Chapter 1: Introduction to Bitcoin and NFTs

Many of you responded to my previous email requesting clarification on Bitcoin, cryptocurrency, and non-fungible tokens (NFTs). To address this, I thought it would be beneficial to share a comprehensive explanation with everyone. This discussion is devoid of political implications; rather, it focuses on understanding a specific technology known as blockchain. More on the political aspects will follow on Sunday.

Not long after I mentioned NFTs and decentralized finance in my last email, Jack Dorsey, the co-founder of Twitter, made headlines by announcing the sale of his first tweet as an NFT. The current highest bid for this digital artifact stands at a staggering $2.5 million. This raises several questions: What exactly is an NFT? How does it relate to Bitcoin? What is the underlying phenomenon driving these digital transactions?

The core issue at hand is that everything considered "digital" — everything displayed on our screens and devices — can essentially be boiled down to electrical signals. Machines understand only two states: on or off. My emails, text messages, video calls, and streaming content are all converted into minute electrical impulses. Consequently, duplicating a digital item merely requires replicating the same sequence of electrical signals.

This presents a significant challenge. For instance, if I possess a twenty-dollar bill, that specific bill is uniquely mine. While one could make a photocopy, the U.S. Treasury implements various measures to prevent such duplication. The physical characteristics of my $20 bill ensure its uniqueness. The dilemma arises when we translate tangible currency into electrical signals, complicating the identification of ownership and prevention of duplication. Our financial systems, which were originally designed to safeguard gold and paper currency, are now being applied to the digital realm, and this approach is fraught with issues, primarily concerning security and costs.

This issue extends to the realm of art as well. When I upload a photo to Instagram and sell a limited-edition print for $1,000, anyone can simply download the image and print it themselves for a fraction of the price.

Blockchain technology was developed to address the ease of duplicating digital assets, thereby establishing scarcity. Bitcoin is a specific type of blockchain that functions as currency. Other blockchains can be utilized for various purposes, such as signing contracts or creating NFTs for art. Just as one can exchange dollars for euros, the same applies to Bitcoin and other cryptocurrencies. Reputable exchanges, like Coinbase, facilitate the purchase of various cryptocurrencies using U.S. dollars.

To clarify, some purists may challenge my simplifications, but this is the general framework:

Chapter 2: A Lesson in Sibling Trust and Blockchain

Over the weekend, while attempting to teach my daughter JJ some math, I found a creative way to engage her interest. She has a tendency to shy away from numbers, but her love for chocolate was a perfect motivator. I turned math into a game: each correct answer would earn her a piece of chocolate. We began with a simple equation: 1+1=2.

As she solved the equations, I gradually increased the difficulty by adding previous sums to the next equation: 2+1+1=4. This attracted my son Tom, who also wanted to participate. With the promise of chocolate, both children were eager to join in. Each time JJ solved a problem, she had to share a piece of her chocolate with Tom for safekeeping, and vice versa.

I kept a record of their chocolate portions on a piece of paper, tracking how much each child had and how much was in safekeeping. The equations became progressively more challenging, with both kids alternating in their solutions.

My oldest son, Asa, soon wanted to join the fun as well. For every equation he solved, he had to give two pieces of his chocolate to his siblings. My tracking sheet morphed into a chocolate "ledger."

When we finished our math session, a dispute arose. JJ suspected Asa might alter the ledger to claim more chocolate than he deserved. To resolve this, I tore the ledger into pieces, distributing them among the children. If they wanted to retrieve their "safekeeping" chocolate from each other, they had to collaborate to reassemble the ledger. They could also trade chocolate for chores or favors, but any tampering with the ledger would require them to tear it apart again.

This scenario illustrates how blockchain operates. There is a complex equation that grows harder to solve as it progresses. Only computers can tackle these equations, which yield a "hash" resembling a string of random characters like "ZjQpmGgdq2w!q*3pa3RwDzd@." As more computers attempt to solve the equation, they share parts of the hash for safekeeping, creating a network of trust.

In this model, owning a Bitcoin (or a fraction of it) grants you the "owner" hash, while numerous computers contribute to the "safekeeping" hash. The fascinating aspect is the ledger, which is embedded within the hash and distributed across countless computers, forming a "distributed ledger." This is at the heart of blockchain’s innovation, as no single entity can dominate it, making it nearly impossible to hack.

Years ago, I set up my laptop to mine Bitcoin. I downloaded a mining application and, at the time, the equations were manageable enough for a consumer laptop to handle. However, as technology has advanced, it now requires substantial computational power to mine Bitcoin effectively. Back then, it took me several days to solve the first equation, and eventually, I opted to buy Bitcoin on a public exchange instead of investing in expensive mining hardware.

I maintained a list of my Bitcoin hashes, treating them like pieces of chocolate. For instance:

• Coin 1: 9Q39nWijbgg_mqrG8M.zAtnv
• Coin 2: oAX8_hkBU7TaG.XDJh3Q!84-
• Coin 3: 4kCXjUmpsVmY-t8*c_GKy8Xo

For a project, I hired a programmer from Finland. He requested a $10,000 deposit to begin the work. Instead of dealing with bank fees and exchange rates, I simply emailed him a Bitcoin hash as payment.

The reason I can't reuse the hash is that it unlocks the respective safekeeping bits stored across numerous computers globally, generating a new hash in the process. Once a hash is used, it becomes invalid.

When discussing blockchain as a form of currency, the conversation often turns to value. The Federal Reserve backs the dollar, but what gives Bitcoin its integrity? The answer lies in the math. As the equations become more complex, the supply of Bitcoin diminishes. Interestingly, you can purchase fractional amounts of Bitcoin, even down to minuscule fractions.

The nature of the distributed public ledger provides integrity in digital transactions. This, in my view, indicates that blockchain will likely transform the process of signing contracts in the future.

Returning to Jack Dorsey's sale of his tweet for $2.5 million as an NFT: NFTs represent a specific type of blockchain, functioning as a unique token that only you can possess. This token serves as a hash that validates your ownership of a digital asset, whether it be an image, video, or other media.

For instance, platforms like Nifty Gateway operate as the Sotheby's of digital art. Suppose you come across a video currently priced at $2,690 and decide to purchase it. You will receive a hash affirming your ownership. Although anyone can copy the video, only you possess the hash — the NFT — that confirms your exclusive ownership. Should the artist gain significant popularity in the future, you could sell your token for a considerably higher value at a digital art auction.

Special thanks to loyal readers Karim Sahyoun and Eric Anderson for their invaluable feedback on this piece.

Talk to you Sunday — nicco

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