Background on Crypto Currencies and ScaffCoins

 

Scaffies community member and artist Madeira Desouza had some questions about ScaffCoins and their potential use.
I think others might benefit from this as well for their understanding of crypto; thus it is shared here. — Brandon (volunteer admin, Member #1)

Remember, Remember, the Fifth of November: we are a not-for-profit global community.
Our community ScaffCoin is meant to be used between members only, for M/M ballbusting-related “stuff”.

  • General Understanding of Cryptocurrencies
  • What is the “Value” of ScaffCoins?
  • Can we have “Non-Fungible Tokens (NFTs)”?

 

Question: Understanding of Cryptocurrencies in General

“I am interested in learning more about cryptocurrency. I have read some online explanations, but somehow what I’ve read has not resulted in elevating my understanding about the desirability of using cryptocurrencies. Nor do I share in the excitement that I know many have regarding cryptocurrencies.
I see Western society as having two groups of people–consumers and those who create goods/services/products to attempt to sell to the consumers.
It’s all about sellers and buyers. I understand how buyers all around the world find cryptocurrencies exciting. But how can sellers share the same feelings of excitement about cryptocurrencies as buyers do when it seems that the decentralized system of cryptocurrencies setting the prices happens in an apparent decentralized way?”

 

Answer:

I think you oversimplify the current situation, and thus miss a decisive point. When you say two groups of people — consumers and those
who attempt to sell to the consumers” you leave out the middlemen, who sit between those groups (also, there are B2B and B2C markets). So there are
really three parties involved.

These middlemen play a critical and controlling role: as a practical example for a US seller, a middleman such as Visa or MasterCard will simply reverse charges if a buyer so claims, leaving you with the loss (it is nearly impossible to reverse a buyer’s dispute, as granting it runs counter to the middlemen’s interest — it is different for a non-profit with donations: those disputes are always reversed, and happen rarely in the first place). In the event you accept a fraudulent credit / debit card as a merchant / seller, and allowed the buyer to swipe the card rather then ‘stick & PIN’ it, the middlemen such as Visa and Mastercard will not carry the loss, but stick you, the seller, with it. These rules are made by the middlemen, and particularly in the US reversing charges and CC fraud is a huge, multi-billion dollar problem (~$35 bn / year … since we depend still on ancient card-swiping, which is extremely easy to manipulate and ‘skim’ off ATMs, self-service stations such as gas pumps, and Point-of-Sale terminals — you, the merchant, pay for all the chargebacks, and pass it on to your customers with higher prices; we all pay for the fraud losses, because the middlemen sure do not eat them).
Speaking of ancient systems: in the US, we use still paper “IoU’s” (aka “checks”) which are extremely easy to falsify (and happens a lot!). The aforementioned middlemen nor law enforcement seem to have a real interest to protect sellers or buyers from this fraud:

“We Infiltrated a Counterfeit Check Ring! Now What?”
30 JUN 2021 — Imagine waking up each morning knowing the identities of thousands of people who are about to be mugged for thousands of dollars each. You know exactly when and where each of those muggings will take place, and you’ve shared this information in advance with the authorities each day for a year with no outward indication that they are doing anything about it. How frustrated would you be? https://krebsonsecurity.com/2021/06/we-infiltrated-a-counterfeit-check-ring-now-what/

It is nearly impossible for sellers to have a two-way, secure (!), and direct transaction between sellers and buyers, with the exception of in-person and in-cash (dollar bills) transactions.

The general concept of blockchains and cryptocurrencies establishes a system, in which middlemen do not exist. Instead there is an automatic consensus method, which has open rules (so everyone can understand how and by which rules it works). When a transaction between a seller and a buyer is initiated, this consensus in a decentralized network validates the transaction (valid participants, enough funds, etc) and then executes it, basically taking the funds from the buyer and transferring it to the seller. This transaction is then documented in a transparent ledger, which cannot be falsified, and is visible to all. In the network, buyer and seller wallets are pseudonyms, meaning everyone can “see” which wallet transferred how much and when to which other wallet, but do not know who owns the wallets. These transactions are always direct between two parties, and the parties do not need to trust each other (it is guaranteed by the decentralized network and the consensus protocol). The transaction can also not get reversed (never charged back), once completed and written to the ledger (a ledger = chain of record blocks, which also provides an instant, 100% accurate and trustworthy audit — ‘bye bye’ to the likes of Enron, WorldCom, and Wirecard frauds, certified by Anderson Consulting = Accenture, EY, KMPG, Deloitte, and such outfits).

Decentralization means many different participants operate the network (by way of nodes), in return for small rewards to cover their costs and allow for a small profit (incentive), meaning so many different network nodes cannot be manipulated, allowing the consensus to work without interference.

This is the reason there is so much hype and excitement about blockchains — and cryptocurrencies, which run as one application on top of them.

You can compare this to the early Internet, when some people recognized this new technology is so revolutionary, it has to succeed on a wild scale; this started happening in the mid 90s, and people born after the millenium cannot even imagine a life without the Internet (ask any teenager). And: the Internet is fairly simple, “only” giving open standards to data transportation (TCP/IP), email exchange (SMTP), and then, a little later, also data pointers (URLs and HTML).

Blockchain goes MUCH further than this, and gives us (open) standards for programmable money, open-rule-book funds and assets transfers, immutable ledgers, no middlemen, and much more. It is not too far-fetched to say, that a future generation will also feel a life without blockchains is not imaginable.

The simple ScaffCoin value transfer form.

So, to bring it back down to the simple ScaffCoins: transactions between members here with ScaffCoins are a very simple way of participating in this revolution, and having direct two-party value exchange without a third party involved. At this stage, what we do is extremely simple – and obviously not decentralized at all (outside of our means), and the consensus mechanism is equally simple (transfer from one wallet to another, the only rule is basically check for sufficient available funds). The generation of the coins is also equally very simple (see the chart).

In essence, ScaffCoins are the same as all the big cryptocurrencies with huge decentralized networks: within this system, there are only direct exchanges between two parties, “the system” (i.e. the Scaffies server, volunteer admins, etc) cannot control transactions, and anyone outside the system (who has no access to the ledger, i.e. view of all the ScaffCoin wallets) has no idea which trades have been done within the Scaffies community. Obviously, this is still in a very early stage, but you have to start somewhere. SCAFFCON58 also had a topic of ScaffCoins and their potential uses — however, it showed the guys are more interested in balls than thinking ahead, and prefer for the volunteer admins to come up with ideas of uses and applications.

How can this be practically relevant to Scaffies? Here is a simple example: you make your membership donations here with your credit or debit card, or buy a Visa / MC gift card. Except for the last, we go through several steps to protect your privacy: picking a processor (Stripe) who only needs number, expiration date and CVC on the card, but not name or address; calling the carge “3MD” and not “Scaffies Donation”, and so forth. We have had that exact problem with middlemen before, when we used Josh’s PayPal account for the donations for the first years, and then, on October 29th, 2015, PayPal suddenly felt Scaffies is “adult”, and stopped processing donations overnight — what better example to show middlemen (aka “PooPal” since) controlling your funds? What if you were able to buy ScaffCoins (or other cryptocurrency) elsewhere instead, and use them to make the donations for your membership and membership upgrades? Nobody would know you bought them, and nobody knows what you are spending them on.

And thus, with cryptocurrencies, nobody can object to, intercept, or tell you what you can spend them on or not (such as “adult” services, as defined by large corporations: banks, payment processors, smartphone app store operators such as Apple and Google, etc) as they can and do with your middle-men payment options (try to donate to Wikileaks via Visa, Mastercard, or PayPal …). Ask @SparkieShock how many times his income stream has been yanked from him on several different platforms, for not meeting “moral” compliance standards (i.e. being too “adult”). Ask Pornhub the same question? (Visa and MasterCard stopped all payments to them, based on some unproven allegations). You may have encountered it yourself, accepting payments for your artwork via the usual middlemen (Visa, MC, PayPal, etc).

 

 

Question: The “Value” of ScaffCoins

“I do not know how an artist can use crypto such as ScaffCoins without having some say over the value of his art to buyers in the marketplace?”

 

Answer:

Well: who determines what a US Dollar is worth? (a rhetorical question, answered below)

We cannot just set a random value for a ScaffCoin (aside from setting a value being highly illegal and in violation of SEC rules, as it would represent a security in their view!).

Instead, the value of such an “value exchange instrument” as ScaffCoins is determined by what someone is willing to pay for it. As an example I have mentioned the “pizza moment” for Bitcoin in 2010. It is a short read with illustrations (no point in me repeating it all here): https://bitcoinpizzaindex.net/

The actual 2 large pizzas bought on on May 22nd 2010 with 10,000 Bitcoins!

In essence, in 2010 someone offered 10,000 Bitcoins in exchange for two large pizzas. Someone else felt this was an appropriate “value”, got two large pizzas, and exchanged them for the 10,000 Bitcoins. This very simple exchange established a “fiat” (US Dollar) value to Bitcoin: 1/10,000th of the price of two large pizzas (if 2 such pizzas cost $20, then the ‘value’ of 1 Bitcoin was established at US$ 0.002 on 22 MAY 2010). With this value established, others woke up and concluded: “oh, I would exchange (buy) an Italian meal in exchange for x-amount of Bitcoin” etc. Thus a market with demand and supply was established, and the value of Bitcoins changed accordingly. As you know, 11 years later, 1 Bitcoin is currently worth US$35,000 (and was at some time a few months ago over $60,000 — there is fluctuation, with the long-term tendency to go way up).

CryptoCoins are a method of value and asset exchange. This works differently from what you have been used to all your life, which is “fiat” money. ‘fiat’ is Latin and stands for “so be it” (aka “I have faith in it — because I have to believe and have no other option”). Since US President Nixon’s decision to decouple the US dollar from gold (the “Nixon Shock” – the unilateral cancellation of the direct international convertibility of the US dollar to gold) in 1971, a system of national ‘fiat’ currencies has been used globally. While Nixon’s actions did not formally abolish the existing Bretton Woods system of international financial exchange, the suspension of one of its key components effectively rendered the system inoperative. It established the rules for commercial and financial relations among the United States, Canada, Western European countries, Australia, and Japan after the 1944 Bretton Woods Agreement. This system was the first example of a fully negotiated monetary order intended to govern monetary relations among independent states. While Nixon publicly stated his intention to resume direct convertibility of the dollar after reforms to the Bretton Woods system had been implemented, all attempts at reform proved unsuccessful. By 1973, the Bretton Woods system was replaced de facto by the current regime based on freely floating fiat currencies (a type of exchange rate regime in which a currency’s value is allowed to fluctuate in response to foreign exchange market events).

“A fiat currency is a national currency that is not pegged to the price of a commodity such as gold or silver. The value of fiat money is largely based on the public’s faith in the currency’s issuer, which is normally that country’s government or central bank.” (Wikipedia)

So you can say, cryptocurrencies are based on a market value established by supply and demand; while fiat currencies such as US Dollars, Euros, Yen, etc only have the value assigned to them by central banks, and the users of such currencies having to believe in them (while such governments / central banks just keep printing “new” money as they please, and do the same by piling on new debt by issuing “bonds”, which are also fiat money created out of thin air; and the middlemen commercial banks create fiat money out of thin air by lending: they only have to have a small amount of own capital, to lend out many multiples of that — these multiples have no value to make, but instantly become ‘real money’ as soon as you receive your loan in your digital bank account. In that way it is absolutely true that a banking license is the licence to literally ‘print’ money).

You may also recall the first cryptocurrency (Bitcoin = BTC) was invented as part of Blockchain in 2009 and as a direct result of the 2007/2008 financial crisis, in which the middlemen (banks) did high-roller gambling with securities and creative debt packages, which then went totally sore, pulling entire markets and financial systems into the abyss.

The idea behind Bitcoin (and the underlying blockchain technology, which takes the middlemen out of the equasion, too) was to introduce a totally different financial system, in which there is no inflation: the amount of currency (Bitcoins) is limited (to 21 million). Once all 21 million Bitcoins have been “mined” by approx the year 2140 (created by complicated math operations in the distributed network, meaning created through hard and calculable, rule-based work, and *not* created out of thin air like fiat money), there will be no more. To keep it usable, Bitcoins can be split into very small increments (many digits behind the comma, down to 1 “Satoshi”). This concept convinced a lot of people, and by now (2021) Bitcoin is the largest bank in the world (by market capitalization, and by number of customers = wallets), yet nobody “owns” it.

So, thinking of a cryptocoin the same way as you think of a US Dollar (or Euro, or Yen, etc) simply does not work — it is an entirely different concept and system. I know it is hard at first to grasp this difference.

So you have noticed that it is really hard to get guys to spend fiat money on your art, services, and products — even when you are asking for only small amounts (such as $2 a month). We experience the same in trying to convince guys to donate $5 a month for the rich services and content Scaffies provides…. it is and remains an ongoing struggle.

So when you contemplate exchanging your art for ScaffCoins, you should obviously not think in terms of “I ask for US$2 for the same thing, how much is that in ScaffCoins?” but in terms of what would the guys do for it to earn x-amount of ScaffCoins so they can buy your subscription, art piece, etc.

When that guy (Laszlo Hanyecz) in 2010 came up with that number of 10,000 in Bitcoins to offer in exchange for 2 pizzas, he likely kept in mind how easy / hard it was to create these coins with his computer in the early Bitcoin blockchain network. And he obviously felt, what he did to get 10,000 was worth 2 large pizzas to him (not what those cost in US$). He probably had no idea, that by making the offer, and someone actually accepting it, he initiated the creation of a “reference value” of US$0.002 for 1 Bitcoin at the time.

The same is true for ScaffCoins. It is very analog to the Bitcoin idea. ScaffCoin was created originally to reward the guys for their activity here (to allow something in return for those who engage and contribute, versus all the “lurkers & jerkers” who just consume). In Bitcoin, the people who operate the nodes get rewarded for their activities, too, and through those activities coins are created. In Scaffies’ case there is a chart of how many coins are created through which activity.

ScaffCoins have (not yet) such a pizza “reference value” assigned to them. This will happen sooner or later, when *someone* says “I will accept x-amount ScaffCoins for this service or good”, or someone else will say “I give you x-amount of ScaffCoins if you do this or give me that”. Whatever gets exchanged, also has some fiat value to it in US$ … and that then instantly creates this “reference value”, so you can start counting your ScaffCoins by the fiat value they then represent, and keenly follow the changes of that reference value over time.

* I use the Bitcoin example above (and not one of 1,500 other cryptocurrencies), because it is the first and the most successful one

 

Non-Fungible Tokens (NFTs)

 

Question: Can We Have Non-Fungible Tokens (NFTs)?

“I wonder if Scaffies would be able to provide me (or other digital artists) with the capability to offer *individual* *unlockable* digital assets (MP3s, MP4s, PDFs, JPGs, PNGs, GIFs) for which potential customers could use ScaffCoins? I am thinking along the lines of DAZ’s NFT info?”

 

Answer:

“A Non-Fungible Token (NFT) is a unit of data stored on a digital ledger, called a blockchain, that certifies a digital asset to be unique and therefore not interchangeable. NFTs can be used to represent items such as photos, videos, audio, and other types of digital files.” (Wikipedia)

NFTs would certainly help making art unique and prevent copying.

We have not looked into NFTs here — as you know, we still have to explain what cryptocurrencies are (see above), and how ScaffCoins fit into it all.

Each blockchain has their own implementation for NFTs – they are not standardized. We use a simple ScaffCoin here, without a distributed network or a digital ledger – so in order for us to even contemplate NFTs, we would need to set up this kind of infrastructure. While we refer to ScaffCoins as a “cryptocurrency” (to make understanding easier), it is neither ‘crypto’ nor a ‘currency’; but a ‘value exchange vehicle’ within the community, which at some point in the future may have a ‘reference value’ as discussed above.

At this point I don’t think we (as a not-for-profit community) have the resources to dive deeper into NFTs, to see if and when we can make an offering with the technology to the community. We have no paid staff (all administrators are unpaid volunteers) and our funds come exclusively from member donations: there is no money to spend on such elaborate programs like commercial DAZ (which you mention in your question) can set up for their customers.

Surely, we are open to it, and may at some point in the future also make content on Scaffies unique through NTFs.

 

More tidbits on NFTs:

Bargain? World Wide Web’s source code NFT sells for $5.4M at Sotheby’s
01 JUL 2021 — The source code for the World Wide Web has been sold by the inventor for $5.4 million.
https://cointelegraph.com/news/bargain-world-wide-web-s-source-code-sells-for-5-4m-at-sotheby-s

Twitter ‘dropping NFTs all day’ in nonfungible token giveaway
30 JUN 2021 — The social media platform is giving away 140 free nonfungible tokens to 140 followers in a series of tweets that began on Wednesday.
https://cointelegraph.com/news/twitter-dropping-nfts-all-day-in-nonfungible-token-giveaway

Twitter CEO Jack Dorsey keeps saying ‘no’ to Ethereum
01 JUL 2021 — Despite Twitter releasing 140 NFTs on the Ethereum blockchain, Twitter’s CEO continues to reject the altcoin as an investment.
https://cointelegraph.com/news/twitter-ceo-jack-dorsey-keeps-saying-no-to-ethereum

 

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