NFTs, or Non-Fungible Tokens, are almost as popular to talk about as cryptocurrency these days! But where crypto has at least some analogy to the physical world (it’s all about the forms money can take), NFTs are an entirely different kettle of (virtual) fish. NFTs are about establishing a virtual asset that is unique in and of itself and has no interchangeable equivalent.
Coming back to one of my favorite resources, Investopedia, they say:
“Non-fungible tokens or NFTs are cryptographic assets on a blockchain with unique identification codes and metadata that distinguish them from each other. Unlike cryptocurrencies, they cannot be traded or exchanged at equivalency. This differs from fungible tokens like cryptocurrencies, which are identical to each other and, therefore, can be used as a medium for commercial transactions.”
A great definition, but that’s only if you know what “cryptographic asset,” “blockchain,” “fungible,” and “cryptocurrencies” mean. Let’s start there.
- Cryptographic asset: A digitally expressed piece of information that uses cryptography such that it cannot be copied or duplicated
- Blockchain: A technology in many ways like a database that has pieces of itself distributed across the internet that cryptocurrencies use to support their claim of being uber-secure and highly resistant to fraud.
- Fungible: This basically means mutually interchangeable with another item. A dollar bill is a fungible asset—any one modern dollar bill (or bitcoin) is completely interchangeable with another modern dollar bill (or bitcoin).
- Cryptocurrency: See more about this in our previous blog post. We describe crypto “as defined by Investopedia … is “a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend.”
Back to what that means for an NFT: an NFT is a unique digital record for an object. You can buy or sell the NFT, but you can’t make duplicates of it, nor can you change it. And if you do buy or sell it, the original record gets a note that the exchange happened. Every future exchange adds another note, thus keeping the full record of everything that’s happened to that unique digital record.
The technology that enables this is called a blockchain, which as described above is a very special kind of technology that has no single, centralized “home” where all the data is ultimately stored. Blockchains are (often) decentralized, and everyone who engages with that blockchain is part of the process to validate the addition of any new information (or block) to the chain.
Now let’s talk a bit more about what you can do with an NFT. One popular use case is that of artists. Artists create things, but once their thing is sold (and sometimes even before that), they lose all control over that asset. If the asset is resold, the original artist usually doesn’t see any commission. An NFT can serve as a receipt that makes sure that every future transaction gives the artist some additional compensation for their creation. This is a potential game-changer for artists, but it’s not perfect. Here’s where we touch on some of the biggest misunderstandings in the NFT world:
The NFT is the receipt. It is not necessarily the actual item. Someone can create an NFT for a digital or physical object; that does not necessarily give the purchaser the right to have and hold that object. They may just have some percentage of the object or, in more nefarious situations, they may have been sold something the creator of the NFT has no right to actually sell. And for digital objects, assigning the object an NFT does not mean that all copies of that object are magically associated with that NFT.
Think of it this way. You have a photo on your phone that you received fantastic feedback on from your friends when you posted it to Instagram. You decide you want to make it into an NFT so you can sell it. You can do that … but all those copies already out there, which are visually indistinguishable from the original, are not protected. Don’t confuse an NFT with copyright!
That said, you may still have questions. After all, SURELY something that has net a person $3 million US dollars (way to go, Jack Dorsey of Twitter) must be something big! Right? Well, to be honest, I can’t explain that. The problem content creators like artists have when it comes to being fairly compensated for what they do is a problem. And if the world were a fair and reasonable place where NFTs would magically make the assets the NFT provides a receipt for somehow different (like different in appearance, or different in how people might see them online) then maybe this would justify the NFT craze.
Alas, the world is not a fair and reasonable place. Today’s use of NFTs often enters into the realm of the absurd. What many people are hoping for, however, is that NFTs will provide a powerful mechanism in the world of Web 3 to encourage more content creation with fair and enforceable concepts of ownership and compensation.
If you’d like to watch a particularly entertaining skit on NFTs, Saturday Night Live recorded a fun session on it. If, however, you’ve got time and want a really deep dive into a skeptic’s view of NFTs, there’s a two-hour video on YouTube for you. Still, never let it be said that there aren’t some really strong voices out there in favor of NFTs: read about Animoca’s success in the NFT economy.
And if what you’d really like to do is to start investing now, well, as ya like. You might want to talk to your financial advisor.
Photo by Shubham Dhage on Unsplash