Today, Explained - WTF is an NFT?

Episode Date: March 23, 2021

On Monday, a tweet sold for $2.9 million. That followed a JPEG that went for $69 million. The Verge’s Liz Lopatto explains how internet ephemera turned to gold. Transcript at vox.com/todayexplained. Learn more about your ad choices. Visit podcastchoices.com/adchoices

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Yesterday, a tweet, a tweet was sold for $2.9 million. $2,915,835.47 to be exact. The tweet was sent at 3.50 p.m. on March 21st, 2006. It said, just setting up my Twitter, all lowercase. $2.9 million. $2,915,835.47 to be exact. Mind you, this was the first tweet ever sent. It was issued by Twitter's founder, Jack Dorsey. And yesterday, Twitter billionaire and friend of Beyonce's husband, as my mom calls him, Jack Dorsey sold his first ever tweet for $2.9 million. Say it with me, $2,915,835.47 to be exact. Perhaps you're wondering, WTF? The answer is NFT. Non-fungible tokens or NFTs are exploding in popularity. It's the latest cryptocurrency craze.

Think Bitcoin. But instead of holding a coin or dollar, you hold an asset like art, tickets, music. At a high level, you can think of it as a way of making some kind of digital asset unique. Liz Lopato, deputy editor at The Verge. There's this artist, Beeple, who just sold an art collage of his for $69 million. Nice. It's a collage of 5,000 individual images made one per day over more than 13 years. I think it puts him among the top three most valuable living artists. So it's like Jeff Koons and Beeple and someone else?

I think that's right. So I brought my own sound effect button. So let me know if you want me to press it at any point during the interview here. And then you have the Kings of Leon putting out an NFT of their latest album. Like only one person can own their new album? Which if that's the case, what a favor to society they just did. They had a big moment. They're going to have like three kinds of tokens, I guess.

One is a special package. One is like live shows with front row seats for life. And a third is like exclusive audio-visual stuff. It seems like this is an answer to the way that we've seen the music industry sort of struggle to deal with streaming, because it's a lot harder to make money on Spotify than it is by selling CDs.

Fair. You have the Nyan cat meme, which is like that cat with rainbows that like, I think its body is like a pop tart. How do you spell it? N-Y-A-N. Nyan cat. Nyan cat.

Oh yeah. It's like a cute cat that has a pop tart for a body. That's sort of got a stream of rainbow coming out of its backside. That's right. That's the one. Are you telling me that this cat just sold for a ton of money too? Yeah, I think it was $590,000.

Okay. And then you have the NBA selling highlight clips on their platform called NBA Top Shots. And what is NBA Top Shot? Here comes LBJ! Basically, it's kind of like trading cards, where you have all the stats for that game and that player,

and this cool clip of them doing a cool move. Usually it's like dunks or a really good block or whatever. And it's specific and it's additioned so that you can sell it for some amount of money to other collectors. It sounds like you're saying that basically anything on the internet can be sold as an NFT from funny like cat gifts to NBA shots to a Kings of Leon album to like some JPEGs? Yeah, that's right. I mean, there are so many other things that I can list because it really feels like there's been a craze for this lately. How exactly does it work? Because I'm sure for a lot of people listening to this right now,

it sounds like you're talking about things that I could just Google and save to my desktop and forget about until one day when there are too many things saved on my desktop. Yeah, that's right. But let's back up a little because I think to understand NFTs, like I need to walk you through some very basic things about cryptocurrency. Cryptocurrency? Yeah, I'm really sorry. Deep breath, everyone. So cryptocurrencies are basically digital cash. And the most popular you've probably heard of, it's Bitcoin. The digital currency created a dozen years ago as an alternative to cash is exploding in value. Elon Musk, the CEO of Tesla, recently bought $1.5 billion of Bitcoin

and said his company will accept it as payment for its electric cars. The thing to know about Bitcoin is that it was supposed to be like a way of replacing normal money, but decentralized. So we have like the Fed and Bitcoin does not. And the way that that worked was that there's like this permanent ledger of all of the transactions that take place in Bitcoin. Because without that kind of central authority, you need to figure out some other way of having authority. And that way of having authority is called the blockchain. Fun fact, Liz, the blockchain is today explains white whale. So if you're about to explain the blockchain, people are for a treat oh man that's almost impossible because there isn't actually like an agreed upon definition of what a blockchain is perfect um but so this is like a ledger of all of these transactions right so like in the same way that like you have papers that document like a horse's lineage

yeah if you buy a racehorse it's kind of like that, except it's permanent. And each individual record that gets added is called the block. And then the group of them are called the chain. So that hence blockchain. Right. And this is all constantly updating on computer servers across the world, as you said, decentralized. And so what is going on is that there's essentially a kind of contract that is being made on the blockchain that points at a digital asset, let's say Nyan Cat, and says, Sean owns this asset, and then there's the URL.

That's basically it. The most popular smart contract for this is Ethereum, although there are lots and lots of other competitors that are also like popping up to support NFTs. And like Ether is the cryptocurrency that uses Ethereum, which is a blockchain. Did I use the words correctly? I think you did really well. Yeah, it's the second most popular cryptocurrency after Bitcoin. So the way people can own the Nine Cat NFT or the Kings of Leon album as an NFT or Jack Dorsey's first tweet as an NFT is comparable to the way people can own cryptocurrency. Is that fair?

Yeah. I mean, in the same way that like cryptocurrency is a digital way of money, like a digital kind of money, this is a kind of digital ownership, right? Like this is a bunch of people recording what everyone owns in the same way that with cryptocurrency, you record what all transactions occurred so that there is a permanent record. Why would anyone want to buy any of this stuff? Can you explain that, Liz? Listen, if you want me to explain human behavior, we're going to be here all day. But I think maybe it's helpful to think a little bit about ownership, right? Because one of the things about the web is that even if I like download a GIF

and put it on my desktop, I don't really feel like I own it in the same way that I might feel like I own a painting that's on my wall, right? Like that painting is specific. It's in a specific place at a specific time. It was like made by a specific artist. And even if the artist made a copy of that painting, that one is still specific, right? And there's no way to do that online until now. And so the idea is that it basically gives you a way to make an online asset unique and allow you to have a sense of ownership. But the only people who seem to be engaging in this form of online ownership are clearly like the super rich people who can afford to drop $600,000 on a Pop-Tart kitty cat or $69 million on some people artworks or or 2.9 million on Jack Dorsey's first tweet. Is this just like a bunch of rich people calling dibs on something that like no one really wanted to own in the first place? I think that there are a couple of things to like discuss here. And like, these are all the headline generating ones. So of course they're the ones that are like the record for the most money,

right? But if you look at something like Top Shot, you see stuff that's trading for five bucks. It's possible to get in there. It's just not going to make headlines. So there's that. But if you look at sort of NFTs, especially art world NFTs, it kind of seems like a bunch of people who are really invested in cryptocurrency in the online world want to like create almost like a second economy that is entirely online. And so the same way that you see rich people go to Art Basel, they're buying art as a status symbol. That's not the only thing that's happening, but it's certainly one thing that's happening. So will this mean anything for people who aren't rich at some point? I think it already does for some. If you take, for instance, an artist, one of the problems of being a digital artist

is that it's really hard to make money. If you look at somebody who draws online, it can be very difficult to get sales. And so I think a lot of artists are viewing this as a way to get paid for their work that didn't exist previously, especially if they are digital artists rather than somebody who like sculpts or paints. That sounds like possibly a positive development. I mean, I think that's why people are so excited. It's always been a problem figuring out how to make money from being a creator online. And this is a problem in the music industry. It's a problem if you make video.

It's a problem, you know, pretty much across the board. So like figuring out a way that you can sell this stuff to somebody who wants it is a good way to figure out how to get yourself a payday. And so I think those people are very excited about this. Great news for artists, but terrible news for the planet? That's after the fire. Your sex is on fire Your sex is on fire Your sex is on fire Support for Today Explained comes from R.A.M.P. I'm concerned. your pocket. Ramp says they give finance teams unprecedented control and insight into company spend. With Ramp, you're able to issue cards to every employee with limits and restrictions

and automate expense reporting so you can stop wasting time at the end of every month. And now you can get $250 when you join Ramp. You can go to ramp.com slash explained, ramp.com slash explained, R-A-M-P.com slash explained. Cards issued by Sutton Bank, member FDIC, terms and conditions apply. Justine Kama, you're a science reporter at The Verge. We just spoke to your colleague, Liz Lopato, and she said that NFTs are finally a way for a lot of artists who would otherwise not get paid for their work to make some darn money, which sounds great. But you wrote a piece for The Verge that says

NFTs are terrible for the environment. How come? That's right. So they come at a pretty hefty cost for the planet in the form of greenhouse gas emissions. So that's definitely a problem that is still plaguing NFTs right now. How much energy does it actually take to make and sell and preserve an NFT? So that's still pretty complex. One thing that we should be aware of is that NFTs are bought and sold using different cryptocurrencies. And so they operate on different blockchains, and not every blockchain is the same.

Some have way larger carbon footprints than others. But most NFTs at the moment are tied to Ethereum, and Ethereum has a carbon footprint that we know right now. Ethereum uses about as much energy as the entire country of Libya for a year. The entire country of Libya. That's right. Yeah, it used to be Ecuador, and then it kind of climbed up to Libya, which uses a little bit more energy.

I haven't checked yet today, but it might be a little bit higher at this point. Okay, so that's an entire cryptocurrency using the amount of energy as an entire country, increasingly bigger countries, it sounds like. What about something as small as, say, I don't know, do I want to use the Kings of Leon example? What's a better example? Nyan Cat? There's a lot of fun ones. What's your favorite? You know, I found a bunch of kind of like little esoteric ones. Yeah. So those are probably some of my favorites. Like I wrote about little Space Cat who is just a little cat in a rocket ship heading to the moon.

And it was supposed to be symbolic of the way NFTs are taking off. So that was a little sweet one. Okay, cute. Well, how much does it take to operate your little cat? Space Cat was responsible for about as much energy as the entire energy usage of a resident in the EU for two months, which is actually double the average, according to this analysis of about 18,000 NFTs, which found that the average NFT has a carbon footprint that's about the energy usage of an EU resident for one month. For all the people out there who are scratching their heads about this Libya business or using the energy of an entire European household for one or two months. Why is it that an NFT or a cryptocurrency like Ethereum

or Bitcoin use so much energy? Again, it goes back to the blockchain that they're using. So right now I'm primarily talking about Ethereum, which operates on a model called proof of work. Major cryptocurrencies like Ethereum, Bitcoin, they use this proof of work model, which is basically a security system to keep the blockchain secure. The blockchain is essentially just a decentralized ledger of transactions. And the way you add a block of verified transactions to this chain is by solving these super complex puzzles that can only be solved with these energy guzzling machines. We are one of the largest Bitcoin mining operations in the United States. There are 1800 servers. They are doing nothing but calculating those difficult equations that required in order to mine Bitcoin. They don't store any memory.

They don't have a CPU. They have just one specialized chip that's doing this over and over again. It's all those machines that are solving all these puzzles to add these blocks to the blockchain that is generating so much climate pollution, greenhouse gas emissions. So essentially, to legitimize the license or the ownership model of these NFTs, or to legitimize all of the transactions for various cryptocurrencies, all of these computers need to be constantly humming along, solving problems, and that's creating a ton of energy usage. Is that right? That's right. That's exactly right. Is there any way to make this process that is, I guess, increasingly becoming an essential part of our world more efficient? Luckily, there is. And so this is the big argument that a lot of fans

of NFTs and cryptocurrencies are making, which is that there are solutions on the way. You can essentially cut down greenhouse gas emissions from NFTs to near zero by switching away from that proof of work model. There are other sort of security systems to keep the ledger accurate that don't rely on those energy guzzling computers solving a bunch of puzzles. And so right now, the biggest alternative is a model called proof of stake. And instead of sort of paying

with the huge amounts of electricity that you're using, they just have to lock up some of their cryptocurrencies and that's sort of their stake. And by locking up their cryptocurrencies, they know that if they fool around, if they do anything fishy, they'll be penalized by losing some of that. Ethereum itself has said that it will eventually move to that proof of stake model. And as one of the experts I spoke to from my story said, when it does that, its emissions will drop dramatically overnight. On the other hand, there are other cryptocurrencies that artists or anyone who wants to buy an NFT can turn to.

My colleague Liz, she has reported on NBA's Top Shot, which works on a blockchain called Flow. And Flow works on that proof of stake model, which is way better for the environment. I know one of the reasons behind this proof of work system is to protect NFTs from being hacked or to protect cryptocurrencies from being toyed with. Is there still the same level of security and safety with these alternative models? I think that you'll hear experts kind of argue in both directions on that one. There's definitely some concern about even just the transition. If Ethereum was to switch over to the proof of stake model, you have to get pretty much everyone on board, which is a huge undertaking for a decentralized system like this. But they're still going to try.

That's what they say. How do the artists feel about this? I mean, it's funny to think of like Kings of Leon as like writing, I don't know, you know, mainstream pop rock songs a year ago and now being like maybe involved in this environmental discussion about the cost of their art. So I don't know about Kings of Leon, but there are plenty of artists that are concerned. You're seeing a huge controversy swirling with, you know, some artists that totally believe that they can offset their emissions, that they can find solutions to make NFTs less harmful to the planet. And so it's not a reason to abandon them. There are others who are totally boycotting and saying this is just wrong. You're seeing these very passionately written manifestos on Medium about why they refuse to

engage in anything to do with NFTs. So there's a serious NFT backlash is what you're saying. Yeah, there's a huge NFT backlash. And I mean, you know, the climate crisis is so urgent. We have very little time to act. We need emissions to save the planet and save ourselves by not contributing to this climate crisis. And so, you know, that's part of the reason why you're seeing this huge backlash. Are NFTs an easy target because they're new and they sound like playthings for the rich compared to, I don't know, like air travel? I do think that NFTs are kind of an easy target because, one, I mean, they're very catchy, right? They're so grabby right now. It's an easy way to point and say like, that thing is bad. It's a little to point to and be like, that is ruining the planet as easily. And so I think that NFTs and artists have become a little bit of an easier target in this discussion, even though the situation is a lot more complex. So if there's one takeaway here, it's like leave Kings of Leon alone and take it up with Ethereum.

Yeah, definitely take it up with the cryptocurrencies. Justine, thank you. Thank you so much. Justine Kalma and Liz Lopato both write about NFTs and cryptocurrencies at TheVerge.com. I'm Sean Ramos for him. This is Today Explained. 18 Voting Start