactions to public key, but you need private key to unlock them and prove you are the owner.
Joy: This validation process using private keys is why Devin Finzer says the blockchain finally solved the ownership problem.
Greg: Plus moving tokens around anywhere and anyway owners want. Once we have non-fungibility established, things become more fungible — no pun intended.
Joy: Maybe we should stop here and save more topics for another day.
All: Good idea!
