NFTs Are A Scam; Here's Why | Chaianalysis Script

This is the script to my video on NFTs, (and why they're a scam,) which you can watch here.

NFTs. It feels like every day, I see people screaming into the uncaring void, "What the FUCK is going on? What is an NFT? None of this makes any fucking sense! "If only someone cool and sexy would explain what all this means, maybe in an easy-to-understand video essay on YouTube!" And I agree! Philosophy Tube should do a video on this stuff! But in lieu of that, I suppose I'll have to do. Some of this is going to get a little bit mathy, but I'll do my best to explain any terms that come up that the average person might not understand. We're going to go over what the blockchain is, how it works, and why this whole thing is the stupidest idea since trickle-down economics. Ready? Let's do some analysis.

CREATED BY CHAIA ERAN
WITH VOICEOVER BY SABERA MESIA
NFTs
PART ONE: THE BLOCKCHAIN

Welcome to the blockchain, Mr. Anderson. …that line's not actually spoken in any of the movies. I checked, it's not in there! Now, before I can really get into the blockchain, I'm going to have to give a very brief primer on cryptography: If you already understand hashes and keys, feel free to skip ahead to the timestamp onscreen. Imagine a mathematical calculation that is incredibly easy to do, but incredibly difficult to reverse. As an example, if you multiplied two large prime numbers together, the resulting number would have only two prime factors - those two prime numbers - but finding those numbers would be incredibly difficult. A supercomputer calculating for the entire length of time that the universe has existed wouldn't be able to find them. That resulting number is called a hash, mostly because trying to undo it will turn your brain into hash browns. Now, imagine you have two very large, complicated numbers. These numbers have a special connection to each other: If you take a message and hash it using one of the numbers, the result is encrypted. Now, here's the special part. If you take that encrypted result, and hash it using the other number, the result is your original message! These numbers are called keys. One of them will be called your private key, which only you know, and the other will be called your public key, which everyone knows. These two concepts, hashes and keys, are surprise tools that will help us later. Got it? Good. Let's keep going.

The blockchain is a decentralized database for managing transactions — people buying and selling. These transactions are stored in blocks, and those blocks are stored on the blockchain. And by decentralized, I mean that every single computer on the blockchain contains a complete copy of the whole damn thing! Now, to the creators' credit, they did propose an algorithm to cut down on disk space, but still, let me tell you a story. FOR YOU SEE!

Long ago, in the ancient period of the late 70s and early 80s, before the Internet, there was the ARPANET. And on the ARPANET, every single computer had a file called HOSTS. HOSTS was a text file that had the name and address of every single computer on the ARPANET. Whenever a new computer was added to the ARPANET, every single computer had to update their HOSTS file — usually by manually downloading the file from Stanford's FTP server. Eventually, it got too big and bulky to stay decentralized, and in 1983, it was replaced by the DNS protocol. How the DNS works isn't super important. The point is that the HOSTS file got too big to store on everyone's computers — but the blockchain, which contains much more data, is still stored on every single computer that's connected to it, as if that passes for decentralization. They've literally recreated a problem that got solved before the Internet existed!

Anyway, back to the blockchain. I mentioned blocks, but what is a block? A miserable pile of secrets. But enough talk. HAVE AT YOU—

A block is an object that contains a hash of many transactions, and it also contains the hash of the previous block in the chain. This means you can work backwards from any block and go all the way back to the start of the chain. So, you can trace transactions backward to make sure they're legitimate. Whenever a new block is created, the first transaction on the block will mint a new cryptocurrency token, depending on which blockchain you're working on. So, for example, making a new block on the Bitcoin blockchain will mint a new Bitcoin. There are supposed to only ever be 21 million Bitcoins, but people just made more cryptocurrencies, like Ethereum and Dogecoin, so that limit is essentially meaningless — especially since the rate of new Bitcoins being made has slowed so drastically that the limit won't be hit until 2140.

So, how's a block made? Well, it's mined through a process called proof-of-work, and here's where we really start to go down the rabbit hole. In proof-of-work, anyone trying to mine a new block generates a nonce. A nonce is a random unique number. Once a nonce is in a block, it can't ever be used in another one again. The user will hash the nonce and see what comes out. If the hash meets certain obscure requirements - such as the binary of the hash starting with a certain number of zero bits, or pleasing Beelzebub with its blood sacrifice - great! If not, the user moves on to the next unused nonce and starts again. When a user finds a nonce that works, it broadcasts the block to every other computer on the blockchain, which check to make sure that the transactions within the block are valid — that is, to make sure the currency being spent in the block hasn't already been spent in another transaction. If the block is valid, the other users approve the block by just working on the next block, which will have the new block's hash in it. If it's not valid — well, then all that work and electricity just went down the drain!

If two blocks are validated at the same time, the blockchain will split, which is called a hard fork. Whichever chain has the most computers working on it, and thus becomes the longest, will be deemed the correct fork, and the computers working on the other forks will abandon their work and move to the valid fork. This is all incredibly complex and CPU-intensive; and it's so intensive by design. The idea is that anyone trying to overpower the blockchain would rack up such a high energy bill that it wouldn't be worth it. I'll talk later about the actual feasibility of this kind of security, but the idea is there. The thing is, though…

All that computational work on the nonce, finding a valid hash, eating up massive amounts of electricity, destroying the environment? That has nothing to do with actually making the block. Making the block takes far less power. The only reason they keep running these nonce calculations is to "win" the right to create the next block. If more people are mining, they make the requirements for the nonce harder, so that the same number of blocks come out no matter how hard you work; just like real capitalism!

OK, but hold on, hold on, hold on. Maybe we can just tweak this, then, if it's not actually required? Maybe we can do something called proof-of-stake, instead of proof-of-work? Proof-of-stake is much simpler, really. You get a few trusted individuals who are willing to put their own money at stake to become validators. These validators will be randomly selected to propose a new block to be added to the blockchain, and they'll broadcast the block just to the other validators. The other validators will attest that the block is legit, and when enough validators attest to it, the block gets added to the blockchain! Validators get rewarded, and any validators who slack off or try to attack the blockchain lose the money they put at stake. Simple and clean, right? Well, not really. It gets rid of the ridiculous amounts of wasted energy, but proof of stake doesn't solve any of the other problems with cryptocurrency.

PART TWO: THE OTHER PROBLEMS WITH CRYPTOCURRENCY

Let's talk about money. Specifically, we're gonna talk about two different kinds of money: commodity currency and fiat currency. A commodity currency is a kind of money where the value of the money comes from what it's made of. Gold coins, for instance, are valuable because they're gold, and sheafs of barley are valuable because you can make food out of them. Humans have been doing this for over a hundred thousand years. In German POW camps in 1945, prisoners used cigarettes as money. It's important to note that they weren't bartering; The price of food and clothing was always measured in cigarettes, and they wouldn't accept trades — everything was paid in cigarettes. Now, while commodity currencies can undergo inflation, their value is tied to the value of whatever it is you're using — and when that value is used, the currency tends to deflate as money goes out of circulation. After all, barley can be eaten, gold can be melted down for its metal, and cigarettes can be smoked.

Fiat currencies are different. They have no intrinsic value at all. Their value is in the trust people have in the group issuing the currency. For example, the value of a loonie, the Canadian one-dollar coin that's minted in my hometown of Winnipeg, has nothing to do with the brass and steel it's made of. Instead, the Canadian government said, "This is a dollar. It has value because we say it has value," and everyone went, "OK, sure." Because only the Canadian Royal Mint can issue Canadian dollars, be they loonies, five-dollar bills, or a number on a computer, and the Royal Mint keeps a cap on how much they mint to control inflation, everyone agrees that the dollar is worth a dollar, and they use it to represent economic exchange. In essence, its value is based on the government going "dude, trust me."

Now, it's a very important point that fiat currencies have no use value. A use value is how an item is used outside the market. The use value of bread is that you eat it. The use value of air is that you breathe it. The use value of Celeste by Extremely OK Games is that it turns you into a trans catgirl.

(Nya)

And because fiat currencies don't have this, their entire value is held in their exchange value — how much of something else you can get for it. (OK, technically they do have a use value, but nobody's melting down their loonies for the steel.) Bitcoin, Ethereum, and other cryptocurrencies are fiat currencies, no matter what the crypto bros say — but instead of being based on trust in a bank or a government authority, they're based on trust in the security of the blockchain. Problem is, the blockchain isn't actually all that secure. In a real bank with real money, you typically have some kind of fraud insurance, and any money stolen out of the bank in an epic movie heist is a loss for the bank, not for its clientele.

But under proof of work, the blockchain is defended by the hope that the computers of honest users overpower the computers of attackers — which depends on miners wasting vast amounts of resources to constantly provide proof of work. And what would happen if an attacker did overpower the blockchain? Well, the second and final line of defense for Bitcoin is that the creator deliberately made continuing to mine new Bitcoins more profitable than stealing, in the hope that anyone who took over the blockchain would just keep it going. If you kill the boss, you become the boss.

And proof of stake doesn't solve this! All it does is consolidate power into the hands of whoever's able to put up a bit of money, meaning a hacker doesn't even need to overpower the entire blockchain, they just need to hack enough validators, or set up enough bots with currency. Besides, all it does is provide more coins to the validators, who have to already have money to become validators in the first place.

So, cryptocurrencies aren't secure enough to be used as currencies. Which is why they're not.

The exchange value of a real currency is tightly controlled by the government and central banks to keep it relatively stable — you don't want the value of a dollar changing wildly from day to day. Cryptocurrencies, on the other hand, are uncontrolled, which makes their exchange value volatile. Most miners are using cryptocurrencies as a speculative asset — they mine Bitcoin, wait for the price to go up, then sell it. The Gravel Institute did a really good video on this, so I'd recommend you check them out after this video.

But alright, maybe I'm being too harsh. As scammy as cryptocurrencies are, they at least make some kind of sense, if generously interpreted as a libertarian wet dream playground version of unregulated capitalism, rather than an outright Ponzi scheme. But surely nobody would make it even worse, right?

PART THREE: NON-FUNGIBLE TOKENS
(Oh, dear lord, help me.)

So, currencies are fungible — that means that any gold coin, dollar, or Bitcoin is exactly the same as any other gold coin, dollar, or Bitcoin, at least as far as the market is concerned. The bank doesn't care if your cash is covered in Dorito dust, or that you're paying for your Mountain Dew with a commemorative coin from the Vancouver Olympics, a dollar is a dollar.

This is something different. Let's take a block on the blockchain, and instead of putting cryptocurrency transactions on it, let's put a different kind of transaction. Inside this transaction is a non-fungible token, or NFT, representing something else. That something else could be a GIF, a Tweet, a video, in-game loot for one of the many bullshit video game companies that are jumping on the bandwagon—pretty much anything. It doesn't really matter. What matters is the NFT. So, a block contains an NFT. It also contains two other pieces of data — one that says who created the NFT, and another that says who owns it. These pieces of data are usually the creator's public key, and the owner's private key. The creator can, at any time, use their private key to prove that the NFT is real, and anyone can use the owner's public key to verify who owns the NFT.

So, OK, that works pretty well, if you ignore the massive environmental damage proof of work does. Most NFTs are stored on the Ethereum blockchain, which keeps promising a switch to proof of stake but never commits, while Ubisoft's new NFTs are stored on a proof of stake blockchain. But the thing is, the environmental factor is a moving goalpost for NFTs. If you bring it up, you just circle back to talking about crypto in general.

The real problem with NFTs is that the token is completely meaningless. It's got zero use value, just like any other block, but it's not a currency you can use for transactions like Bitcoin, it's just a representation of a digital asset. A big selling point of the blockchain is that the data stored there can't be altered. But remember, the data contained on the blockchain for your shiny new NFT isn't the actual digital asset, it's just a representation of it — it has a hash of the asset's data, and a link to wherever the asset is actually stored. Problem is, if that actual location goes down or changes, you now own a token proudly pointing to a 404 File Not Found error, and because of the blockchain, this token cannot be updated.

And speaking of that asset, even if it remains up, more often than not, that asset is publicly available. That means that its real use value — whatever the use value of a shitty picture of a monkey might be — is available to everyone, not just whoever bought the NFT. It's important to me that you recognize that when you buy an NFT, you are not buying the digital asset. You're buying a digital certificate with no legal binding that says you own the "original" of an infinitely replicable piece of data. That certificate has absolutely no use value, and outside of the current NFT bubble, it has no exchange value, either. You might as well print out your Pokédex certificate on the Game Boy printer! At least that gives you bragging rights.

A thing can be a use value, without having value. This is the case whenever its utility to man is not due to labour. Such are air, virgin soil, natural meadows, etc. A thing can be useful, and the product of human labour, without being a commodity. Whoever directly satisfies his wants with the produce of his own labour, creates, indeed, use values, but not commodities. In order to produce the latter, he must not only produce use values, but use values for others, social use values. Lastly nothing can have value, without being an object of utility. If the thing is useless, so is the labour contained in it; the labour does not count as labour, and therefore creates no value.

— Karl Marx, Capital (1867)

By the way, even if the asset is literally stored on the blockchain, there's nothing an NFT can do that a regular database can't do better, but that doesn't stop Square Enix's President from releasing a stupid as hell New Year letter about how these stupid tokens were "met with a great deal of enthusiasm by a rapidly expanding user base," and that he expects "to see an eventual right-sizing in digital goods deals as they become more commonplace among the general public, with the value of each available content corrected to their true estimated worth." That is never going to happen, because that worth is literally zero. I could go into more detail about this letter, but you know what? The Jimquisition already did a video on Yosuke Matsuda, and they've got more profanity than I could ever throw at Shinra—I mean, Squenix. Thank God for James Stephanie Sterling. I'm more interested in a different question.

PART FOUR: WHY THIS KEEPS HAPPENING

So, why the hell do people keep buying cryptocurrency and NFTs? What the fuck is going on? Even stocks have some use value; they let you act as a shareholder in a company. But NFTs? These things are a perfect representation of how divorced from reality capitalism has become. People are paying absurd sums of money for a meaningless certificate. So, WHY? Well, some of it is money laundering, but frankly? They do it because they don't understand what it is, and they think they can make a profit off it. The entire value of cryptocurrency as a speculative asset is based in how much electricity it takes to make; it has to, otherwise the power bill would outweigh the benefits of mining, and everyone would stop. And since the proof of work keeps getting harder as more people join in, speculating on cryptocurrency is just betting that the same currency will be even more wasteful tomorrow, making the waste of today a good investment — this is a borrowed observation, my bibliography is in the doobly-doo.

If proof-of-stake were adopted like the crypto apologists keep prophesying, this waste future speculation would be gone, and with nothing backing it, the price of cryptocurrency would plummet; it might become useful as an actual currency again, but the people who have invested so much money into the currency as a speculative asset have an incentive to continue to hard fork away from any proof-of-stake integration, because the alternative is losing their fortune.

Buying something, then relying on more people being willing to buy in, then selling it on to them for a higher price, while they only buy for the sake of selling it at an even higher price to other people? There's a name for this sort of thing; a pyramid scheme. And while getting involved in a pyramid scheme is stupid, people do stupid things all the time. Neither I nor anyone else can stop people from doing stupid things. If you want to buy an NFT, go ahead. Just know exactly what you're buying, what it costs our planet, and what you're likely to get out of it: bupkes.

Bibliography

Return to Writings