Three days had passed since the Kingston family last had a long chat at the dinner time. Today Emily raised a question that interested everyone.
Emily: So has anybody heard about the thing called NFT?
(All except Cleo raised hands)
Emily: Jason, you heard about NFT, too?
Jason: Yeah, why, you found it hard to believe? A friend of mine was a big fan and he kept telling me all the stories about NFT, like some kid in Asia sold his selfies for more than a million dollars.
Kimberly: Oh I heard crazier stories than that: This Seattle based teenager artist built a collection of NFTs valued at more than $26 million.
Emily: Yeah, I heard that one, too. The funny thing is that the kid was selling stickers and prints for $5 a piece online just one year ago.
Kimberly: So who can tell us what NFT stands for?
Lily: I know the first letter “N” means “Non” and “T” for “Token” or Tokens. Someone once told me the meaning of “F” but I forgot it now.
Emily: “F” means “Fungible,” which means “replaceable” or interchangeable with something identical. So “Non-fungible” basically means not replaceable or not identical to something else. But if something is non replaceable, it must be unique. That’s what it says.
Lily: How do you know so much about NFT? Are you gonna create your NFT and sell it?
Emily: Not really. Our arts teacher asked us to write an essay on NFT.
(Turning to Greg), speaking of the essay, dad, what do you think of NFT? Do you see much value in it?
I look at some NFTs and I don’t understand why someone’s selfie deserves more than a million dollars.
Greg: It’s natural to feel that way, and I am sure you are not the only one with questions. I myself have been thinking of it a lot lately.
Kimberly: Do you look at it more from a financial perspective or a commonsense perspective?
Greg: It’s interesting you put that way, but I believe both ways are needed to fully understand NFTs. In fact, not only financial and commonsense but we may even need an artistic perspective. After all, those non-fungible tokens are mostly seen as arts.
Joy: Wow. This conversation is getting more interesting! I have a nonprofit client who is familiar with arts and museums. We were chatting the other day about NFT, and I asked her opinion. She said the same thing you just said that it is easier to understand NFTs if you know arts.
Emily: Oh good! I’m glad you guys mentioned that. I came across this interesting and fairly recent article on Washington Post published last December that talked about just that. It’s pretty long but let me pull it out on my phone to give you a few highlights.
Greg: Is the one written by a journalist who went to Miami, Florida to cover American’s most prestigious art fair, I forgot what is called.
Emily: Yeah. It is Art Basel Miami Beach, which attracts the world’s art collectors.
Greg: That’s a good piece and I liked it. It has lots of information in it and brought us the latest stories in NFTs, crypto, blockchain and the art world.
Emily: I think so, too. Anyway, the first section of the article has a definition that says an NFT “is a unique digital representation of a good — for our purposes, a work of art. It’s akin to a certificate of authenticity or a deed and it’s recorded on a blockchain.”
Jason: I have heard the name before but what exactly is a “blockchain?”
Emily: I’ve learned a lot this time from writing my essay. The best way to define a blockchain conceptually is a “distributed and decentralized database.” In case you did not know, a database is just a bunch of data stored in a computer that allow people to access for information.
Jason: Well, how do they make database “distributed and decentralized?”
Emily: The key is to create “information redundancy.” Before blockchain, databases are separated and isolated from each other, each owned by a different organization.
Jason: What’s wrong with that?
Emily: Well, to see what’s wrong, the first thing is to recognize that those databases are centralized because no matter how big a company or a government agency is, it only has one database.
Kimberly: Yeah, now that you mentioned it, a good example is IRS, the government agency that collects citizens’ taxes. Pretty much everyone pays taxes, right? And the IRS has a huge database for all taxpayers’ transactions, not just this year but way back. Think of how many records there must be in the IRS database.
Emily: Exactly. The danger with centralized databases is that they attract hackers. But even without hackers there are natural disasters like fires, earthquakes, floods, power outages and lightening hits. It is called “a single point of failure” for all centralized databases.
Jason: So blockchain stores the same database with multiple copies in multiple places.
Emily: Exactly. Multiple databases are decentralized because there is not a single database that controls all others. All duplicated databases are equal and if one database is hacked or corrupted, others won’t, and we can quickly find out the bad copy and kick it out of the system.
Greg: What you said is a nice conceptual definition of blockchain, I want to add a technical note to it: Anything registered in a blockchain is truly non-fungible, meaning unique or unreplaceable because it is designed to be that way. A blockchain is a bunch of blocks each with a unique time stamps with information in it and these blocks are connected to form a chain.
Kimberly: So let’s see, that means no two Bitcoins are identical because they each will have a unique trace on the blockchain, right?
Greg: That’s exactly right and that’s the beauty of digital currency, unlike fiat currency, where one dollar is just one dollar, the one dollar bill on my left hand is fungible or identical with the one dollar bill on my right hand.
Jason: What is fiat currency?
Greg: Oh, it’s just a fancy way to call the traditional money issued by government, like the American dollars we use every day, or Japanese Yen, or the Euros.
Joy: Speaking of fiat money, I’m thinking that no two dollars are identical, either. I bet the one dollar on your left hand will have a different serial number than the one on your right hand. However, the two dollars do have identical value, just like two Bitcoins.
Greg: That’s right, I forgot about the serial numbers. Good point!
Jason: I have a few dollar bills left from my lunch money. Let’s see: Yeah, this bill has a serial number F30022163M, the other one says K61556364C. They are different.
Kimberly: If blockchain can make two units of the same digital currency, like Bitcoin or Ethereum, non-fungible or unique, it certainly will make all NFTs unique, right?
Lily: I think we should separate two kinds of uniqueness. Yes you are right to say that on a blockchain everything is unique, and nothing is identical with anything else, even between two bitcoins or two dollar bills. But do we really care about that kind of technical or trivial uniqueness? I doubt it.
Emily: That’s an excellent point. I was thinking along the same line but with NFTs. One big problem with NFTs is that people can always make copies of the same popular NFTs for themselves. If they all registered their individual copies on a blockchain, they will be unique in some ways, like when they were entered, and who the owners are. But from commonsense perspective, that kind of uniqueness is really no big deal, as these copies are all identical except for the blockchain generated uniqueness.
Kimberly: I like the term “blockchain generated uniqueness.”
Joy: So the issue is how we maintain “commonsense uniqueness” above and beyond the “blockchain uniqueness.”
Jason: But why does commonsense uniqueness matter?
Kimberly: Because we human beings all want to be unique; you don’t want to be just a carbon copy of someone else, even with someone you love or admire, right?
Greg: Going back to what Emily said, the problem we face today is not scarcity but the opposite of it: abundance. We can easily copy and paste anything digital that in a commonsense view are identical to each other. This is very different from the old days when making an identical copy of the masterpiece was impossible. The best one could do was to have a fake one that looks like the original, never identical.
Lily: Like back in the days for Picasso, Davinci or Monet, right?
Greg: Yeah. Today’s technologies allow us to produce identical copies so easily and in so large quantity that the “art hackers” in the old days could not even dream about.
Joy: So you are saying the big question today is how to restore or save scarcity in the age of abundance?
Greg: Exactly.
Joy: Well, one way to do that is through algorithms. Like the number of Bitcoin was programmed to be no more than 21 million ever. There, not only do we have scarcity but know exactly the size of supply.
Emily: The same logic works in NFTs. It turns out owning a free and identical copy is not enough for some people, they want to possess the one that is original and are willing to pay a big price for that.
Greg: So Bitcoin scarcity is created by the creator of the digital currency, but for NFTs scarcity is saved by some buyers on the demand side.
Kimberly: That makes sense, because there is always only one original NFT, regardless of how many free copies out there.
Lily: Not only that, but the more copies out there, the more valuable the original becomes. Whoever bought the original can always brag that she or he bought the one out of a million, which sounds much better than one out of 10.
Greg: This gets me to think that the basis of value today is different from Picasso’s time. In the old days, the value of artworks was attached to the artists, who were “the one and the only” to produce masterpieces that nobody else could match.
Joy: So only masters could produce masterpieces. Using the chicken-egg metaphor, the masters were “chickens,” masterpieces were “eggs,” and the chickens always came first. As long as there is only one Picasso in the world, the value of his artworks would be fixed, regardless of how many imitations there are.
Kimberly: But isn’t that always the case that a particular artist produces a particular piece of artwork, so the “chickens” always come first?
Greg: Well, yes and no. Different NFTs will be produced by different artists just like before but today’s artists do not have the same “monopoly power” as Picasso had. Think of what has changed?
Kimberly: Well, like you said earlier, there is an abundance of virtually identical copies today.
Greg: Yes. In the old days there was just one copy for each masterpiece of Picasso for the entire world. It’s a natural monopoly. If you wanted to see the masterpiece, you visited a museum. But nowadays everyone can have a personal copy of a NFT if she wants.
Kimberly: But that’s just easy accessibility, which does not kill monopoly power. There is still only one Picasso in the world.
Greg: There is only one Kimberly Kingston in the world, does that give you the same monopoly power as Picasso? Monopoly power is not about being the only one, but about your capability of changing or influencing the behaviors of others.
Kimberly: I see. Sounds like the abundance of identical copies shifts the power from NFT artists and sellers to buyers and we have a “buyers’ market” for NFTs.
Lily: But wait, in a buyers’ market the price goes down, why do we still see some skyrocketing prices in the NFT market?
Greg: Interesting question. But it’s getting late and let’s continue the conversation tomorrow.