This is one of the AI-generated covers in my recent minting of The INCIDENT. You can click on the image above to check out what ebook NFTs look like over at book.io, and you can also mint or buy your own unique copy if you'd like to support the project and pick up a digital collectible that is meant to increase in value over time.

What the heck is an ebook NFT?

Josh and Ben, cofounders of Book.io (recently acquired by Ingram Spark) described very well in conceptual terms what ebook NFTs are, so I'll just copy and paste, then provide a bit more background afterwards.

From Josh & Ben:

Any digital book that you think you previously bought, either an eBook or Audiobook – from any retailer like Amazon, Audible, iBooks, Barnes & Noble – you actually just bought a license to view the book. You don’t own it, and the Publisher, Author, or Retailer can take it from you at any time. Further, once you buy this license to view it, you are stuck with it on your book shelf for as long as they allow you to have access to it. You can’t give it to a friend or resell it once you are done. You don’t own the book.

NFT books are true digital assets that you own and are resellable and transferrable to whoever you want. This is real-world utility, which we believe a lot of blockchain solutions have been searching for the right problem – it starts here.

 

(Source: 

https://help.booktoken.io/knowledge/why-do-we-need-nft-books)

WTF does Non-Fungible mean?

"Fungible" just means that one thing can be replaced by another without any loss or gain in value. So if you and I each have a one-dollar bill, and we swap those bills with each other -- you take mine and I take yours -- neither of us is better or worse off after the trade.

That's because dollar bills are fungible. One of them is just as good as any other.

Non-fungible items can't be swapped or replaced in this way without losing or gaining some value in the process.

In the digital world, if you and I each had copies of the same photo, for example, we could performing the swapping experiment and it would turn out the same way as the dollar bill swap.

But if you have a rare and beautiful image, and I have a common and less beautiful one, you would probably not want to swap images with me. 

"But wait! Can't you just make copies of the images you already have and send the copy to your buddy?"

Yes. Exactly. That's called the "copy and paste problem" with digital assets. They can't be worth much if anyone at all can make and distribute as many copies as desired. There's no scarcity, and therefore very little value. We are evidently wired to wonder, can it really be worth having if anyone at all can have it so easily?

And this problem has plagued digital commerce -- and authors -- since the dawn of digital.

Digital rights management (DRM) is the way that amazon, apple, and others cryptographically handle the copy and paste problem. They use cryptography to prevent us from making pirated copies of the books we "buy" from them.

And as Josh and Ben pointed out above, you haven't bought anything other than a license to read or listen to the product, which still belongs to apple, amazon, etc.

Also note: the digital product no longer belongs to the author, either. It's now the property of the retailer, and they can do just about whatever they want with it. Yeah, it's in the fine print.

Retailers use DRM for the usual reasons, and while they probably could have built things so that you and I could own cryptographically protected copies -- which is really what NFTs are -- of ebooks and songs, they chose long ago not to do so.

Which I'm grateful for, because it has given us the opportunity to build a better digital commerce world that serves all of us reasonably well, instead of mostly just serving corporate shareholders well.

I have nothing against corporate shareholders. It's just that, traditional biz-school dogma notwithstanding, they're not the only ones on the planet who matter.

And there shouldn't need to be a giant corporation wedging itself in the middle of every transaction on the globe.

Business at its best is people connecting with people, and that's actually been a shockingly terrific part of this whole experience: All of the readers, authors, and NFT aficionados I've met over the past few days and weeks have been nothing short of amazing. Friendly, open, helpful, frank, funny, enthusiastic (even the jaded ones :). 

So what you see on TV (srsly, WTF are you doing watching TV??) about the crypto space doesn't map well to any of my experiences.

But what IS it?

A digital collectible (NFT) is a secure file that can only be accessed by one account holder.

Everyone else on the planet knows the public address of this account, and knows which assets are stored inside of the account.

"Accounts" are called "wallets" in the crypto space, and there are two components:

The "public key" is the address. Conceptually, it's a bit like an email address. Tokens (often called "coins") and assets (NFTs, which can be any number of digital things like photos, ebooks, music, videos, etc) are sent to and from this public address during the course of normal transactions.

Great, someone sends some money to your crypto wallet (in the form of a crypto token which can be converted to your favorite government currency such as USD, or can be converted into Bitcoin, which is real, hard money not subject to Federal Reserve manipulation. But I digress). Or maybe they "gift" you an NFT. 

Now you have stuff in your wallet.

How do you know how much money is in there? Easy: it's public. Everyone in the world can see how much of each asset has been deposited into your wallet.

This feels frightening, but it actually adds a tremendous amount of security to the system. Everyone knows how much money should be in your wallet, so if a bad actor tries to "cook the books" a bit, the entire world catches them red-handed.

Isn't that a privacy concern? Damn right it is, so you have to be a bit careful.

But it's not necessarily a security concern. Just because everyone knows how much you have, doesn't mean they can easily take it from you.

This brings us to transacting, and how to "send or spend" your crypto assets.

To send crypto assets from one wallet to another -- transactions are peer-to-peer and not intermediated by buildings full of bank bureaucrats -- we need to specify two things:

1. The recipient's address

2. The type and number of digital assets to send.

We specify these two things inside of our wallet app. There are many reliable and functional wallets to choose from for each crypto protocol, and they all perform the same basic functions.

A crypto "protocol" is the set of rules that govern transactions for a given token. Bitcoin has a protocol that makes it the world's first truly hard money. Ethereum has a different protocol that serves different purposes, including the minting  (or creation) of NFTs. Ebook NFTs are currently created with book.io on the Cardano chain, whose currency token is called ADA. 

This brings us to the final step in initiating a transaction to send assets out of your wallet and into another wallet.

"Signing" your transactions

So you're in your wallet app, and you want to send money or NFTs to another wallet -- maybe you're buying something, or maybe you're mitigating your risk of loss or theft by dispersing your assets into multiple wallets.

So far you've specified the recipient's wallet address -- which you've very carefully checked character by character -- and you've specified the amount to send.

The last step is to digitally sign this transaction.

And this brings us to the concept of your private key.

It's the password to your wallet.

It allows you to spend or transfer your money.

But it's not like a normal password.

Normal passwords can be chosen by you. But crypto private keys cannot, for a very important reason:

Every private key is mathematically and uniquely related to the public key associated with that wallet.

This means that there is only one valid private key for every wallet in existence.

And there's a bit of cryptographic magic (which comes from number theory and is actually quite beautiful if you're mathematically inclined and nerdy enough to dive down that rabbit hole) that enables the entire cryptographic world to function.

When you "sign" your payment transaction, you're creating a mathematical mashup between the transaction identification number and your private key.

Transaction IDs are just like check numbers in the old (obsolete?) banking system.

This miraculous mathematical magic I spoke of earlier works like this:

Your private key (password) is "genetically" related to the public key (address) of your wallet. You use your private key to digitally "sign" your transactions.

This digital signature has special properties.

The entire world can instantly  and easily (through math) verify two things just by looking at the transaction signature:

1. That the signer of the transaction used the only private key in the world that could possibly be associated with the public wallet address being used to send the assets. No one else but the possessor of the correct private key could possibly have signed this transaction.
2. That the wallet address initiating the transaction actually possesses the assets its owner is attempting to spend (in the case of tokens) or send (in the case of NFTs).

"But wait a minute! If the whole world can glean so much information just from the signature, can't someone reverse-engineer your private key, too?"

Damn good question and I'm glad you asked, because this is where the universe has hooked us up in a big way.

The math behind private keys (password) and their relationship to the associated public key (wallet address) is well beyond our scope here, but there is a critical property that enables the whole thing to work:

It is trivially easy to verify that a transaction was signed by the unique private key associated with the wallet address (public key).

But it is mathematically impossible to guess the private key itself by using either transaction information or the wallet's public key.

Notice that it's not mathematically difficult to reverse-engineer the private key. It's mathematically impossible.

While the private key can theoretically be guessed, 256-bit encryption means that there are 1.14e77 (114 followed by 75 zeros) possibilities to muck through. That's just a slightly smaller number than the estimated number of atoms in the observable universe.

So the private key is mathematically pretty bulletproof.

It's hard to overstate the impact of this happy happenstance.

This enables true ownership.

In the old (obsolete? :) banking system, YOU don't actually own the funds in YOUR bank account. Your bank owns those funds, and can do with them as they please. When you request a withdrawal of "your" funds in "your" account, the bank's responsibility is to send money to you in the amount of your withdrawal request.

But they're not sending "your" money to you, strange and outrageous as that sounds. Because as soon as you deposit your money in any bank, that money is no longer yours. The bank owes a debt to you in the amount of your deposit, but you actually don't have any money at all in the bank. The bank has all the money. If they pork it away, say by writing millions of bad loans during a housing bubble, any amount of your money above the FDIC insurance limit has evaporated into thin air.

This is a total mindscrew, but you can verify this extremely uncomfortable situation by reading your bank's depositor agreement.

But in crypto land, the ONLY person who OWNS anything at all is the person who has the private key associated with the wallet in question.

For my money, cryptographic transaction is the most secure method of transacting yet invented. You don't have to trust anyone else to behave themselves. Because the math gives zero fucks about how popular or powerful or rich a person might be. Math is just math.

So why have politicians, bankers, and "news" outlets made so much hay by harping on the risks associated with crypto?

And why have so many people lost so much money?

And why does grandma think crypto is satan's tool?

Stay tuned.

Commercial break: This is another of the AI-generated covers in my recent minting of The INCIDENT. You can click on the image above to check out what ebook NFTs look like over at book.io, and you can also mint or buy your own unique copy if you'd like to support the project and pick up a digital collectible that is meant to increase in value over time.

The only two ways to lose your shirt in crypto land.

The first way to lose money in crypto land is to lose, forget, or misplace your private key.

Any money in any crypto wallet in any protocol under the sun is completely untouchable without the unique private key.

There's no help desk to help you "reset" your password.

The private key is a once-in-a-lifetime kind of thing for each wallet address. There can never be another password that will unlock the funds.

So... be careful.

Think of it like cash. If it falls out of your pocket into the sewer drain, it's gone forever.

If you accidentally expose your private key and someone gains access, kiss your money goodbye.

NEVER store your private key on an internet-enabled digital device. I recommend using a hardware wallet instead.

NEVER write down your private key and then take a digital photo of it.

DO buy a safe and store your private keys in it.

NEVER EVER EVER reveal your private keys to anyone, no matter how convincing they seem.

DON'T LOSE your private keys.

How big a deal are lost private keys? 

Well, some folks estimate that around 25% of all the Bitcoin ever mined has been lost forever due to lost private keys.

Can anyone guess your private key?

Yes. In theory. But your private key is one among 1.15E77 (a 1 followed by 77 zeros) possible private key combinations. For comparison, we think there are between 1E78 and 1E82 atoms in the observable universe.

It bears repeating: SHA256 encryption gives you almost as many possible private keys as there are atoms in the observable universe.

So to guess a private key correctly using current  computer technology, it would take centuries of trying, on average.

In order to build a "regular" password that strong, it would have to be 39 characters long, assuming you're using case-sensitive letters, numbers, and symbols for each character.

(For my fellow nerds: 256 binary options gives 2^256 possibilities. 39 characters with 94 options each gives 94^39 possibilities, and these come out to be close enough to each other to make the analogy useful.)

So, bottom line: guessing crypto passwords really isn't a thing.

Here's the second way to lose your shirt in cryptoland:

Speculation Risk

Whenever you invest in anything, you are hoping for an increase in value, but you are also exposed to a decrease in value.

This is called "speculation."

While the word is used pejoratively on TV and by pols, all investment is speculation.

Most stocks go to zero, and most crypto projects fail.

Even ones that are ethically and earnestly run can fail.

Obviously there are bad actors who mint and sell a bunch of tokens, pocket the immediate cash, and abandon the project without attempting to deliver on the promise.

Some attempt to deliver on the promise for a while, but aren't able to make it work. Most never found a viable purpose in the market, just like most internet ventures in the gold rush days wound up a smoking pile of ruins.

It's important to know that it's usually not possible to know this in advance, so these results are not often due to a moral or ethical failure on the entrepreneur's part. It's just the nature of entrepreneurship. There are millions of ways for things not to work, and very few ways in which they do.

And the value of the crypto token goes toward zero as projects fail to gain market traction.

So when you're investing in a project, you have to do your due diligence, just as you would do when you're considering a stock purchase.

More than 90% of startups fail for all sorts of good reasons, and I suspect the failure rate might be higher in the crypto space, just because of the "gold rush" phenomenon. To build a successful crypto project, you have to have product-market fit -- exactly the same thing any business needs in order to be successful.

This is my twentieth year as an entrepreneur and investor, and I have had my ass kicked enough times to possess a very healthy respect for the risks involved. 

So caveat emptor.

A word on regulation.

In the good old days, which weren't actually very good in comparison to right now, there was relatively little regulation of businesses. Enterprising swindlers could easily stand in the middle of the town square and tout the virtues and endless possibilities of their new venture, which would surely bring fabulous riches to each and every person who had the keen foresight and unwavering courage to invest.

Or something.

Investors handed over money, swindlers handed over a piece of paper representing a certain number of shares in the fledgling enterprise, and both were happy.

Until the swindler pocketed the money, folded up his tent, and skedaddled to the next unsuspecting town.

The high rate of fraud scared away would-be investors, which stifled innovation, progress, and (not for nothing) tax revenue. 

So, urged on by investors, governments stepped in to perform due diligence on behalf of taxpayers. 

Was this a good thing? By and large, yes. Obviously nothing is black or white in the real world, so there are certainly mixed results to bolster any ideological argument you might favor.

But what is undeniable is this: the instances of outright fraud have been decreased to almost nil.

I said ALMOST nil. But that's exactly why frauds make the news: fraud is not all that common when compared to the total number of business ventures that sell shares to the public.

What does this have to do with crypto?

Just this: we're in the early days of crypto projects, which means there are still a lot of hucksters standing on a soap box in the middle of town selling rainbows and unicorns.

But I think it's important to realize that regulation is inevitable, and that it will be both good and bad, but mostly good.

We'll still be exposed to crypto business ventures failing. We'll just be less exposed to fraudsters.

What drives this part of the lifecycle? Outrageous frauds, such as the one that appears to have been behind the FTX collapse. People get pissed, lawmakers get a chance to pretend to be pissed off on behalf of their citizens, laws get passed, bureaucracies stand up to execute the laws, etc.

No reason to moan about it, because we know it's going to happen. Just like lost contact lenses and pets peeing on the carpet.

OK. So now you have almost all the basics.

Protocols and Centralization

As I mentioned earlier, each crypto project is founded on a "blockchain protocol."

This is really just a fancy ledger, with some shockingly powerful implications.

And some very important limitations.

Each of these cryptographic protocols keeps a record of its transactions on what is called a "blockchain." This record is protected cryptographically from external tampering.

Every transaction is part of a public record that can be viewed and verified by everyone in the space.

If, for example, I wanted to go back and slightly change the amount of money I sent to you last year so that I could maybe keep more of it in my wallet, it would instantly trigger alarm bells all over the world.

That's because every few minutes, these crypto protocols package up all of the transactions that have occurred over the past few minutes or hours, and use the information to perform a mathematical thing called "hashing." 

Just like with your private keys, the "hash" for any particular list of transactions is derived from the specific details within the list of transactions.

And the hash corresponds perfectly to ONLY that list of transactions.

If I were to sneak in and just change one tiny little transaction...

The hash for the whole pile of transactions would no longer work.

Everybody would know instantly that there was fuckery afoot, and my fraudulent book-cooking would merely be ignored.

This is the beauty of the blockchain. No outside agent can revise history without everyone else knowing about it nearly instantaneously.

And there's a very clever method of making sure that no one can change transactions that happened a long time ago, either.

When the computers running the protocol for a particular crypto project package up the list of the most recent transactions, they do something cool: they insert the hash (a string of letters and numbers) into the new block of transactions before they run the hashing function. This way, each new block of transactions to be hashed serves as yet another confirmation of every block that has preceded it.

This is effing cool.

So everything's groovy, right? No bad actors can possibly revise history or double-spend their tokens to perpetrate fraud. Right?

Well, not so fast.

It's very hard for OUTSIDERS to mess with the protocol.

Insiders are another story entirely.

With every crypto project except one (Bitcoin is the exception), there is a small number of humans pulling the levers and making the decisions.

Because most crypto projects are companies, and companies are run by founders and officers and managers, and these humans can unilaterally decide to make changes to the inner workings of the system.

If a transaction occurs that these people don't like, they simply pretend it never happened. They issue a new "official" ledger -- kind of sounds like a government edict, right? -- which does not contain the transaction that made the founders mad or embarrassed.

Which is what you sign up for when you invest in a centralized project.

Yes, verifying the cryptographic continuity of the official ledger can be accomplished by any Tom, Dick, or Harriet who cares. 

But the people in charge of the project can put whatever they want to put inside of the ledger.

Even if doing so removes honest money from your wallet.

Happens quite frequently.

So when you buy the tokens issued by one of these centralized projects (Ethereum is the most famous centralized project), you are subject to the whims and fancies of the small number of people who are calling the shots for that project.

Caveat emptor when you're dealing with anything other than...

Digital money.

There is only one protocol that is truly decentralized, and therefore exceptionally resistant to fuckery, and that protocol is Bitcoin.

There is no central authority in the Bitcoin protocol.

The code that runs the whole thing is open-source.

You can download it, change it however you'd like, and deploy it in a computer to help run the network.

EXCEPT that Bitcoin runs on consensus.

There are something like one million computers all over the world dedicated to verifying each transaction by following the instructions in this open-source protocol.

But built in to the protocol is the requirement for consensus. I can make any changes I want to the protocol, but the rest of the network will completely ignore it...

Unless I can convince 51% of the other people who operate copies of this protocol to adopt my changes, too. At the same time.

So I would have a long uphill slog to make any substantive changes to the protocol.

Let's consider the implications:

In order to suddenly "print" a bunch more Bitcoin tokens (I'm talking about Federal Reserve style currency creation), over half a million individual network participants would have to agree at the same time to this inflation initiative.

This would be a difficult uphill battle, because Bitcoin is valuable only due to the fact that it cannot be printed like windshield flyers. It would work against participant's self interest to abuse the protocol by printing more for ourselves, because it would reduce the value of every Bitcoin in circulation, and might even destroy confidence in the protocol entirely.

Bitcoin nodes and miners are in operation all over the world, so consensus-building takes enormous care and effort.

Meanwhile, every other protocol is controlled by a few nerds. This means that while the "official" transaction record is cryptographically safe from tampering, it is NOT safe from manipulation by the central authority that controls it. For example, Ethereum recently made a wholesale change in its governance, which it needed relatively little in the way of consensus from its community to accomplish.

For this reason, here is how I recommend viewing the crypto space:

Bitcoin is money. Everything else is a security or commodity.

"I understand securities -- they're stocks in companies -- but what's this business about commodities?"

Glad you asked. Read on.

Commodities in Crypto

First, a definition of 'commodities' from Va Tech:

"Unlike stocks and bonds, commodities are an important aspect of daily life. A commodity is a basic good used in commerce that is interchangeable with other goods of the same type, and these are often used as inputs in the production of other goods and services. Traditional examples of commodities include grains, gold, beef, oil, and natural gas. Commodities affect the prices of your food, gasoline, plane tickets, jewelry, and the clothes you wear. In fact, the price of your breakfast is highly dependent on some of the most actively traded commodities out there – cereal (corn), toast (wheat), latte (coffee), sausages (pork), and donuts (sugar)!"

Source: https://www.coins.aaec.vt.edu/what-are-commodities/

In crypto projects like Ethereum and Cardano, the underlying tokens are kind of a hybrid between securities and commodities.

Buying the token supports the project, and positions you as an investor who hopes that the project succeeds.

But in these two projects specifically, and in a number of others like them, the token itself is used to "pay for" the execution of a smart contract.

In other words, it costs you ETH tokens to create a contract, NFT, or other asset that is then placed on the ETH blockchain.

 So in this way, the token is also a commodity. It is something that you have to buy in order to create something else with it, much like you would have to buy gold to produce gold-plated audio cables (yes, I'm a convicted musician and audio nerd here...). 

And to bring it all home...

It costs ADA tokens to create an ebook NFT using the Cardano protocol. :)

OK, that's enough.

I'll do another post shortly to 'splain how to actually go about minting your own copy of a highly desirable NFT, such as  (ahem) my recent mint of a special double-volume edition of Books 1&2 in the million-selling Sam Jameson series.

If you'd like to check it out and maybe pick up five or ten unique NFTs for yourself to hold forever as your future nest egg (one hopes :)...

Just head over here.

Until next time...

Lars

Final Shameless Plug: This is another of the AI-generated covers in my recent minting of The INCIDENT. You can click on the image above to check out what ebook NFTs look like over at book.io, and you can also mint or buy your own unique copy if you'd like to support the project and pick up a digital collectible that is meant to increase in value over time.