Bitcoin, NFTs and Property Rights. Bitcoin Tech Talk #232

NFTs are bribes for the Ethereum ecosystem and they are doomed economically. Even the most enthusiastic backers of NFTs are already conceding that it’s a bubble and that the prices being paid for NFTs are crazy and unsustainable. While the market dynamics of the tokens are interesting to examine, in this article I’ll look at what you get for these tokens and contrasting that with what you get with Bitcoin.

NFTs are really odd beasts. By definition they are tokens on some network, meaning that there’s some entry in some ledger that someone owns a token. That token is, again, by definition, non-fungible, meaning that someone has something that isn’t supposed to be equivalent to something else. Other than these attributes, it’s not clear what rights NFTs give.

When it comes to digital property, there have been traditionally only two categories. We have infinitely copyable data and property that’s centrally managed. Infinitely copyable data is stuff that’s on some storage medium somewhere like MP3s, for example. Owning that data means that you have the file and it’s easy to copy with perfect fidelity and has no scarcity whatsoever. It’s data or more generally, information and though governments may pass laws to control its distribution, there’s no technical reason for its scarcity. This means, among other things that there is no exclusivity over such data.

The other category is access to something centrally managed. Usually, there’s some proprietary software that gives the owner access to something, like streaming music on Spotify or a sword in World of Warcraft. Such scarcity requires a central authority. In the world of content, governments grant monopolies to trademarks, copyrights and patents and only those designated have intellectual property rights. This is enforced not through technology, but through laws and are implemented in Digital Rights Management (DRM), among other things. Enforcement of the property right can be really messy in this area, though central authorities in a walled garden like Blizzard’s World of Warcraft have a much easier time because they can enforce exclusivity through software. In other words, this class of digital stuff is centrally controlled and can therefore be scarce.

Bitcoin created a third category: decentralized scarce property. It’s neither centrally controlled nor infinitely copyable, giving us property that’s both digital and exclusively owned. From a property rights perspective, Bitcoin is brand new in that it doesn’t have a physical form yet can be owned without any central authority enforcing that property right. This is not a small improvement. Physical property can always be physically seized. Digital or intellectual property can always be reassigned by the central authority. Bitcoin is something that’s neither physical nor has a central authority and thus has the property of being unconfiscatable.

This grants us a sort of super-property right, which, properly secured, cannot be taken without the consent of the owner. Up until Bitcoin this level of unconfiscatability was really only true of beliefs. Bitcoin, in other words, is the best of both worlds. It’s property that has the non-physicality and convenience of digital stuff with the possessibility of physical stuff.

NFTs on the other hand, are a Frankenstein in terms of property. They are clearly not the bytes on disk, which can and are easily copied for free. NFTs are also not intellectual property as the they don’t give the token owner any centrally recognized copyright or trademark. NFTs are a designation by the token creator that it represents some digital item outside the system. Clearly, there is a token as there’s a ledger entry but that’s it. It’s really just a designation from the creator of the token.

If ICOs are being your own central bank, that is printing their own money, then NFTs are being your own copyright office, that is giving some authority to a piece of art that nobody has to recognize.

Where Bitcoin has the best of both worlds, NFTs has the worst. NFTs have the cumbersome and arbitrary authority of multiple central controllers and have the recognized rights of infinitely copyable stuff, which is to say none.

This is another sad tale of “blockchain tech” creating Rube-Goldberg machines that don’t do anything well. As usual, NFTs are the result of blockchain solutions looking for problems. It’s currently being subsidized by ETH whales and the marketing investment may pay off for a time, but as I’ve said before, NFTs are going to crash. I sincerely hope the people being suckered into this hype learn their lesson.

Bitcoin

AJ Towns makes the case that UASF may not be so easy as it was last time. He asks the question around segwit, what if a hard fork was what the opponents of UASF wanted all along and the miners “cooperated” to bring the hard fork to fruition? The article is sobering for its conclusion that UASF may not work this time around. The article points out that the community is overconfident as a result of what happened in 2017, but that the will of users in a potential UASF hasn’t really been tested.

SuredBits shows how they did a multi-oracle DLC settlement. Basically, they used 3 oracles for the price of Bitcoin at a certain time. This was a proof-of-concept, but in any significant DLC, I expect this sort of setup to become much more common. Self-custodied Bitcoin-based options that use DLCs would surely use multiple oracles to determine price.

BitMex is using Bech32 for deposits. The article points out the clear cost savings as a result of their switching to native segwit and in a high-fee environment like what we have today, this makes all the sense in the world. This will hopefully reduce network congestion over time as they are known to send a large batch of transactions around 9am ET every weekday.

ColdCard has released firmware 4.0.0 which has native libsecp256k1. This is not only great for compatibility as the EC math is guaranteed to be the same as Bitcoin Core, but also because the operations should be significantly faster. They have other upgrades in this firmware release including the automatic calculation of the last word for seed entry.

Lightning

Fulgur Ventures has an overview of the different Lightning implementations. They cover c-lightning, lnd, eclaire, Rust lightning, electrum and lnp and give statistics about the usage of each. There’s also pretty good setup instructions to run each implementation, an overview of different features that are in each implementation and the respective roadmaps.

Sphinx Chat is now available as a hosted service. This is a messaging app over lightning that’s been in the works for a while. Instead of running your own lightning node and running Sphinx Relay, there’s a service to do that for you. It costs as little as $2 for a one-time setup fee or as much as $3/month for a dedicated instance. This feels like the beginning of the decentralized web that we’ve always wanted.

lnd 0.12.1-beta introduces an interesting new concept called sidecar channels. The problem is that new users to lightning have to fund their own channels and it can be very cumbersome to get the initial channel opened. With sidecar channels, a third party can create a pool of channels and give them to a user in a trust-minimized way. The concept is interesting and a potential revenue stream for lightning providers.

Economics, Engineering, Etc.

Gigi makes the argument that responsibility is programmed into the Bitcoin user journey. Each user ends up going through the incentivization of low time preference behavior and a humbling experience taking wrong turns. In other words, Bitcoin teaches responsibility to users in a way that are undeniably beneficial to civilization. Worth reading if you’re into Bitcoin philosophy.

Dylan Leclaire from Bitcoin Magazine highlights the synergies between Bitcoin and insurance. Dylan argues that the insurance industry is in a lot of trouble as their main source of yield is bonds and that’s what they use to pay out claims. However, in a near-zero interest rate environment, they are completely starved for yield and need better ways to store all the premiums they collect. He argues that Bitcoin can be that store of value and come to the rescue of an industry that will be completely upended as rates go to zero or even negative.

One of the more interesting scam-the-scammers projects that I’ve seen is Salmonella. It turns out that there’s a class of Ethereum rent-seekers called sandwich traders. Because of the proliferation of DeFi, much of what gets executed in a DeFi smart contract relies on prices calculated at the time of execution. By inflating the price before the smart contract executes and deflating the price afterwards, sandwich traders can make a good amount of money. Salmonella is a poisonous smart contract that looks eminently sandwich-able, but instead has a nasty surprise for the sandwich trader. Apparently, they’ve earned over 100 ETH using this exploit. As I’ve said many times, DeFi is really broken and you’re playing a very rigged game. These guys are taking advantage of those that rig it.

Ray Dalio makes the case that bonds are going to be dead soon and that Bitcoin will look much more attractive. He argues that bonds are essentially going to be terrible investments and being short cash and cash assets is the correct move based on the macroeconomic environment. He believes that lawmakers will put restrictions on movement to assets like Bitcoin.

Madison Czerwinski has an interesting perspective on Bitcoin energy with her argument about nuclear. There are 3 nuclear power plants that are scheduled to prematurely close which combined would supply clean energy for the entire Bitcoin network by themselves. The article has a great perspective on energy and more arguments like this should be made.

Akamai reports on a class of malware that uses Bitcoin’s blockchain to figure out where to phone home. The malware mines Monero on the infected computer and uses Block Cypher to look at the output amount for a particular address to figure out the IP address of where to get a block template. Worth reading just to figure out the sophisticated new ways in which malware is evolving to take advantage of cryptocurrencies.

Coinbase settled with the CFTC about their allegations about wash trading. This seems like a move to get their ducks in a row for their upcoming direct listing.

India bans Bitcoin again…

Events

I am hosting a Thank God for Bitcoin book launch dinner in Austin April 7. All 8 of the authors will be there and we’ll have plenty of meat to eat.

I am going to be at Texas A&M Bitcoin conference on April 16-17. This will be my first in-person conference since Bit Block Boom last summer.

I am starting up my Programming Blockchain seminar again. Next seminar is on August 13-14 in Mexico. This is a 2-day seminar for programmers to learn about Bitcoin. You can apply here. I also have a few scholarships available for those that can’t afford it.

Podcasts

On this week’s Bitcoin Fixes This, I talked to Willy Woo about trading. Find out what trading entails, his outlook for Bitcoin and the journey he took to get to where he is now.

I talked to Right Response Ministries about the new book:

My other books are here.

Fiat delenda est.