Proof Of Work

I’ve been observing Bitcoin for a few years now, and I think understand what “proof of work” is in that context — the electricity expended in order to secure the network. If that sounds abstract and technical, that’s because it is. At least it was to me until a couple years ago when I wrote my piece on NFTs as collectibles, compared them to baseball cards and had a realization: artificial scarcity, i.e., scarcity without proof of work, is a scam.

Anything made rare by fiat, i.e., decreed so by law or code or by a person or organization, is only apparently scarce. I can digitally certify anything as an NFT, and it will truly be the only one certified as such, but I can do one every minute for the rest of my life. A million unique objects individually but collectively as common as snowflakes in a storm.

Consider when you get *any* hand in poker, lets say, 7d, As, 10h, 2c, 4c, that is four times more rare than a Royal Flush of which there are four versions. Oh my God! I can’t believe I got exactly 7d, As, 10h, 2c, 4c! The odds against me getting that specific hand were massive! Wow, crazy you got that hand. I can’t believe I got Ks, Kh, 10d, 4s, 5h! The odds you would get your specific hand, and I would get mine are unfathomable! Let’s see what everyone else got. This is a historic night in the history of poker!

Scarcity and uniqueness cannot simply be whatever garbage we designate as such. There must be a basis for distinguishing the Royal Flush from a randomly scarce hand, in that case because the patterns align — all the same suit, the highest cards and in order. As humans we appreciate pattens, rather than the specific (and more rare) random hands mentioned above.

Likewise with collectibles and art, there are general principles that make them valuable, even if the specifics are often hard to identify prospectively. For baseball cards, for example, enduring over time is a big part of the appeal. Cards from the 1950s and 60s are typically worth far more than those from the 70s and 80s. They have dwindled in supply over the years, and they have “proof of work” so to speak in surviving the decades intact while many of their copies have not. Of course the quality and popularity of the player is important too, and his importance in baseball history.

Art is more complex, and I know next to nothing about how it’s valued, but based on these principles I’d much rather take my chances with old masters than expensive contemporary works that might yet fall out of fashion. The old masters have proof of work, so to speak, surviving the test of time, while the new ones are just hot in the moment.

But this concept of unforgeable proof of work applies even more broadly. A resume is list of work, but a portfolio is proof. If you were looking to hire a writer, would you rather read his resume or his Substack?

Proof of work (whether one uses that phrase or not) is deeply connected with our conception of what’s valuable. “Hand-made,” “hand-crafted,” usually signal products that are more expensive because of the attention that went into them. “Farm to table” food signifies a chain of custody that eliminates the high-volume, low-quality middlemen, during which freshness is lost.* You will never see a restaurant chain with Michelin stars. Once a process is replicable or automated, it becomes a volume play, something more utilitarian than unique.

*(Of course, designations like “hand-made” and “farm-to-table” can be watered down into meaninglessness too.)

Scams are the opposite. They are made to appear like proof of work, but there is no work, except in the presentation. Think Bernie Madoff showing fake 12 percent, risk-free annual returns, or a hedge fund that bet big and won with other people’s money, using that gamble gone right to recruit new investment. Computer models from markets to covid spread to climate change present themselves as rigorous and scientific, but it’s all salesmanship — quality of track record over time is the only possible proof of work for such endeavors, bells and whistles notwithstanding.

. . .

It’s no wonder then that since I first drafted this piece in early 2022 that NFTs have gone nearly to zero, and the US government has had to precipitously raise rates to stave off inflation from printing so much money over the last few years. The things you can create with a wave of a wand or the stroke of a keyboard can only retain value in the short term, on account of a collective delusion, a tacit agreement not to notice the Emperor is naked, and, even better, not to notice you’re not noticing. Unfortunately, someone always notices, word spreads, and like Wile E. Coyote looking down after he’s several feet off the cliff, it’s too late.

Proof of work is when the coyote looks down, sees he’s standing on the steel girders of a bridge and keeps running.