NFTs - A Quick Guide

You have probably come across this term several hundred times by now, especially if you have been following any of the craze that has been happening around Cryptokitties, Cryptopunks, Beeple’s Everydays, or a bunch of musicians selling their work as NFTs. Before we dive into what exactly they are and how they work, it is crucial for us to understand one thing.

NFT stands for non-fungible tokens meaning that they are unique and can only be used once. Note that they are a part of blockchain technology and not collectibles.

This means that they function as stores of collectibles, but they are not pieces of art themselves. Now that this basic understanding is out of the way, let’s dive in.

NFT - A Primer

An NFT is like a cryptocurrency, but the only difference being that it does not have an inherent value like other cryptocurrencies do. When I generate an NFT, I am actually minting (read: creating) a token on a blockchain (in this case, Ethereum). This token can further point to an asset (physical or digital) that exists in the real world. We must emphasize the word point.

Let us say that an artwork is an NFT, or a house is an NFT. What we mean is that the important information/documents that verify ownership (of an asset) or access (to the house) are stored somewhere safe (say on an encrypted website), and access to that website is stored in an NFT. So, what a non-fungible token is is nothing more than a piece of data that gives you (if you are the owner of that token) access to whatever asset that the token has information about.

Let’s assume Alice was to create an artwork, upload it on a safe website, and then create an NFT for it. The NFT has the information about where that digital asset is stored on the Internet. So, when she sells it to Bob, Bob can easily get that artwork.

But what makes a token unique? This is where fungibility comes in.

Fungibility vs Non-Fungibility

When we say something is fungible, we mean that it can be easily exchanged in return for something else. So, let’s say that you have a dollar note. You can easily exchange your dollar note for a dollar note from Alice. This is because all dollar notes are fungible and carry the exact same value.

However, NFTs reside on a blockchain, which means that they have a unique address (read: position) on the blockchain. Because each token has its own unique position, it cannot be replaced by any other token. This makes the NFT truly unique.

But wait, can someone not copy the artwork that the NFT points to and claim that it is their own artwork? Yes, they can. But this is not possible with NFTs.

Smart contracts

This is where smart contracts come in. A smart contract is nothing more than a piece of code that has information about the ownership of NFTs. Written explicitly in the code is information about who the creator of the NFT is along with who the owner of that NFT is. Remember, there is a crucial distinction between the creator and the owner.

It can further have information about how that NFT can be further used. For instance, if Bob wants to further sell Alice’s artwork, he can write about the permission for re-sale from Alice and encode that in the smart contract. This will ensure that both parties are in agreement about the reselling of the asset.

Does this mean that NFTs can literally point to anything?

Different Types of NFTs

In theory, NFTs can literally be anything like digital artwork, a house, a car. So, you can consider them to be both physical and digital assets. Obviously with physical assets like houses and cars it is a tad difficult in understanding how the agreements about sale and re-sale would be encoded. However, they can be of various types.

Games

Cryptokitties is the first NFT game where you can breed virtual cats and sell them online. Several cats have sold for hundreds of thousands of dollars. They were launched in 2017 and ever since there have been various different types of NFT-based games.

In fact, there are several different types of computer games where virtual assets like skins, mods, or even weapons can be converted into NFTs and sold as such.

Cryptopunks are also quite similar with the only difference being that they are not a game, but simply a collection of various pixelated figures that are considered to be the pioneers of the cryptoart movement.

Art

Art-based NFTs are more of a recent phenomenon. They boosted into popularity in early 2021 when the sale of an artwork called Everydays by an artist called Beeple sold for over $60M. This helped introduce the mainstream media to the concept of NFTs and cryptocurrencies, which was until then restricted to users from within the industry only.

Ever since then, there have been various different artists who have sold their work as NFTs. For instance, Kings of Leon recently sold their album as an NFT and were in fact the first musical artist to do so.

Physical Assets

NFTs can also be physical assets. The founder of TechCrunch sold their apartment in Kiev as an NFT. This, too, was the first time that an actual physical real estate asset had been sold as an NFT.

Are NFTs useful?

In a sense, yes. Artists have praised the technology because they have been able to make a fortune by selling their art as NFTs. While some have considered this to be nothing more than a bubble, NFTs have thus far proven themselves to be quite useful because of their non-fungibility. Imagine what they could do to supply chain traceability, for instance. They are a revolutionary piece of technology, although they are still not as mainstream as one would hope them to be.