By: Benjamin Jacob
You’ve undoubtedly heard the hype surrounding NFTs and the massive piles of cash being flung about for the rights to own…well something. But if you’re like most people – you’ve either made a vow to yourself to never understand it or you’re probably still asking – so what exactly is it again?
This is the first in a series of blog posts that will seek to demystify NFTs, smart contracts and the blockchain technology enabling these digital innovations.
One thing is certain – big money is pouring into NFTs from buying and trading NFTs themselves to massive bets being placed by well-known institutional investors on early entrants pioneering the market like Dapper Lab’s NBA Top Shot which recently raised $350 million and is now valued at over $7.5 billion.
Many of these notable transactions deepen the mystery as to what NFTs are and why such exorbitant sums are being paid for them.
From Jack Dorsey’s first tweet selling for $2.9 million
To $208,000 being spent on a highlight clip of Lebron James dunking.
To Christy’s astonishing $69 million auction of Beeple’s digital work, Everydays: The First 5000 Days.
So – what exactly is it again?
An NFT stands for “non-fungible token” and essentially is a unique digital asset whose ownership is tracked on a blockchain via a digital signature – essentially identifying information recorded in smart contracts. The “non-fungible” means it cannot be exchanged in the same way that fungible items can be (dollars, bitcoin, gold,). An example of a non-digital, non-fungible item would be a Michael Jordan rookie card, an original Picasso, or a ticketed seat for a concert event – exchange it and you have something different. An NFT is essentially a one-of-its-kind token used to digitally represent ownership of some kind of asset – and that asset could be digital or non-digital. Most NFT transactions have taken place on the Ethereum blockchain but NFTs can exist on other smart contract blockchain platforms as well.
But how can it be the original?
An NFT is considered the “original” because the NFT is a unit of data stored on a digital ledger (blockchain) – that aspect is what certifies it as a unique digital asset. But this does not restrict copies from being made. The value is very much speculative and subjective in a sense because the value of it being an “original” is truly in the eye of the beholder. So while someone could easily “copy” and reproduce the original with an identical visual representation, they cannot copy the blockchain characteristics of the “original”.
Why NFTs though?
Thus far, we’ve seen images, text, videos, music, and even tweets be made into incredibly valuable NFTs. Essentially, anything digital can be turned into an NFT and the value is driven by speculation of its future worth – it truly is an invention. The most popular and lucrative spaces for NFTs thus far have been in the art and sports collectibles space but experts and NFT evangelists proclaim this is just the tip of the iceberg.
To better understand NFTs, it is helpful to consider that even prior to cryptocurrencies we had digital currencies such as airline miles or credit card points. Similarly, we’ve had non-fungible digital assets since the beginning of the internet – think website domains, in-game video game purchasable items, even social media handles on Instagram and TikTok are all examples of non-fungible digital assets each with varying degrees of tradeability and liquidity. With most of these assets, you really only “own” them in certain contexts and this very question of ownership is the subject of current litigation against Apple over the use of labels “buy” and “rent” when Apple apparently has the ability to revoke access.
NFTs seek to make ownership in the digital world more like ownership in the real world – where you can transfer and hold title to your assets indefinitely and without constraint – by providing a coordinating infrastructure to seamlessly process transactions for this kind of digital “stuff”. In our next post, we’ll examine the attributes of this coordinating infrastructure that make NFTs unique, valuable in investors’ eyes, and create potential for massive disruption for how the world conceives of digital ownership.
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