The perfect explanation of NFTs

NFTs Explained

This gave me a chuckle. I remain skeptical about NFTs, or at least at the tech underlying them, since there's no actual scarcity. That said, as long as people are buying and selling, I suppose there's a market.

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    Personally, I couldn't be more excited about NFTs, or at least the technology. Let's see if I can explain it in much over-simplified terms. I'll put some effort into this for my fellow IndieHackers.

    The underlying technology is Blockchain. This provides a permanent and immutable register for all transactions. In simpler words (I hope) this provides a history of everything that happens in a permanent and unchangeable registry of changes. This is accomplished with some pretty clever protocols and rules. This "history" is kept in a ledger that is distributed where everyone makes sure nobody else is cheating or making unauthorized changes. The cool thing here is that it can be trusted because the history is treated as a very important thing.

    All of this is protected with a powerful security system that uses something called "proof of work" which means you have to earn the trust you are given by the "system". Yes, this consumes tons of energy (which is a flaw) and so smart people are working hard to provide better solutions (like proof of stake). Consider this like an early software program that consumes too much processor time and memory and needs to be written better.

    Don't be fooled into passing on Blockchain because of power consumption concerns because this will be fixed. It MUST be fixed. Proof of Work is brilliant because it is so secure but it does consume vast amounts of energy. There are better solutions so don't think this will bring down the hope of blockchain.

    Combined, the permanent and immutable register along with the very strong security (proof of work or proof of stake) are the fundamental building blocks of blockchain technology. This is distributed across a network of participating systems. Imagine a really good trustworthy version of Napster that can be used for a lot more than just music. Now, let's make it really cool.

    The next thing we add is "Smart Contracts". Smart Contracts are simply the ability for the system to take on rules and use software to execute them. One simple rule is that you cannot spend more than you have in your account. Another is that you cannot spend something that you don't own. Another rule is that if you meet your obligations and I meet mine then a transaction is programmatically triggered (like payment is released for services rendered). It's all software and it's all based upon math.

    Smart Contracts make all kinds of things possible. By building a library of rules into a set of smart contracts you can eliminate the need for third parties to authorize and oversee exchanges between people, companies, and other entities. Imagine not needing Banks for most simple things and eliminating all of their fees. This is Defi.

    Defi, as just one example of a potential use of Blockchain technology, uses the Register (perfect, permanent, and immutable) to establish trust. It uses the Smart Contracts to establish rules to enable transactions. And it uses Proof of Work to establish security. Oversimplifying, it can build a software system that makes a version of our current banking system. But instead of being centralized (where the middle men take a lot of money, can corrupt the system, and get really rich off our money) it is now decentralized using blockchain (where we don't need anybody in the middle and get to keep all the money ourselves).

    OK then, what about NFTs? Using blockchain technology and smart contracts you now have a system that can establish both trust and provenance. THAT'S HUGE! Anyone who has even seen Antiques Roadshow knows how important provenance is. Provenance creates value. And trust is such an important concept in business that it's nearly a miracle that a software system can provide it. I'm not sure you can overstate the importance of what I just said. NFTs can be used as a mechanism for establishing a trustworthy provenance for digital goods.

    What can assigning trust and provenance to a digital good accomplish? Never before could you assign value to something like a Tweet (Jack Dorsey who founded Twitter just sold the first ever Tweet for $2.9 million) or a Video (NBA Top Shot has sold over $500 million worth of NBA videos in their first 6 months) or a digital image (Beeple sold a digital picture for $69 million at the reputable Sotheby's Auction House). Just imagine the possibilities of assigning value and ownership to everything on the Internet that could never previously be valued. That's a fundamental shift in Internet reality.

    Certainly some of this is crazy but it goes to show what is possible. When the excitement dies down there will still be some amazing new realistic possibilities with NFTs. The important thing to note is that digital goods can now be unique. Anyone can own an exact copy of the Mona LIsa and they will all look the same but there is only one that is the original. Anyone can take a million dollar baseball card and copy it but the copies don't have the same value as the original even if they are indistinguishable. Anyone can have a copy of Jake Dorsey's first ever Tweet but the original has an NFT that is authenticated by Jack Dorsey and trusted by the provenance of the blockchain. There is only one original.

    It takes a moment to comprehend why any collectible has value. Am ultra-rare Lebron James card just sold for $5.2 million. The owner probably has it locked in a safe somewhere. If the corner gets bent the value goes way down so it is hardly ever handled. Exposure to light can make it fade so it's probably kept in the dark somewhere. But someone can claim that they own it and that comes with pride of ownership and exclusivity. They can sell it for a lot of money so that means it has value. Ask yourself, is the NFT of the First Ever Tweet any different?

    But let's throw out everything I just said and say I'm crazy. Let's, for a moment, accept all of the naysayers arguments about how this is ridiculous. Then you still cannot argue against the billions and billions of dollars going into the development of blockchain businesses and you certainly cannot deny that even the biggest financial institutions are getting into blockchain. You also cannot deny that thousands of very very smart people are working on this stuff and that, crazy or not, money is being exchanged in huge sums. You also can't deny that NFTs are commanding a lot of money (even if some of it is hard to fathom).

    What about Cryptocurrencies? Now, as far as Cryptocurrencies are concerned you should imagine them as startups. Some are backed by really great new ideas and will make billionaires out of those who are involved. Some are backed by terrible ideas that won't last. There will eventually be a shakeout and most startups fail. But dismissing blockchain as a whole is like dismissing any other new technology that emerges before you do the research and understand it.

    I worked at Microsoft on the Internet Explorer team during the Invention of the WWW. I worked on Mobile when nobody believed the little screens could ever work for websites. Frankly, I've watched a lot of stuff go by without being smart enough to envision the future clearly. I'm not making the same mistake with blockchain. The more I learn the more it seems that this just may be the emergence of the Web 3.0.

    Hope that helps. Much love to my fellow IndieHackers and great admiration to you Cortland!

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      I want to invest my money in someone who sells “shovels” in that NFT world. So who is the best at selling “shovels”? OpenSea, Superfarm, Rarible, Enjin ... are they a "shovel" seller ???

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        I think you are very smart to think "shovels". I'm a big fan of Origin Protocol and you've listed some of the others that I like. It seems to me that everything always comes back to Ethereum so Ether has done well historically for me. There are people building solutions for interoperability between Ethereum and other blockchains so that you can utilize the scalability of those Proof of Stake solutions to mint NFTs at low gas prices and then transfer the NFTs back to the main marketplaces like OpenSea. So solutions for interoperability are attractive "shovel" providers. There are already successful leaders like Dapper Labs who really impress me because they have developed such a great deal of expertise (including one of the authors of ERC 721) and I'm always impressed by their leader Roham Gharegozlou who seems to be a visionary. And you can also look to see where the smart money is going by asking yourself where other smart people are investing. I'm in no way offering investment advice because it's just too risky and so many of these companies will fail completely. However, I'm very excited and am personally investing a huge amount of my time learning about this space. Investing time and attention is the smart play. One blockchain I like a lot is Cardano because they are taking a slow and steady approach using the brightest minds in academia with everything they do peer reviewed. Cardano excites me but it's a slower play - but built very solidly by very smart people. AI is also very exciting on blockchain using smart contracts for automating distributed solutions (take a look at SingularityNET) and blockchain is perfect for another HUGE evolution in the tech world, the Internet of Things (IOT). And I haven't even mentioned DEFI which has vast sums of investment and effort going into it. I also like COSMOS. In conclusion, the big takeaway is that a lot of energy, effort, time, and resources are heading towards the development of blockchain. In my opinion you are correct to be excited but take the time to learn the space and then when you see a vision that you truly believe in follow that direction. I'd also diversify to mitigate the huge risk by choosing several that you come to believe in. I hope this helps and I wish you great fun, success, and happiness!

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          Hey, @wirewalker thanks for the reply.

          I would love to share a funny story with you. Twenty years ago, when I was in high school, a few of my classmates were constantly playing some card games. Some monsters, wizards, trolls, etc. They called it Magic. "We play Magic The Gathering, woohoo!" I couldn’t believe they were doing that. I told them, "Guys stop playing those kid games and start chasing girls. That way you'll never find a girl!" Today, these guys, if they want to sell just a few of their MTG or Pokémon cards, can buy a great car. And today I just want to get away from my wife. :) Ha, ha. I hope she doesn't read this. :D

          Let’s say MTG or Pokémon start doing NFT on their cards. Do you think they will sell it through sites like Rarible, Opensea, etc. or they (Hasbro, Pokémon) will sell on their own platforms?

          I’m not in the crypto world and I don’t understand that very well.

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            Yes, they CERTAINLY will sell their cards as collectibles. They have a lot of options as to where to mint their NFTs and where to sell them. Because they already have their own brand and brand awareness it would probably be best to go their own way, perhaps use Origin Protocol to mint and make their own marketplace, and just let their users know about it. They already have established relationships with their potential customers and they already have a website that gets a lot of traction. More to the point that I think you are making is the idea that a lot of things can be made into NFTs and sold digitally. The floodgates are open wide!!!

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          When you say: "And you can also look to see where the smart money is going by asking yourself where other smart people are investing." Who are the smart people, in your opinion? So I can do my research.

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            I'm a fan of hashoshi on Youtube. Mark Cuban has been interesting with an intelligent take on crypto and has even been teaching himself to code smart contracts. The Winklevoss twins are very smart in the space but they have a vested interest in a particular outcome. I'm not very interested in investment information myself but an more interested in the technology. I'm often interested in what Charles Hoskinson has to say but he's "the Cardano guy".

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      Hey Wirewalker, what are you doing now? I'm curious because I discovered my SaaS has amazing potential in blockchain. I'm always looking for new people to talk to about the space. I've been down a lot of fun rabbit holes in the last few months ;-)

      Also, is there a way to DM someone in IH?

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    Haha, this is good.

    It's a lot like the traditional Art market. I don't understand why those weird paintings go for millions of dollars.

    Apparently, people buying and selling keeps that market running.

    And same can be said of NFTs.

    But because they are digital so there's an order of magnitude more of absurdity :P

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      I didn't either but it goes for 1 simple reason (watch the video) → https://twitter.com/deadcoder0904/status/1390222552249819136?s=20

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    All very fishy though. I'm about to go eat so I don't feel like finding it, but there's stats showing that ~30% of sold NFTs resulted in a loss for the seller when you include the fees. Very few make more than a few hundred max. And there's evidence that a lot of the big sales (like the Beeple at the fine art auction house) either had some sketchy stuff going on in the auction orders, or were straight up bought and sold between the same person multiple times (like some of the meme sales) to fake demand - the theory being that a few actors bought a lot and are trying to offload with another wave of hype they hope to manufacture with these headline-catching sales numbers in the NFT space.

    Has that same ICO smell: legitimate actors in many cases, but a significant amount of big dollar scams and cons.

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      A quick check on OpenSea shows over 15 million NFTs for sale, each one of those would have cost around $70 in fees to list (according to
      https://notfunatparties.substack.com/p/inside-a-viral-website), and I'd hazard a guess that well over 30% of those 15 million will either not sell at all or will sell at a loss to the artist.

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      Exactly feels like ICOs in the last run up. A lot of value being created, but mostly a lot of scammers noticing it and seeing the possibility for a quick buck with ~ low effort.

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      ICOs craze never made sense to me, to this day

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    I guess NFTs are meant for creative work and creators, where they can be founded by a community while providing services, special content, or value to those who own the NFT.

    To me, that's the real value of NFT.

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    Yo boyz/girlz,

    Red pill of the day:

    NFTs exist because smart financially-minded "gray hat" marketers bought the NFTs with their own crypto money or the money of their friends..

    This doesn't cost them anything since they are essentially selling something to themself... However, it does trigger the greed dynamic amongst naive crypto investors looking for a hot tip.

    It's called the Epstein gambit, 5 gold stars for anyone that knows why :)

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    haha too funny.

    Took me for a whirlwind.

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    Anyone want to chime in about real estate? Some deeds are paper documents dating centuries (if available). Lot's of money and time (waste) exchanging hands just to confirm ownership and title.

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    This is great!

    Owning an NFT of the Mona Lisa is clearly not the same as owning the original painting. It's surprising the lengths that people go to conflate the two ideas.

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    Haha, this helped so much 👍

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    I have written a slightly detailed explanation of NFTs. But have tried to keep it simple to understand for beginners.


    Would love some feedback.

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    I launched 24hourhomepage.com right around the time NFTs were getting a lot of buzz. A number of my customers asked if I was going to go that route too.

    Tempting, but no.

    I wanted to create a fun, valuable internet artifact independent of what could be a just a trend. 📈

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    Fun but not really useful and probably creating even more misunderstandings.

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