What are NFTs? • Macey Smith

In the second episode of our Crypto 101 series, blockchain expert Macey Smith, joins host Niki Christoff in the studio to break down non-fungible tokens (aka NFTs) for those of us who aren’t billionaire art collectors, expert gamers, or Mark Cuban. Niki and Macey chat about the Ethereum blockchain, OpenSea marketplace, CryptoPunk NFTs...and a vision for how smart contracts can create a vibrant marketplace for creators and collectors in the not-too-distant future.

At the end of the day, people just like to own things that they think are cool and that they can brag about and whether it's something physical or not- digital is sexy now, y’know? - Macey Smith

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Transcript

Intro:

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Niki: I’m Niki Christoff, and welcome to Tech’ed Up. Today we’re talking about non-fungible tokens or NFTs. If you’re already confused, don’t despair! We have blockchain expert Macey Smith in the studio to cover the basics of this new marketplace and why it matters -- even if you’re not a billionaire art collector, a gamer, or Mark Cuban. 

A note to our listeners: In this episode, we mistakenly refer to the iconic Bored Ape NFTs as “bored monkeys” before correcting ourselves. I want to personally apologize to any primates we may have offended. 

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Transcript: 

Niki: Good morning. 

Macey: Good morning. 

Niki: Macey Smith, welcome to Tech’ed Up. Thank you for coming on. 

Macey: Yeah. Thrilled to be here.

Niki: It is bright and early on a Washington DC morning. You're drinking black coffee. [Macey: Yes!] And we're here to talk NFTs: WTF? No one knows what they are. [laughs] Can you help us?

Macey: Yeah. So, you know, I love the purpose of your podcast because I love to kind of just get down to the basics. So, NFT stands for non-fungible token. What the heck is that? Um, ultimately, it means that it's one of a kind, it can't be changed. It can't be divisible. Like, a fungible token would be crypto. You can split up Ethereum into, y’know, pieces of Ethereum. Non-fungible means it cannot be split up. So, these are things that are entirely unique.

The first Monet painting. The first Playboy centerfold photo. Um, maybe the first piece of art that a child drew. The reason why this is important is because when things are unique, there can only be one owner of the original. And that's what makes these things so interesting to people, especially collectors, but can be really valuable to other people in other circumstances down the line, which we'll talk a little bit about later.

Niki: Okay. So we're going to back up a beat [chuckle] because even in your intro, you've said stuff [Macey: Okay] that I think some people may not get. So, a non-fungible token [Macey: mm-hmm] can't be broken up. What does this have to do with crypto as an ecosystem? People pay for these things with cryptocurrency?  [Macey: Yeah] The blockchain technology, which we talked about in our last episode, makes it so that you can't scam people about the ownership [Macey: Yeah]--can you, am I getting it right?

Macey: Yeah, yeah, so- Okay, so an NFT is a digital asset. And the asset is held on a blockchain. And when people think about blockchain, they think about crypto because crypto tokens are created on the blockchain. Ethereum is the most commonly used blockchain for NFTs right now. And the way it plays into the crypto ecosystem, you must be a part of the Ethereum blockchain in order to put your digital asset on the blockchain or your NFT.

Niki: So you have just explained something to me that I didn't know. So I know that there is a blockchain for Bitcoin, and you use that to trade or buy Bitcoin or mine it.  [Macey: mm-hmm] It’s all on that blockchain. So, what you're telling me is that Ethereum is a different blockchain. The unit of currency is ether and that is the blockchain you've got to be a part of to trade non-fungible tokens, NFTs-

Macey: It's the most common one right now-

Niki: Got it. [Macey: Yes, Yep] So I'm just going to read some headlines, [Macey: Okay] real headlines.

“Time Magazine's NFT launch sends gas fees spiraling.” [chuckle] “An NFT game strives to unite utility with assets in a post-apocalyptic world.” Okay. No one knows what any of that means.

[both laugh]

I don't even know what that means or what it's trying to say! [more laughter] But It's like we're being punked by the mainstream media, like no one knows, but, what my, the gist of what I think it is, and what you've just explained is, it's a marketplace for these digital items that could be artwork, that could be anything with like a watermark on it. And you're, you're trading ownership of it. So, for example, Jack Dorsey's first tweet, he recently sold as an NFT.  [Macey: mm-hmm] I think it was getting, like,  two and a half million dollars. The tweet still lives on Twitter. [Macey: Right] But whomever owns it, has Jack Dorsey's permission to own it. They have the metadata, [Macey: Yeah] it's like a signed photograph, but it doesn't mean it disappears from the internet. So, this is really about people having ownership of something unique.  [Macey: Right] Is that what the value is?

Macey: I think, so, that's the value to collectors. People will go on eBay and they'll buy a really old photo that’s signed. It may be, y’know, the only photo of some famous baseball player. For some reason, people love having the first and only of things and pay a ton of money for it. I think, from a business perspective, what's interesting is these are going to be traded the same way as physical goods. There's always supply and demand, and what the price is just depends on what people are willing to pay. Who cares if it's not tangible. Right? People love having a one-of-a-kind thing. Now there's kind of the market where you have the folks who are willing to pay a lot of money for something really silly, but still, it's a market, right? If there is demand for this, people are going to supply it.

Niki: So, some of the hottest NFTs right now are CryptoPunks, which are these little pixelated heads that people use as their avatar. And I can’t even imagine spending money on one, but people are spending money on them because they want a CryptoPunk to define their digital identity instead of, say, a headshot. [Macey: mm-hmm] They want this thing that looks like it's from a 1980s video game, [Macey: Yeah] pixilated, whatever. But the point isn't that I don't think it’s valuable or that people should be spending money. People are spending money on it. So there's a market.[Macey: Yeah] So, I think the marketplace is called Open Sea? Is that the-

Macey: [interrupts] That's the most popular one. 

Niki: That’s the most popular. So, people go onto that. It's on the Ethereum blockchain. They've got their ethers [Macey: Yeah] ready to buy stuff, and they're buying these unique items. [Macey: Yeah] Ok. 

Macey: Yeah, yeah. For a lot of money. Just to take a step back. [pause] The world is going digital, right? I was actually talking to my fiance last night, talking to him about how I'm coming to do this podcast. And I was so excited, and he's like, “I would never hang digital art on my wall.” Well, don't you think people also used to say, “No, I would never go stay in a strange person's house.” Yet now Airbnb is like a multi-billion dollar company, y’know, and as you may think at the time, that's a crazy idea. I bet you five to ten years down the line, no one's going to think it's crazy anymore. Y’know, you may want a tangible Monet hanging on your wall. I bet you walk into billionaire's houses five to ten years from now, and they have those frames, y’know, now you buy a Samsung TV [Niki:  mm-hmm] in a frame and when it's off, it's like a piece of art.

Niki: [surprised] I had- I was not aware that that was an option! {both laugh]

Macey: It's a thing. It's a thing! [both laugh] And people are paying a ton of money for it. [Niki:  Yeah] So it seems so silly, but I think it's going to happen. Everything changes; It just seems crazy at the time until it actually happens.  

Niki: This is why I'm so glad you came on as a guest because you have this enthusiasm for this space that I think others are dubious about, but you're right! And I think with, what I'm struggling with is the idea that we are really moving from an analog to a digital society, right? That everything is going to be online. If you're a billionaire with a Monet, only a few people see it, but if you're a billionaire who owns a really expensive digital item, a lot of people know you own it. [Macey: Yeah] So, there's some value in that maybe, and also maybe more people can enjoy it or absorb it. Is that the idea?

Macey: Yeah! At the end of the day, people just like to own things that they think are cool and that they can brag about and whether it's something physical or not- and digital is sexy now, y’know? Blockchain is sexy. So people love to say, “Oh, I own an NFT.”  [Niki:  Yeah] Mark Cuban says it--it’s cool. Elon Musk says it--it’s cool. Y’know, and Mark Cuban's all about NFTs now. So, I think he's really stirring up the market. But it's, I don't think it's just for the super-wealthy. I think that there are other opportunities for people who may be looking for a way to create income for themselves to utilize this. So, right now, I think it costs about a hundred dollars to, um, mint your digital asset to, to the Ethereum blockchain, your NFT.  [Niki:  Ok] So, assuming you have, you know, a hundred dollars to buy a fraction of an ETH, which then you use to mint, y’know your digital asset to the blockchain, let's say someone finds that and loves it and pays a thousand dollars for it. That's a whole new market for the unemployed and for the unbanked. Right? Who don't have enough money to start a bank account or take out a loan. So, I don't think that's occurring quite yet, commonly, but I think it's a really neat business opportunity that I don't see why there would be any problem, y’know people creating a miniature business like that, like, a micro-business doing that.

Niki: I think that's such an interesting idea of where this could go. Because I think of it, again, as middle-schoolers and they're all bored out of their gourds. So, there was this article that actually inspired this episode about this 12-year-old in England who created, like, a whale   [Macey: mm-hmm] NFT. It was like a pixelated-I keep saying, pixelated, I may not even be using that term correctly, but-

Macey: [interrupts]  It's, like, cartoonish.

Niki: A cartoonish whale. He sold it. He made tens of thousands of dollars off of it, which frankly, I don't think is a bad thing for middle schoolers to be doing.  [Macey: yeah!] But more interesting is what you said about emerging markets. [Macey: mm-hmm] So, if you have people who might have a digital asset that they can then sell globally to someone else. It does create a business model for them, even if in their small town or their country, they can't go to the market and sell it for the same amount of money. That's sort of the vision you're talking about.

Macey: Yeah, yeah and there's also, not to get into it too much, but when you mint your, um,  asset, you can set up a smart contract where every time the ownership is sold, you receive some of that payment–[Niki: I see, so] 

Both: it’s like a royalty. 

Niki: Got it! Okay, so it's royalties on your digital asset [Macey: yeah!]  that you've sold. So it could be artwork. It could be music  [Macey: mm-hmm], it could be anything that's digital  [Macey: yeah]. And what you're encouraging me to do, is to think through a world in which we care more about those digital luxury items, the rare things that we can buy that are non-fungible[Macey: yeah], but also that have a watermark that are unique in the future.

Macey: [quickly] I don't think everyone will move in that direction, but a lot of people will. A lot of people do a lot of things on the internet that I didn’t even know until I started reading about it, like gamers. NFTs are now being traded through video games. I think you had mentioned that earlier because they want unique, like, clothing items or tools in their video game. Like, people live online. And I think it's hard for us to imagine the market because that's not a, y’know, a part of the world that we're used to seeing, but that's why I think that this is- it's inevitable. 

Niki: It’s inevitable ‘cause it makes me think of Wall-E where they're in their little, y’know, chairs, pushing a button with one finger, [Macey: [chuckles] yeah] and I think it freaks me out. We're in these abstract early days where the use cases seem sort of bizarre to people who aren't gamers or Mark Cuban or Elon Musk [Macey: yeah], but the potential is that it could, it could be pervasive and widely accessible the way that eBay is. [Macey: yeah] Anybody spelunking around looking for a unique thing, can find it, pay for it. And then that creates income for the person who has it [Macey: mmhmm], created it, or happens to own it–

Macey: Yeah. Yeah. 

Niki: So, I,  this is very interesting, so you mentioned a Playboy centerfold. [Macey: laughs] Would it be that the person who owns it digitizes it and then sells the rights to the, the, unique Playboy centerfold?

Macey: Yeah. Like, y’know, nowadays you take a photo and it's saved as a digital image. Whether you take it on your phone or- y’know, all cameras are digital. So then, they could sell- Playboy who is actually entering the NFT market-

Niki: Oh, I did not know that. [Macey: Yeah] Okay. So, this is a real example. They want to get into NFTs– 

Macey: They could say this was the photo taken of this centerfold. It's the one that's going to be published in the magazine, but here is the original digital copy. And somebody could buy it. Like, can you imagine? [hushed voice] Pamela Anderson, if they had done that back in the day, how much people would pay for the first and only digital copy of, y’know, the Pamela Anderson centerfold?

Niki: Yeah, or Farrah Fawcett in her swimsuit. [Macey: [laughs] Yeah, or Farrah Fawcett!] Yeah! And I'm sure there are people that will find this sort of appalling, but I feel like if it's an income stream…[Macey: Yeah!]  Because of the difficulty of copyright enforcement [Macey: mm-hmm], in some ways, this is a way with the smart contracts that you can continue to earn royalties in an open ledger, I think?! It's not going to be as behind the scenes as maybe some trading of artwork is now, which is sort of remote and opaque and nobody knows.

Macey: Yeah, I mean people can [pause] hide their identity, y’know, because you, you, ultimately just have a unique, y’know, random generated key that is your identity, but there are ways that if you wanted to, you could say that you bought the first centerfold, but the other great thing is everything is anonymous. 

So, here's another way that NFTs I think can be used. So, a lot of people I think, eventually, will use, and are using, Bitcoin to back loans, right? Because it's pretty stable. Um, and they're able to use it to, to back maybe major loans that they're taking out. NFTs can be used actually the same way on the Ethereum blockchain. So, if I was the guy who bought the $26 million bored monkey NFT from Sotheby's, which actually happened, it's this funny picture of this monkey with like glasses on and $26 million crazy-

Niki: {interrupts] Bored like the emotion. He’s bored?-

Macey: Yeah. Bored monkey is what it's called. Um, I could use that to back a loan that I take from someone else in the ecosystem. So, whereas banks now provide you with a loan and then you have to give some sort of collateral, let's say, y’know, your house or your car, you can use NFTs as collateral. Now, a potential risk is, let's say bored monkey two weeks ago, it was worth 26 million. But all of a sudden, the market decided we don't really give a crap about NFTs anymore. And now bored monkey’s worth $0, right? [Niki: Right] At which point, y’know, your loaner is not very happy because the collateral isn't really worth anything. And they just have to hope that you pay them back because now your NFT is worthless.

Niki: So, is it, I think it might be Bored Apes?

Macey: Bored Apes! Bored Apes! [laughs] 

Niki: I'm only saying this because I want to make sure people know. [Macey: Yeah [laughs], Bored Apes!] But to be honest, when I first read about it [Macey: Yeah], I was just like, what? [Macey: Yeah] And then, I just moved right along. Just kept it moving. [Macey: Yes, Bored Apes!] ‘Cause I was like, what's a Bored Ape? So, yes, [laughs] so, Bored Ape, a picture of a bored ape. A digital version of it can be used as collateral. [Macey: Yup] it's worth, wait, how much?  Millions of dollars–

Macey: They paid 26 million–yeah.

Niki: Yeah, it could be, could be collateral for a loan unless the Bored Apes market collapses. And then- but that's true for anything you might be using as collateral.  

Macey: Sure, Sure. But I think because the market is so uncertain- like, the housing market's been around forever, right? Car market’s been around, but because this market is so uncertain, people are probably less likely to hold it as collateral, but you can. And, imagine you bought an NFT for a hundred dollars, and I, then, used your NFT as collateral on a loan that I gave you. And all of a sudden, that NFT becomes worth a million dollars. You default on your loan; the smart contract, all of a sudden, gives me your NFT. 

Niki: And your point is it doesn't matter if I think a Bored Ape should be worth a penny, [Macey: Yeah], what matters [Macey: [softly] the market], is what the market thinks. We were talking once about gold[Macey: mm-hmm]. So, a lot of people talk about Bitcoin as digital gold, because it's limited it's, you know, for all of these reasons, it's mined, there's a set quantity of it, and you made a good point– 

Macey: Why do people count on gold as being valuable? Like, it's just a thing. It’s [pause] y’know, like, people say that gold is the backing for the dollar, but I also find it funny that we walk around with little pieces of paper in our hands and it buys us things. It's all based on what people think is valuable and that's how cryptocurrency is valued. Do people think Bitcoin is valuable? Yes. So they're paying more for it. Do they think Ethereum is valuable? Y’know? Yes. They're paying more for it. Do they think that crap coins like Dogecoin– 

Niki: Shit coins [both laugh], not crap coins. [both laugh]

Both: Shit coins! 

Niki: We can say it cause that's what people call it.

Macey:  So hilarious! [Niki: Laughs] I mean, y’know, let's be honest!  Maybe one day, Dogecoin can be used as the common currency for something. I highly doubt it, but people think it's a joke, so it's not worth anything. But at the time, the craze made it valuable. So people made a lot of money on it. It just–

Niki: It's the Beanie Babies of our age. Do you know what a Beanie Baby is? 

Macey: Yeah. Yes, I do. [Niki: Laughs] little plush thingy, right? Yeah, yeah.

Niki: They were super valuable. I got a Cabbage Patch kid. I can't even imagine what my parents paid for that thing–

Macey: Or like Pokemon cards. Why do people pay so much money for Pokemon? I don't even, I don't get it at all. But I don’t have to, [Niki: So, it’s not] it's valuable. If I found a hundred dollars of Pokemon card on the ground, I'd probably be happy. ‘Cause I’d think, “Shit, I can sell it for a hundred bucks.”

Niki:  And think that that's the point, right? Everything we value, we just value because it is. [Macey: Yeah]  It's worth something to people. [Macey: Yeah!] And that's what this is. 

Macey: Yeah! I had one funny thought I wanted to share. So, when I saw that a pair of digital designer sneakers were sold as an NFT, digital! [Niki: Ok, so] Ok, so people can, like, take a picture of themselves, so they have the digital version and somehow there's some app where they can put the sneakers on themselves and take a photo. [Niki: Ok] But they're unique sneakers. No one else has them. I think that is hilarious, by the way. [laughs]  But can you imagine, y’know, how Instagram has these influencers these days and they wear these clothes and then you're like, “Oh, I love that top. It's from Saks. I'm going to go to Saks and buy it.” Can you imagine that's a way that these artists, who are developing these NFTs, can market their products?

Which is why I think that there could be a market out there for this because people already do this. And, people love it. Clearly, somebody paid $10,000 for sneakers that they will never be able to wear. [Niki: Right?]  But they're in photos wearing them. And how do we market ourselves and how do we socialize these days? Over the internet!

Niki: People are wearing them online. And that is where a lot of people's presence is. [Macey: Yeah] It's how they're connecting with other people. [Macey: Yeah] So, the image you project, including if you have very cool, hard-to-get [Macey: Yeah], arty sneakers...by the way, I try to buy washable cashmere, like, at least once a quarter, off of Instagram [Macey: laughs], which leads me to, I do think we should have a warning for people. You want to be thoughtful about scams. And I read about people [Macey: Yeah] getting kind of scammed where they, if they give their little code, [Macey: mm-hmm] key, if someone else gets ahold of it, they can lose all of their value.

Macey: Yeah. That is always a risk. They are making physical wallets, these days almost like USBs  [Niki: Ok] so that you can't lose that. To be honest with you, I just keep my key in, oh, I probably shouldn't tell people this, but in a certain place with a password protecting it, but I mean, that's the whole security of it; if you lose your key, yeah, you could lose millions of dollars. 

Niki: I have a friend who works in, kind of, the password space [Macey: mm-hmm] and he said almost every password in Washington, D.C., is on a piece of paper taped under people's keyboards. 

Macey: Yeah, yeah!! I know. It's crazy.  [both laugh]

Niki: Don't lose your key!!  [Macey: I know!] if you buy this stuff, you've got to keep track of your key.

Macey: I know, yeah!  Yeah, I do hope that if you do have millions of dollars, you would have, like, maybe a safe in your house with it written down, you know? Somewhere that you can't lose it. 

Niki: In your panic room? [both laugh]

Macey: Yeah, in your panic room! But, I'm thinking, if you're a big crypto trader and you have a lot of money on the blockchain, you're probably keeping your keys somewhere pretty safe. [Niki: [laughs] Yes] I would hope! 

Niki: So, I now think we've evolved beyond what regular people are doing  [Macey: yeah], but I love your enthusiasm for this space. And I also love that you're thinking about it, not just as gambling on what it could be worth [Macey: mm-hmm], right? But the idea that a person who owned something that they've designed, living anywhere in the world, can sell it to people who think it's valuable. [Macey: mm-hmm] Things are only as valuable as we decide they are. And right now, things that are valuable are online. 

Macey: Yeah! We’ve got to get with the program.

Niki: You have explained, in this episode, something, truly, which is the reason I started this podcast. Thank you for breaking it down for everyone.

Macey: Yeah, this was fun. 

Niki: This was fun. Thank you, Macey.

Macey: Thank you! 

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Outro:

Niki:  Next week, we continue our Crypto 101 series, and I talk to SEC Commissioner Hester Peirce about the Feds. Stay tuned by following Tech’ed Up wherever you get your podcasts. Video content is available on YouTube, the link is in the show notes.