For online content creators the unavoidable subject of 2021 has been NFT’s.
From incredibly cringe-worthy ape profile pics, to incomprehensibly tasteless tributes to deceased
celebrities, to six-figure sales of the “original copy” of a meme, it is the thing that is currently
dominating the collective brain space of digital artists and sucking up all the oxygen in the room.
And I do want to talk about that, I want to talk about my opinions on NFTs and digital
ownership and scarcity, all the myriad dimensions of the issue, but I don’t
just want to talk about NFTs, I can’t just talk about NFTs because ultimately they are just
a symbol of so much more, and it is that “more” that is ultimately important.
So let me tell you a story.
In 2008 the economy functionally collapsed.
The basic chain reaction was this:
Banks came up with a thing called a mortgage-backed security,
a financial instrument that could be traded or collected that was based on a bundle
of thousands of individual mortgages. Based on the general reluctance of banks to issue mortgages,
the risk-aversion in lending someone hundreds of thousands of dollars that they’ll pay off
over the course of decades, these bonds were seen as especially stable. However
they were also immensely profitable for the banks who both issue the mortgages and the bonds.
Because of that perceived stability a lot of other financial organizations,
like pension funds and hedge funds, used them as the backbone of their investment portfolio.
In this arrangement a mortgage becomes more profitable to the bank issuing the mortgage
as a component of a bond than it is as a mortgage. Proportionally the returns per
mortgage from the bond are just that much better than the returns from the isolated mortgage.
There’s some problems, though. Problem one is that the biggest returns on a bond come from
when it first hits the market, a new bond that creates new securities sales is worth
more than an old bond that is slowly appreciating, but not seeing much trade. Problem two
is that there are a finite number of people and houses in America;
the market has to level out at a natural ceiling as eventually all or nearly all
mortgages are packaged into bonds, thus very few new bonds can be generated and sold.
So here’s the incentives that are created.
One: it’s good for banks if there are more houses that they can issue mortgages for
Two: the more mortgages issued the better, because a bad mortgage is
worth more as a component of a bond than a good mortgage that’s not part of a bond.
So real estate developers find that they have a really easy time getting funding from banks for
creating vast new suburbs full of houses that can be sold to generate mortgages,
but rather than building the kind of housing most people actually need and want,
they focus specifically on the kinds of upper-middle-class houses that fit into the sweet
spot from the perspective of the banks packaging the bonds. Buyers, in turn, find that they have a
suspiciously easy time getting a mortgage despite the fact that, for most people, the economy wasn’t
doing so great. Wages were stagnant and yet even though developers were going absolutely haywire
building new housing, the houses being built were all out of their price range to begin with,
and counter intuitively this massive increase in supply wasn’t driving down the price.
This is because the houses were being bought, just mostly not by people intending to live in them.
They were being bought by speculators who would then maybe rent them out or often just
leave them vacant with the intent to sell a couple years later.
Because speculators were buying up the supply it created synthetic demand. The price keeps
going up because speculators keep buying, which creates the illusion that the value is going up,
which attracts more speculators who buy up more supply and further inflate the price.
These speculators are enabled by a system that is prioritizing generating new mortgages
purely for the sake of having more mortgages to package into bonds.
The down payments are low and the mortgages all have a really attractive teaser rate,
meaning that for the first three to seven years of the mortgage the monthly payments are rock bottom,
as low as a few hundred dollars per month against a mortgage that would normally charge thousands.
Caught up in all this are legitimate buyers who have been lured into signing
for a mortgage that they can’t afford by aggressive salespeople who have an
incentive to generate mortgages that they can then sell to a bank who can put it into a bond
to sell to pension funds to make a line go up, because it’s good when the line goes up.
It’s a bubble.
The bubble burst as the teaser rates on the mortgages started to expire,
the monthly cost jumped up, and since the demand was synthetic
there were no actual buyers for the speculators to sell the houses to.
So the speculators start dumping stock, which finally drives prices down, but because the
original price was so inflated the new price is still out of reach of most actual buyers.
Legitimate buyers caught in the middle find their rates jumping, too,
but because the price of the house is going down as speculators try and dump their stock
the price of the house goes down relative to the mortgage issued,
and thus they can’t refinance and are locked into paying the original terms.
Unable to sell the house and unable to afford the monthly payments,
the owners, legitimate and speculators, default on their mortgages, they stop paying.
Eventually the default rate reaches criticality and the bonds fail.
As the bonds fail this impacts all the first order buyers of the bonds, hedge funds, pension funds,
retirement savings funds, and the like. It also cascades through all derivatives,
which are financial products that take their value directly from the value of the bond.
This creates a knock-on effect: huge segments of the economy turn out to be dead trees,
rotten to the core, but as a rotten tree falls
it still shreds its neighbours and crushes anything below it.
It was a failure precipitated by a combination of greed, active fraud,
and willful blindness at all levels of power. The banks issuing the bad mortgages were the same
banks selling the bonds and providing the capital to build the houses to generate the mortgages.
The ratings agencies checking the bonds were, themselves, publicly traded and dependent
on being in good relations with the banks, incentivized to rubber stamp whatever rating
would make their client happy. The regulatory agencies that should have seen the problem coming
were gutted by budget cuts and mired in conflicts of interest as employees
used their positions in regulation to secure higher paying jobs in industry.
And, the cherry on top, the people largely responsible for it all knew that because they
and their toxic products were so interwoven into the foundations of the economy they could count
on a bailout from the government because no matter how rotten they were, they were very large trees.
This naked display of greed and fraud created what would be fertile soil for
both anti-capitalist movements and hyper-capitalist movements:
both groups of people who saw themselves as being screwed over by the system, with one
group diagnosing the problem as the system’s inherently corrupt and corrupting incentives,
and the other seeing the crisis as a consequence of too much regulation, too much exclusion.
The hyper-capitalist, or anarcho-capitalist argument is that in a less constrained
market there would be more incentive to call foul, that regulation had only succeeded in
creating an in-group that was effectively able to conspire without competition.
Of course this argument fails to consider that a substantial number of
people within the system did, in fact, get fabulously wealthy specifically by betting
against the synthetic success of the market, but regardless.
Into this environment in 2009 arrived Bitcoin, an all-electronic peer-to-peer currency.
Philosophically Bitcoin, and cryptocurrency in general,
was paraded as an end to banks and centralized currency.
This is what will form the bedrock, both philosophical and technological,
that NFTs will be built on top of. It’s a bit of a hike
from here to the Bored Ape Yacht Club, so I guess get ready for that. Strap in.
As we get into this we’re going to need to deal with a lot of vocabulary, and a lot of complexity.
Some of this is the result of systems that are very technically intricate,
and some of this is from systems that are poorly designed or deliberately
obtuse in order to make them difficult to understand and thus appear more legitimate.
The entire subject sits at the intersection of two fields that are notoriously prone to
hype-based obfuscation, computer tech and finance, and inherits a lot of bad habits from both,
with a reputation for making things deliberately more difficult to understand
specifically to create the illusion that only they are smart enough to understand it.
Mining and minting are both methods for making tokens, which are the base thing that blockchains
deal with, but the two are colloquially different processes, where mining is a coin token created as
a result of the consensus protocol and minting is a user-initiated addition of a token to a
blockchain. All blockchains are made of nodes, and these nodes can be watcher nodes, miner nodes,
or validator nodes, though most miner nodes are also validator nodes. Fractionalization is the
process of taking one asset and creating a new asset that represents portions of the original.
So you get $DOG, a memecoin crypto DeFi venture capital fund backed by the fractionalization of
the original Doge meme sold as an NFT to PleasrDAO on the Ethereum network.
I’m sorry, some of this is just going to be like that.
The idea behind cryptocurrency is that your digital wallet functions the same as
a bank account, there’s no need for a bank to hold and process your transactions because
rather than holding a sum that conceptually represents physical currency, the cryptocoins
in your cryptowallet are the actual money. And because this money isn’t issued by a government
it is resistant to historical cash crises like hyperinflation caused by governments devaluing
their currency on purpose or by accident. It brings the flexibility and anonymity of cash and
barter to the digital realm, allowing individuals to transact without oversight or intermediaries.
And in a one-paragraph pitch you can see the appeal, there’s a compelling narrative there.
But, of course, in the twelve years since then none of that played out as designed.
Bitcoin was structurally too slow and expensive to handle regular commerce.
The whole thing basically came out the gate as a speculative financial vehicle
and so the only consumer market that proved to be a viable use
was buying and selling prohibited drugs where the high fees, rapid price fluctuations,
and multi-hour transaction times were mitigated by receiving LSD in the mail a week later.
And as far as banking is concerned, Bitcoin was never designed to solve the actual problems
created by the banking industry, only to be the new medium by which they operated. The principal
offering wasn’t revolution, but at best a changing of the guard. The gripe is not with the outcomes
of 2008, but the fact that you had to be well connected in order to get in on the grift in 2006.
And even the change of the guard is an illusion. Old money finance assholes like the Winkelvoss
twins were some of the first big names to jump on to crypto, where they remain to this day.
Financial criminal Jordan Belfort, convicted of fraud for running pump and dump schemes and barred for life from trading regulated securities or acting as a broker, loves Crypto.
Venture capitalist Chris Dixon, who has made huge bank off the “old web” in his
role as a general partner at VC firm Andreessen Horowitz Capital Management, is super popular
in the NFT space. He likes to paint himself as an outsider underdog fighting the gatekeepers,
but he also sits on the boards of Coinbase, a large cryptocurrency
exchange that makes money by being the gatekeeper collecting a fee on
all entries and exits to the crypto economy, and Oculus VR, which is owned by Meta, nee Facebook.
Peter Thiel, who also went from wealthy to ultra-wealthy off the Web2 boom via PayPal,
loves crypto, and is friends with a bunch of eugenics advocates who
promote cryptocurrency as a return to “sound money” for a whole bunch of extremely racist
reasons because when they start talking about banks and bankers, they mean Jews.
Some of the largest institutional holders of cryptocurrency
are the exact same investment banks that created the subprime loan crash.
Rather than being a reprieve to the people harmed by the housing bubble,
the people whose savings and retirements were, unknown to them,
being gambled on smoke, cryptocurrency instantly became the new playground for smoke vendors.
This is a really important point to stress: cryptocurrency does nothing to address 99% of
the problems with the banking industry, because those problems are patterns of human behaviour.
They’re incentives, they’re social structures, they’re modalities. The problem is what people
are doing to others, not that the building they’re doing it in has the word “bank” on the outside.
In addition to not fixing problems, Bitcoin also came with a pretty substantial drawback.
The innovation of Bitcoin over previous attempts at digital currency was to employ a distributed
append-only ledger, a kind of database where new entries can only be added to the end, and then to
have several different nodes, called validators, compete over who gets to validate the next update.
These are, respectively, the blockchain, and proof-of-work verification.
Now, proof-of-work has an interesting history as a technology, typically being
deployed as a deterrent to misbehaviour. For example, if you require that for every email
sent the user’s computer has to complete a small math problem it places a trivial load
onto normal users sending a few dozen, or even a couple hundred emails a day,
but places a massive load on the infrastructure of anyone attempting to spam millions of emails.
How it works in Bitcoin, simply put, is that when a block of transactions are
ready to be recorded to the ledger all of the mining nodes in the network compete with one
another to solve a cryptographic math problem that’s based on the data inside the block.
Effectively they’re competing to figure out the equation that yields a specific result
when the contents of the block are fed into it, with the complexity of the desired result
getting deliberately more difficult based on the total processing power available to the network.
Once the math problem has been solved the rest of the validation network can easily
double-check the work, since the contents of the block can be fed into the proposed solution
and it either spits out the valid answer or fails.
If the equation works and the consensus of validators signs off on it the block
is added to the bottom of the ledger and the miner who solved the problem first
is rewarded with newly generated Bitcoin.
The complexity of the answer that the computers are trying to solve scales up based on the
network’s processing power specifically to incur heavy diminishing returns as a protection
against an attack on the network where someone just builds a bigger computer and takes over.
Critics pointed out that this created new problems:
adversarial validation would deliberately incur escalating processing costs, which would in turn
generate perverse structural incentives that would quickly reward capital holders
and lock out any individual that wasn’t already obscenely wealthy, because while the escalating
proof-of-work scheme incurs heavy diminishing returns, diminishing returns are still returns,
so more would always go to those with the resources to build the bigger rig.
No matter what Bitcoin future was envisioned,
in the here and now computer hardware can be bought with dollars.
Rather than dismantling corrupt power structures,
this would just become a new tool for existing wealth.
And that’s… exactly what happened.
Thus began an arms race for bigger and bigger processing rigs, followed by escalating demands
for the support systems, hardware engineers, HVAC, and operating space needed to put those rigs in.
And, don’t worry, we’re not forgetting the power requirements.
These rigs draw an industrial amount of power and, because of the winner-takes-all
nature of the competition, huge amounts of redundant work are being done and discarded.
Estimates for this power consumption are hard to verify, the data is very complex,
spread across hundreds of operators around the globe, who move frequently
in search of cheap electricity, and it’s all pretty heavily politicized.
But even conservative estimates from within the crypto-mining industry puts the sum energy cost
of Bitcoin processing on par with the power consumption of a small industrialized nation.
Now, evangelists will counter that the global banking industry also uses a lot of power,
gesturing at things like idle ATMs humming away all night long, which is strictly speaking,
not untrue. On a factual level the entire global banking industry does,
in fact, use a lot of total electricity.
But, for scale, it takes six hours of that sustained power draw for the Bitcoin network
to process as many transactions as VISA handles in one minute,
and during that time VISA is using fractions of a cent of electricity per transaction.
And that’s just VISA. That’s one major institution.
So, like, yes, globally the entirety of the banking industry consumes a lot of power,
and a non-trivial portion of that is waste that could be better allocated.
But it’s also the global banking industry for seven billion people,
and not the hobby horse of a few hundred thousand gambling addicts.
So just to head all this off at the pass, Bitcoin and proof-of-work cryptocurrency aren’t
incentivizing a move to green energy sources, like solar and wind, they are offsetting it.
Because electrical consumption, electrical waste, is the value that underpins Bitcoin.
Miners spend X dollars in electricity to mine a Bitcoin, they expect to be able to
sell that coin for at least X plus profit. When new power sources come online and the
price of electricity goes down, they don’t let X go down, they build a bigger machine.
In 2012 Vitalik Buterin, a crypto enthusiast and butthurt Warlock main
set out to fix what he saw as the failings and inflexibilities of Bitcoin.
Rather than becoming the new digital currency, a thing that people actually used to buy stuff,
Bitcoin had become an unwieldy speculative financial instrument,
too slow and expensive to use for anything other than stunt purchases of expensive cars.
It was infested with money laundering and mired in bad press.
After the FBI shut down Silk Road you couldn’t even buy drugs with it anymore.
In practice you couldn’t do anything with your Bitcoin but bet on it,
lock up money you already have in the hopes that Bitcoin goes up later, and pray you don’t
lose it all in a scam, lose access to your wallet, or have it all stolen by an exchange.
The result, launched in 2014, was Ethereum, a competing cryptocurrency that boasted lower fees,
faster transaction times, a reduced electrical footprint,
and, most notably, a sophisticated processing functionality.
While the Bitcoin blockchain only tracks the location and movement of Bitcoins,
Ethereum would be broader. In addition to tracking Ether coins, the ledger would also
be able to track arbitrary blocks of data. As long as they were compatible with the
structure of the Ethereum network, those blocks of data could even be
programs that would utilize the validation network as a distributed virtual machine.
Vitalik envisioned this as a vast, infinite machine, duplicated and distributed across
thousands or millions of computers, a system onto which the entire history of a new internet could
be immutably written, immune to censorship, and impossible for governments to take down.
He saw it dismantling banks and other intermediary industries, allowing everyone to be their own
bank, to be their own stock broker, to bypass governments, regulators, and insurance agencies.
His peers envisioned a future where Ethereum became not just
a repository of financial transactions, but of identity, with deeds, driver’s licenses,
professional credentials, medical records, educational achievements,
and employment history turned into tokens and stored immutable and eternal on the chain.
Through crypto and the ethereum virtual machine they could bring all
the benefits of Wall Street investors and Silicon Valley
venture capitalists to the poorest people of the world, the unbanked and forgotten.
This heady high-minded philosophy is outlined in great detail in the
journalistic abortion The Infinite Machine by failed-journalist-turned-crypto-shill
The book is actually really interesting.
Not for the merits of the writing, Russo fails to interrogate the validity or rationality of
even the simplest claims and falls just shy of hagiography by occasionally noting
that something was a bit tacky or embarrassing, but only just shy.
She tells florid stories about the impoverished people that Vitalik and friends claimed to be
working to save, but never once considers that the solutions offered might not actually work,
or that the people claiming to want to solve those problems might not even be working on them.
That’s actually a big issue, since the entire crypto space, during the entire time that
Russo’s book covers, was absolutely awash with astroturfing schemes where two guys would go to
some small community in Laos or Angola, take a bunch of pictures of people at a “crypto
investing seminar”, generate some headlines for their coin or fund, and then peace out.
For years dudes were going around asking vendors if they could slap a Bitcoin
sticker onto the back of the cash register, because the optics of making it look like a
place takes Bitcoin was cheaper and easier than actually using Bitcoin as a currency.
We have an entire decade of credulous articles about how
Venezuela and Chile are on the verge of switching entirely to crypto,
based entirely on the claim of two trust fund dudes from San Bernardino.
A whole ten years littered with discarded press releases about Dell and Microsoft and
Square bringing crypto to the consumers before just quietly discontinuing their
services after a year or two when they realize the demand isn’t actually there.
The fact that the development of Ethereum was extremely dependent on a $100,000 fellowship
grant from Peter Thiel is mentioned, but the ideological implications of that connection
are never explored, the entire subject occupies a single paragraph sprinkled as flavour into a
story about Vitalik and his co-developers airing their grievances about some petty infighting.
The book is mostly useful for it’s value as a point of reference against reality.
It’s a very thorough, if uncritical, document of absolutely insane claims.
“The idea was that traits of blockchain technology—such
as having no central point of failure, being uncensorable, cutting out intermediaries,
and being immutable—could also benefit other applications besides money.
Financial instruments like stocks and bonds, and commodities like gold, were the obvious targets,
but people were also talking about putting other representations of value like property deeds and
medical records on the blockchain, too. Those efforts—admirable considering Bitcoin hadn’t,
and still hasn’t, been adopted widely as currency—were known as Bitcoin 2.0.”
I love this paragraph because it outlines just how disconnected
from reality the people actually building cryptocurrencies really are.
They don’t understand anything about the ecosystems they’re trying to disrupt,
they only know that these are things that can be conceptualized as valuable
and assume that because they understand one very complicated thing, programming with cryptography,
that all other complicated things must be lesser in complexity and naturally
lower in the hierarchy of reality, nails easily driven by the hammer that they have created.
The idea of putting medical records on a public, decentralized, trustless blockchain
is absolutely nightmarish, and anyone who proposes it should be instantly discredited.
The fact that Russo fails to question any of this is journalistic malpractice.
Now, in terms of improvements over Bitcoin, Ethereum has many. It’s not hard.
In terms of problems with Bitcoin, Ethereum solves none of them and
introduces a whole new suite of problems driven by the technofetishistic egotism of
assuming that programmers are uniquely suited to solve society’s problems.
Vitalik wants his invention to be an infinite machine, so let’s ask
what that machine is built to do.