NFTs and Trustless Trust: Making Inroads
How does trustless trust relate to NFTs and why do they matter beyond making it easy to sell scarce digital assets with a visual component?
One key innovation makes Bitcoin and crypto at large truly revolutionary. In my last post, I introduced you to the concept of “trustless trust,” while mentioning that it can be used as a lens with which to view all of the cryptocurrency industry. Now, let’s take that a step further and apply that lens to NFTs.
What are NFTs?
NFTs are the most exciting thing to hit the crypto-sphere since Bitcoin and Ethereum both launched. Yes, you heard that right, and no, I don’t mean just because they allow digital art to be traded as quickly and reliably as a cryptocurrency. That’s only one of many use cases for NFTs and it doesn’t fully define them.
Instead, circle back to “trustless trust” and think: what is the tech behind NFTs and how might it redefine trust itself?
NFTs and Trust
Just as Bitcoin takes away the need for governments and banks in the creation and management of money, NFTs take away the need for publishers, record companies, and intermediaries in the creation and management of content. If you’re wondering how that’s possible, it all comes down to the tech behind them.
Back in 2015, when Ethereum launched, it took the concept of a decentralized currency network and added the capacity for apps and services to it. By 2017, crypto’s leading candidate for hosting a decentralized internet had evolved to include the first Ethereum-based NFTs(Bitcoin had some, but they never really caught on).
Search for the history of CryptoKitties and you’ll get a clear picture of just how wild and new the NFT space was back then. Even at its height in December 2017, the CryptoKitties app only really had a few thousand daily active users, but it ground the Ethereum network to close to a standstill as cumulative CryptoKitties transactions hit $4.5m. After that point, crypto’s leading NFT project faded into relative obscurity for a time, but it had already tipped us into an age in which all content would become underpinned by the same trustless trust that Bitcoin holds dear.
Three events, i.e., the launch of ERC-721, the DeFi summer, and the record-breaking sale of Beeple’s Everydays collection, all of which I’ll touch on below, pushed us even further into what I’m calling “the Fourth Web.”
The Launch of ERC-721: Why It Still Matters
On the heels of CryptoKitties first growth spurt came a token standard that would go on to underpin many of the NFT and NFT-adjacent projects that we know and love today.
That standard was ERC-721.
If you’re not familiar with token standards, start by getting familiar with smart contracts. From a bare-bones point of view, a smart contract is a piece of software that executes certain functions based on conditional logic. An even simpler model to use to understand it would be the vending machine.
You put in the amount of money that corresponds to the drink or snack you want and the machine retrieves it for you, sends it to a slot where you can get it, and even gives you the change you’re owed. All of this is automated except for you pressing the buttons that correspond to your desired item and inserting the cash you need to pay.
Just like a vending machine knows to dispense your drink or snack based on a corresponding code, a smart contract knows to dispense a cryptocurrency based on a corresponding payment. In truth, that’s only one of many exciting things this piece of semi-autonomous software can do today, but if you understand this basic idea, then you understand what underpins most of the crypto industry.
Semi-autonomous banking and trading.
Still, if you’re a developer, how do you know that your smart contract will really do what you’ve designed it do? Perhaps even more importantly, how do you know it will keep up with the blistering pace of development that’s native to crypto?
That’s where token standards come in.
In case you don’t already know, the term “token” is often used to refer to a cryptocurrency that doesn’t necessarily function as a currency and lives on a blockchain other than Bitcoin’s. Often, tokens serve as access keys to blockchain-based games and services.
A token standard is a set of rules/best practices for creating a smart contract that does what you want it to do, particularly with regards to the tokens(cryptocurrencies) or NFTs it issues and keeps track of. While ERC-20 is the most popular token standard for Ethereum-based cryptocurrencies(tokens), ERC-721 is the most popular standard for NFTs, which you can think of as crypto coins that give you the rights to something unique like a piece of digital art.
Token standards matter because, without them, we’d have an industry built on a horde of different ideas of how smart contracts and by extent, crypto tokens should look.
Instead, we’ve got a space that’s just about the most interoperable in the world and because this is true, “money legos,” the driving force behind the current DeFi movement, were made possible.
The DeFi Summer: Why You Should Care
Last year, when Compound launched, it lit the initial fire for “DeFi Summer.”
To me, this is less because of its’ status as a blockchain-bank with wildly-high interest and more because it introduced a “governance token.”
If Bitcoin is gold that you can buy, sell, or send to anyone, anywhere in moments, then a governance token is a vote that you pay for the ability to have and can move around just as easily, if not easier than Bitcoin. It’s governance tokens that allow for true community ownership of cryptocurrency networks, apps, and projects and while Compound wasn’t the first to introduce one, it was the first to give them away as it did.
Each borrower and lender who participated in Compound’s banking service from June 2020 onward was able to earn a percentage of COMP tokens for their efforts. This is still going on today and you can find the rates here, which are tied to specific token markets.
Circling back to DeFi Summer, however, the launch of COMP token kickstarted the yield farming craze that eventually pumped the decentralized lending space to just under $10 billion in value by September. Yes, there were a lot of vegetables and several notable exit scams along the way, but all of that’s par for the course in a world where anyone can create an asset with a few lines of code and debut it to millions with a single web page.
Since last year, it’s been clear that the internet of value is here to stay, with Bitcoin, Ethereum, and the top lending protocols like Compound, Aave, and Maker accruing most of the money that continues to pour in(even in this current “bear” market).
Add NFTs in the mix and you’ll truly find yourself looking through a microscope into what our internet at-large, and really the whole financial industry will become.
Beeple and Christie’s: The Second Proof of Concept for NFTs
As September came around, DeFi Summer became NFT season.
If you’re looking for one post that’ll give you the lowdown on how that happened, look no further than Robert Stevens’ December 2020 retrospective with Decrypt. As he puts it, by that time, NFTs had already been a thing for a “few years,” but the launch of NFT exchanges like Rarible rocketed them back to trending and later, to stardom.
The why is easy to grasp.
As attractive platforms for trading NFTs began to proliferate, producers(digital artists) and consumers(NFT aficionados) began to flock to them, spurred on by progressively more impressive sales of digital art.
Mike Winklemann, aka, “Beeple,” is perhaps the most influential figure in this respect. As pointed out by The Verge, he went from selling two pieces of digital art for $66,666.66 each to selling a series for $3.5 million two months later.
The more records he broke, the more media attention the NFT space received and the more new participants were drawn in by that attention, culminating in the $69 million sale of his Everydays collection via Christie’s to the well-known crypto scion, Metakovan. Effectively, he kicked off a powerful feedback loop that has slowed for now in the short term but hasn’t come to a halt yet. The world saw that digital art could instantly gain value just like any cryptocurrency, free of any intermediary except the rails that it used to travel from seller to buyer.
In other words, like Bitcoin, digital art became provably decentralized, instantly tradable, and provably scarce, pointing the way for other creative areas to do the same.
NFTs: Where We are Now
Right now, we’re sitting at another tipping point.
Though early proofs-of-concept for music, writing and even VR NFTs exist, digital art still represents the lion’s share of NFT-based trading. For that to change, we need another moment like Beeple’s or better yet, something bigger.
Think NFTs as access tickets to physical events. Gary Vee and the Kings of Leon, amongst others, already launched the first prototypes.
Think NFTs as deeds to rare items like limited editions of your favorite novels. The purchase of a digital art token could trigger the release of a never-before-seen version with an extra chapter, an inscription from the author, or even an alternate ending.
Now think even bigger.
What if that book was engineered for super-fans?
What if you could unlock a version that gave you all of the extra backstories on your favorite characters that you ever wanted? What about extra concept art and maps to go along with that?
Imagine anything you could ever want to know about your favorite novel and keep in mind that you could get access to that novel just as fast, if not faster than you can log-on to a cryptocurrency exchange and buy some Bitcoin(in moments, in digital form).
With that access(deed), you could have a digital copy instantly, thanks to systems like IPFS, then have a physical copy sent to yourself at no added cost.
Most importantly, at all points, trustless trust rules. No intermediaries need to be involved, save for the platforms that aficionados use to experience these new NFT-tied works.
I see a future in which all creative works are digitally native, physically optional experiences and things are finally fair for their creators, thanks to carry-forward royalties.
Books are only one small piece of that and this is only one of many use cases for NFTs that I dream about these days.
What are yours?
What keeps your mind spinning late at night?
Looking Ahead: The Future of NFTs
If this doesn’t look like the typical crypto-focused post, that’s because it isn’t. I’m not, by any means a maximalist, and I’m dedicated to moving away from the typical jargon-heavy content that fills this industry. As I move forward with my content, I aim to do more to uncover the Crypto/DeFi movement through the umbrella of “trustless trust,” in a way that truly everyone can understand. Think DAOs, Lending Protocols, carry-forward royalties, and all of the various applications of NFTs. It all belongs together and if you stick with me, over time, you’ll find it easy to see how.
Until next time, thanks for reading, and remember, I’m always happy to hear your thoughts below or on Twitter [at] ExpatCrypto3. Finally, most of my free time is now being taken up with my newsletter, which is completely free and focused on how the rise of the Metaverse improves things for everyone. Sub here.
Disclaimer: All of this is meant to be purely educational and shouldn’t be taken as financial advice. I’ve dedicated my career to unmasking the crypto industry without “shilling coins” as many content creators do.
