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GiD Report#195 — Can you trust your million dollar NFT?

GlobaliD
GlobaliD
Published in
10 min readJan 19, 2022

Welcome to The GiD Report, a weekly newsletter that covers GlobaliD team and partner news, market perspectives, and industry analysis. Check out last week’s report here.

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This week:

  1. Can you trust your million dollar NFT?
  2. What people are saying
  3. The question of atoms v. bits
  4. Tweet of the week — guy who created Ethereum edition
  5. The investment everyone is talking about
  6. Stuff happens

1. Can you trust your million dollar NFT?

Bored Ape Yacht Club

One of the fundamental novelties of NFTs is that the framework has brought a sense of scarcity and permanence to a place — the internet — that has historically been of abundance and transience.

That NFTs exist on decentralized blockchains further gives users a sense of ownership over their items — perfect for digital collectibles and other use cases such as gaming.

But how permanent are NFTs really? And how decentralized are they actually?

That’s one of Moxie Marlinspike’s points from a blog post last week on his “first impressions of web3 (via /rcb) that’s making the rounds in the cryptosphere.

Here’s Moxie on the problem with NFTs:

Most people think of images and digital art when they think of NFTs, but NFTs generally do not store that data on-chain. For most NFTs of most images, that would be much too expensive.

Instead of storing the data on-chain, NFTs instead contain a URL that points to the data. What surprised me about the standards was that there’s no hash commitment for the data located at the URL. Looking at many of the NFTs on popular marketplaces being sold for tens, hundreds, or millions of dollars, that URL often just points to some VPS running Apache somewhere. Anyone with access to that machine, anyone who buys that domain name in the future, or anyone who compromises that machine can change the image, title, description, etc for the NFT to whatever they’d like at any time (regardless of whether or not they “own” the token). There’s nothing in the NFT spec that tells you what the image “should” be, or even allows you to confirm whether something is the “correct” image.

So as an experiment, I made an NFT that changes based on who is looking at it, since the web server that serves the image can choose to serve different images based on the IP or User Agent of the requester. For example, it looked one way on OpenSea, another way on Rarible, but when you buy it and view it from your crypto wallet, it will always display as a large [poop] emoji. What you bid on isn’t what you get. There’s nothing unusual about this NFT, it’s how the NFT specifications are built. Many of the highest priced NFTs could turn into [poop] emoji at any time; I just made it explicit.

That’s the current NFT reality. But technology has never been just about code. It’s also an inherently social endeavor — as Matt Levine points out in his Money Stuff newsletter:

The NFT does not by itself convey ownership of the underlying thing in either a legal or practical sense. It conveys ownership in some more metaphysical sense: If you buy a Bored Ape Yacht Club NFT, then the people who are part of the BAYC NFT community will treat you as the owner of your ape. This is essentially a social fact and can be true even if the immutable code of the blockchain says that you don’t own the ape, because you were hacked or whatever. The technology is a scaffolding on which to hang a social system, but the social system is what does or does not convey “ownership” in a meaningful sense.

It’s also likely that as the space develops — web3 and NFTs really only entered the mainstream conversation last year — that new solutions will emerge to address some of those technological gaps. (For instance, your NFT might be stored on Filecoin’s Interplanetary File System.)

But there will also be cases where some gaps can’t be addressed or more practically, it doesn’t make sense to address them with decentralized solutions.

As Moxie points out, that’s something the industry and community as a whole will continue to grapple over going forward. There are philosophical merits to decentralization, but in order to deliver a compelling and convenient product to end users, some sort of balance will be struck between the vision of a decentralized world and the efficiency of centralized solutions. (To Moxie’s point, that’s already the case with NFTs and platforms like OpenSea.)

For Moxie, it’s about expectations:

This isn’t a complaint about OpenSea or an indictment of what they’ve built. Just the opposite, they’re trying to build something that works. I think we should expect this kind of platform consolidation to happen, and given the inevitability, design systems that give us what we want when that’s how things are organized. My sense and concern, though, is that the web3 community expects some other outcome than what we’re already seeing.

…

However, even if this is just the beginning (and it very well might be!), I’m not sure we should consider that any consolation. I think the opposite might be true; it seems like we should take notice that from the very beginning, these technologies immediately tended towards centralization through platforms in order for them to be realized, that this has ~zero negatively felt effect on the velocity of the ecosystem, and that most participants don’t even know or care it’s happening. This might suggest that decentralization itself is not actually of immediate practical or pressing importance to the majority of people downstream, that the only amount of decentralization people want is the minimum amount required for something to exist, and that if not very consciously accounted for, these forces will push us further from rather than closer to the ideal outcome as the days become less early.

All of which is hardly a radical take. Decentralization in and of itself is no panacea — even if it is a cornerstone for where we’re evolving toward.

And as web3 continues to grow in prominence and end product, these conversations will only continue and new gaps will be identified.

One gap that will command increasing focus in 2022 is the question of identity. If technology is a fundamentally social endeavor, we need to know who we’re dealing with, whether from a personal, community, or regulatory perspective.

Relevant:

2. What people are saying

Here’s FTX’s Sam Bankman-Fried’s tweetstorm on the subject, referencing this blog post response from Dan Finlay:

I think Dan’s ‘right to exit’ is a key piece. Sure, there are centralized apps in crypto — FTX is one! But you have the right to exit: if you don’t like FTX, you can withdraw assets to another exchange, or to your private wallet.

And, in fact, everything in the crypto universe — or at least almost everything — is plugged into decentralized rails which connect all of the (sometimes centralized) pieces. It’s not perfect, from a decentralization angle. But it still helps a ton.

And those rails are not just decentralized, they’re also open to competition. Don’t like using blockchain X to transfer assets? Try blockchain Y! Banks have had the same ~2 ways of sending funds for decades, and can’t change that. Crypto exchanges generally have ~20.

And, similarly, if some infrastructure provider sucks — RPC nodes, for instance — people can create a new one. That doesn’t, of course, mean that they *will* — and I think Moxie makes some really compelling points that we probably don’t do enough of that as an industry.

There is concentration of usage in various places, and some of those places are not really making progress.

In general, I really encourage people to find pieces of crypto infrastructure that seem shitty, and build competitors to them. That’s how we move forward.

And Moxie’s other point — that crypto is too profit-motivated right now — seems totally correct to me. Hopefully we can take a longer-term view of the ecosystem.

Sam’s first point reminds me of something that an old friend told me (who properly introduced me to Bitcoin told me back in 2013): You can build centralized services on a decentralized framework, but that doesn’t hold true the other way around.

And having that decentralization layer, having that option — whether or not people decide to take it — is powerful in and of itself.

To Sam’s second point, it’s probably no surprise that a lot of the real work gets done during crypto winters. (After all, that’s when Solana was developed.)

Relevant:

3. The question of atoms v. bits

Elsewhere in web3, here’s a compelling take from the FT’s Rana Foroohar (via /rcb) on why we shouldn’t forget about the real world despite the froth around the metaverse:

As Tim O’Reilly, a technology big thinker and one of the popularisers of the term Web 2.0, wrote recently: “The easy money to be made speculating on cryptoassets seems to have distracted developers and investors from the hard work of building useful real-world services.”

But when we step back from the dust that will eventually settle around Web3, it will be the ubiquitous, industrial changes driven by companies like Tesla that will probably be most impactful. They are transforming old industries and building real world assets.

It reminds me of something Peter Thiel likes to say, paraphrasing: We’ve done a lot of work in the world of bits, but we need to do more work in the world of atoms.

(By the way, it’s not necessarily clear that those two things are mutually exclusive. And as Rana points out in her piece — referencing the laying down of fiber to set up the internet revolution — they often go hand in hand.)

Relevant:

4. Tweet of the week — guy who created Ethereum edition

Nicogs.eth:

5. The investment everyone is talking about

Paradigm and Sequoia are investing $1.15B in Ken Griffin’s Citadel Securities at a $22 billion valuation.

(Noteworthy: Ken Griffin is the guy who outbid ConstitutionDAO for that old piece of paper because, apparently, his son told him to.)

It’s an intriguing marriage between the old and the new — as the crypto kids like to say, tradfi (traditional finance) versus DeFi.

Anyway, here’s The Information’s Hannah Miller on why this deal matters:

The investment seems to be more strategic in nature, however, rather than strictly venture-oriented. Citadel Securities is interested in getting into crypto market making, but is waiting for greater regulatory clarity surrounding digital currencies, especially in the U.S., a company spokesperson told The Information.

…

Paradigm and Sequoia can also connect Citadel Securities to exchanges and companies that would enable the market maker to build a crypto business. Both VC firms have invested in crypto exchange FTX, for example, as well as in Fireblocks, a startup that offers a platform for market makers to manage crypto trading.

In addition to potentially securing a powerful new partner for their portfolio companies, Paradigm and Sequoia could also benefit from investing in a company that’s well-positioned to be a major player in crypto trading, in the event that the Securities and Exchange Commission recognizes digital currencies as securities. That move seems likely given SEC Chair Gary Gensler’s recent attitude.

Even though many crypto advocates don’t consider digital currencies to be securities, Paradigm and Sequoia seem to be betting on that to change with their investment. Citadel Securities already has two decades of experience in trading securities and established relationships with regulators, although it has recently tangled with the SEC. Its deep connections could help it quickly become a crypto market maker in compliance with emerging regulations. Citadel Securities could also let Paradigm, which helped create a digital currency lobbying group, gain better access to regulators.

Relevant:

6. Stuff happens

Nft
Web3
Crypto
Blockchain
Gid Report

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GlobaliD
GlobaliD

Written by GlobaliD

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