There are many misconceptions surrounding the world of NFTs. To fully understand how (art-related) NFTs arose we need to look back at the history of tokenization and fungible tokens as a whole. This brief overview was first presented at the Web 3.1 Unconference on February 28, 2022: https://web31.xyz/

1. The Nuances of
Tokenization
A brief explanation on attempts from this past decade

2. Disclaimer
● The views expressed in this presentation are my own and do not necessarily
reflect the views of my employer or any company I advise.
● I am not a lawyer, be sure to speak with a lawyer for legal advice.

3. Background
Before we get to NFTs let us talk about FTs: fungible tokens
Depending on the chain, fungibility for cryptocurrencies (and tokens) can become encumbered via blacklisting. By default, all
addresses / activity on a new chain are “untainted.”
● Ex: Centralized “stablecoin” issuers can unilaterally blacklist addresses (they are not required to whitelist dapps yet)
● Nemo dat and bona fide property (stolen NFTs are sometimes blacklisted from trading platforms like OpenSea, but still
transferable on-chain)
Examples of fungible tokens (with the caveat that governments and exchanges may blacklist certain addresses):
● Unstaked L1 coins (BTC, ETH and hundreds of others)
● Most staked L1 coins (most PoS chains that do not have accountability and/or slashing)
● ERC20 tokens. Note: initially proposed in November 2015, they gained prominence during rise of ICOs in 2017 and are the
most common tokenization standard, not just on Ethereum (via AMMs) but on other chains (BEP 20, TRC20)
Semi-fungible:
● Dapp-based liquid staked L1 coins are fungible with themselves but not with other dapp-based liquid staked tokens (mSOL
versus prtSOL, stETH versus rETH)

4. NFTs
Most promoters, collectors, critics, and haters are completely unfamiliar with the history of tokenization and assume that NFTs are just images
(JPEGs!) that somehow started with Cryptokitties in 2017.
But tokenization on public chains is at least a decade old:
● “Colored” Coins was a term-of-art to describe what several independent teams attempted (2012-2015): to use a discrete amount of bitcoin
and link it to off-chain assets like precious metals, real estate, and other (mostly) tangible property
● Mastercoin (Omni) is (mostly was) a project that used external validators to add functionality on top of Bitcoin using OP_RETURN field (this
is what Tether (USDT) uses on Bitcoin)
● Counterparty is a project that also used external validators to add functionality on top of Bitcoin using OP_RETURN. Some of the first “art”
NFTs launched on it: Spells of Genesis, Rare Pepes. Notable mention: Digital Tangible Gold (held in custody at Morgan Stanley) which was
partially shut down by a Bitcoin maximalist troll.
Why did these early efforts fail to gain much traction?
1. The lack of a widely used neutral protocol standard (e.g., 721, 1155) plagued not just trade lifecycles on public chains but also permissioned
projects
○ And that does not delve into non-technical constraints: what happens to a tokenized financial instrument as it goes between chains managed by different consortia
domiciled in different jurisdictions?
2. Intense difficulty to fuse hooks into off-chain items, especially those in the real world. Some lawyers think the latter – especially as it relates
to DAOs – should be verboten because it opens up participants to an exogenous legal systems (and liabilities).

5. NFTs continued
On public chains, today, tokenization is synonymous with NFTs, specifically ERC 721. This is an imperfect standard that has some usability
drawbacks (e.g., have to individually send one-by-one).
● Collectible card analogy: uniform shapes and size cards evolved over time.
ERC-1155 arose to fix some of these transactional limitations and to enable a token to be: fungible, non-fungible, or even semi-fungible.
What about non-public chain activity?
Every major financial institution in the G20 has experimented with using a blockchain and tokenization in some form or fashion.
Why? Differing motivations although often it is to compress trade lifecycle and reduce intermediaries.
● Note: Dematerialized book-entry securities (at CSDs) are currently not "tokenized" as used in common parlance.
● Project Whitney (DTCC), Onyx (JPM), BSTX, tZero, HQLAx, and more than a dozen have moved beyond experimental phase. Worth
pointing out that some of these could involve into “chain washing.”

6. NFTs are not all the same: a few points of nuance
What is required to generate the image from the on-chain data?
Art Blocks: marketed as on-chain art but require large external libraries to generate the art.
In contrast, SVG on-chain art is rendered by every browser and it is human readable.
E.g., if you read the SVG for OCM, it says: draw a circle at x,y coordinates with radius r, and
fill in with color RGB. Without any external library, anyone could independently recreate the
image.

7. Technical progression for one slice of NFTs over the past ~5 years
Cryptopunks were minted in June 2017. Artwork was off-chain (e.g., used a URL pointer). Was one of the first
projects that created the 10,000 “standard” collection size format.
● Recognizing the value of having an on-chain collection, last year they put the images on-chain.
● Spent the ETH, they can do that because punk images are 24x24 pixels, low amount of data spread across
several transactions (over 73 million gas).
Bored Ape Yacht Club showed how to quickly build a community project with the help of traditional media / PR
companies, but their metadata and images are off-chain.
ArtBlocks: metadata is on-chain but the images need libraries to generate the actual image. Their argument is
that the libraries are widely distributed used by millions of people so unlikely that the libraries will disappear.
Assets fully on-chain: Autoglyphs, Avastars, Chain Runners, Anonymice, OnChainMonkey
Next evolution: only so much can be included on-chain, metadata can be on-chain while larger, higher resolution
images can be on separate infrastructure (IPFS or another chain altogether).

8. Engineering feedback
“Generative art via SVGs can be fun except most collectors generally do not care. And SVG is not
supported by the major platforms yet.
Also: not all generative projects are created equally. This past week a couple of developers showed
off some hobby code on social media but I hope people don't use their github libraries because they
are so wasteful and inefficient. The code was built with good intention but blockchains like
Ethereum are a public utility, and it should not be wasted on inefficient code like the experimental
version they showcased. It would be like I designed a template for you to make a lead-based gas
guzzler SUV: here's a wonderful design for you to easily build a big and loud and polluting SUV! So
the question of, who gets to use it? Unfortunately there are a lot of cash grabs that put a squeeze
on transaction fees and clog up the network.
Another analogy is Mount Rushmore: who gets to carve up this blockchain? Anyone who is willing
to pay? Maybe that is the answer, so then nothing inherently wrong with deploying a contract.”

9. Questions / comments
T: @ofnumbers
E: tim.swanson@clearmatics.com