What is an NFT? - Everything You Need to Know about Crypto Media and Tokens
When someone wants to learn about NFTs, the first thing they usually ask is...
"What does NFT stand for?"
NFT stands for "Non Fungible Token." But that doesn't give you the answer you're looking for, does it?
In this article, I am going to break down everything you need to know about NFTs. I'll touch on...
why they are important
how you can use them
how NFTs fit into a blockchain
how NFTs will play a big role in our culture and the future
what the opportunities are
Let's get started.
What is an NFT?
Let's repeat. NFT stands for "non fungible token."
In simple English, an NFT is a token or a certification that is created on a blockchain that gives scarcity and uniqueness to digital files.
The best way to visualize this is through an example.
Do You Remember Toy Story?
Of course you do.
Toy Story completely revolutionized the way animation is used in creating movies. One would imagine that the first drawings of Woody and Buzz Lightyear would be valuable collectable pieces of art.
But what about the sketches that were animated? What about those digital files of Woody and Buzz Lightyear? What if you had the "original" .ai files of Woody and Buzz? In theory, that is collectable art too. The problem is that digital media is so easily replicated, there's no way to "prove" that the files you have are the original versions.
An NFT, is a token that proves validity to a digital file.
A non-fungible token is a unique identifier that can not be replicated.
Now, with an NFT, the original .ai files of Woody and Buzz can be certified and given value, because the non fungible token validates them.
The Definition of Fungible
Understanding fungibility will make it easier to conceptualize this.
Fungibility means "able to be replaced by another identical item." An example of something that is fungible is money. If I have a dollar bill, and you have a dollar bill, we can swap our dollar bills and each of us will still have a dollar bill. Even though they are two separate items with different identifying properties, they can be swapped and replaced. The dollar bills are fungible.
Non fungible means exactly the opposite. It means that something has a unique identifying property that can not be replaced or exchanged.
A house is non fungible. Both of us may have a house, but the identifying properties of each house make it so we can't easily swap houses and still be holding the same property.
An NFT, or a non fungible token, allows us to create a digital certification of digital assets to prove it's uniqueness and scarcity. These tokens can be attached to anything, whether that's an image, an mp3 file, a PDF, a video, an animation, or even lines of code.
Digital Media and Instant Replication
Are you seeing where this is going?
Screenshots, social media shares, and filesharing have created an unfortunate situation for digital artists. Digital media can so easily be replicated that it destroys the scarcity.
But an NFT can now verify the "original."
A great way to conceptualize this is through the Mona Lisa. We have all seen the Mona Lisa. There are millions of copies of the Mona Lisa. Every day, hundreds or even thousands of people take pictures of the Mona Lisa, they upload the image files to the internet, and the art now becomes duplicated.
Here's one right now.
In reality, there is only one Mona Lisa. We have verified the original and certified it to be authentic. The fact that there is only one makes it scarce and highly valuable.
An NFT now creates authentication for digital media.
Now, digital artists of all kinds can verify and create value around their media files.
How Does Blockchain Fit Into This?
You don't need to understand the programmatic aspect of blockchain to understand it's relevance in creating NFTs.
A blockchain is a simple concept. A blockchain is a base of code that creates a system in where every node in the system verifies a transaction.
The visualization below is helpful.
So instead of a needing private company or organization to certify transitions, the blockchain does it for you. Every time a new "node" is added to the blockchain, that node verifies the transactions right alongside all the other nodes.
If a block (or a transaction) is fraudulent, than all the nodes shut the blockchain down. The more nodes in a blockchain, the more reliable it is, because every node strengthens it's validity. It is "antifragile."
What we have is a decentralized ledger system that can verify transactions without a governing body being involved.
This is what makes NFTs possible.
Before blockchains, there was no practical way to verify ownership or authenticity of digital media files. But with a blockchain, we can issue non fungible tokens to digital media directly through the internet.
The blockchain that NFTs transact on is called Ethereum.
A Fair Market for Digital Assets
What does all of this mean?
Simply put, it means that digital assets now have scarcity, liquidity, and verification. As a result, digital artists can transact against their digital art.
It's an exciting time to be involved in digital media.
However, the fun doesn't stop there. It only gets more awesome!
Why Would Anyone Want to Own an NFT and Have Ownership of a Digital Asset?
When people first learn about NFTs, one of the most common reactions is...
"Why would I ever want to own a token? I can't touch it, I can't hang it on my wall, what's the value?"
It's a fair question. The main point to understand is that value is subjective. Something you see as unvaluable could have an emotional attachment for someone else.
However, it's also important to understand the reality of the world we live in. For instance, NFTs will play a huge role in digital worlds and digital communities that already exist.
Let's take a look at some examples.
Gaming
Most of us are already living and interacting in digital worlds. Gaming is a great example of this. Esports and gaming industries are already creating an alternative world where we live and make relationships.
In Fortnight, there is an economy built into the virtual worlds. Many of the players already spend money on outfits and in-game tools to improve their avatars. In this context, shouldn't we be able to style our digital selves and improve our digital selves in the same way we do in the real world?
If that's the case, how do these digital prodcts get bought and sold? If someone creates a digital pair of sneakers, and a Fortnight player wants to upgrade his/her outfit in the digital world, how does a buyer authenticate the product if the product only exists in a digital file?
The answer is an NFT.
This is only one simple example of how NFTs will play an important role in the free markets of digital products.
Collectibles
What value do baseball cards actually have? When someone makes the argument that NFTs don't have any practical value, it's important to see many physical collectables that don't have any practical value either.
I suppose in some respects, you build burn baseball cards to create energy, but for the most part I think we can all agree that baseball cards are valuable because we have collectively decided they are valuable. The market around rare cards is subjective only to the scarcity and emotional attachment that we put on them.
In this scenario, what's to stop Topps or Magic the Gathering from start publishing their cards online. As NTFs, the cards could be verified and authenticated in the same way that physical baseball cards are.
Collectors could keep their cards (or NFTs) in their own digital wallets and store the cards online in the same way that collectors currently store cards in display cases or even in boxes in the basement.
From a practical standpoint, it's the exact same thing. The only difference is an NFT is not something you can hold in your hand or put in a case, but the value of the card remains the same because the NFT provides scarcity and authentication for the collectable item.
Digital Art
Digital art means more than photoshop and digital photography.
There are memes that have gotten billions of impressions and have been copied billions of times.
Everyone knows the "success baby." This meme has impacted our culture. The success baby has been seen by billions of people. Companies have used this meme in ads, as social posts, as marketing, or even as a joke in their digital circles.
The success baby is a big deal.
There's no reason to think that memes, tweets, GIFs, animations, mp3 files and digital files of all kinds won't become more inundated in our content obsessed society.
A great example I love to see is a recent essay written by Bobby Hundreds.
Bobby Hundreds is a prolific writer and founder of The Hundreds which is a world famous streetwear brand. He minted his recent essay on NFTs and cypto media and put it on the open market.
He sold his essay for 2 ether (a cryptocurrency) which at current market rate, is $3990. (As of 2/20/21)
Bobby's essays have been shared millions of times across the world. Why wouldn't the original copy of his essay hold value?
The fact that it's digital doesn't negate the value of the ideas and the words that he created.
At the very least, NFTs give artists a better way to monetize their art. NFTs create an open market that provide value, transparency, and verification of transactions and ownership.
In fact, in the three days it's taken me to write this article, Micah Johnson just sold his NFT artwork for $1.4 million dollars.
https://twitter.com/ShaanVP/status/1363566573714239488
It's very exciting.
Current Examples of NFT's
We already went through how NFTs will create a new market for digital art. This market place is becoming more liquid and is growing.
But let's give some examples of NFT's that have already created thriving market places in other emerging industries. These examples will open your mind to the possibilities of digital tokens and digital products.
CryptoKitties
CryptoKitties was the first project to take NFTs to the mainstream.
CryptoKitties was an on chain game that allowed users to breed digital cats together, which in turn, would produce new breeds of cats. Each of these digital cats had their own variety of scarcity.
As new cats were bred, they each were created with different variations of varying rarity, which created a marketplace for trade and even created a secondary market.
Since the cats were transacted on the blockchain, each new cat could be verified, traded, and sold. The game even created an in game breading algorithm that determined the random genetic code of the cats. These were called (wait for it..) cattributes.
At one point, the trade of CryptoKitties became so liquid, it shut down the Ethereum blockchain, because Ethereum is only capable of handling 15 transactions per second.
Cleary, there was a market for CryptoKitties. And for good reason. Just look at these cats. They're adorable.
Gods Unchained
Gods Unchained is a digital card came where players can collect cards, build decks, and formulate strategies to play against each other.
Much like physical competitive card games such as Magic the Gathering, or Pokémon, the game has third party marketplaces that allow players to trade and purchase the cards from each other as NFTs.
As new cards and expansion packs are "released" into the open market, the secondary market of players trading and selling the cards to each other is possible because of the NFTs associated with each card.
Without NFT's, people could easily duplicate or create their own cards. But NFTs provide the authentication process.
Other Experiments
Most of the NFT market has existed as digital art, video games, and playing cards, but we have also seen organizations try new ideas.
For instance, NFT.NYC has sold tickets to events as NFTs. This allows them to sell tickets on the blockchain without needing to create paper tickets.
Also, Coin.Kred released an "NFT swag bag" for the event.
The Future of NFTs
Digital art and digital collectables are the obvious examples of how NFTs will become a part of mainstream society. But as you start to conceptualize how NFTs can legitimize digital content, the world starts expanding.
For instance, who is to say that there won't be virtual art museums that we can all attend through augmented or even virtual reality. When we live in virtual worlds, who owns the real estate of these worlds?
If you are going to an art museum in an augmented reality, NFTs allow art curators to lease or purchase digital art and display it at an event. The ticket prices for these exhibits will exist in the same way the do now.
Taking this one step further, as our virtual worlds continue to grow, how do we start to divvy up the real estate in these worlds? If I am a programmer and I create a virtual world that becomes very popular, what's to stop me from creating NFTs around different zones of land in my virtual world and selling it to virtual real estate developers or even leasing it to virtual business owners?
Once you see how NFTs create an entry point for digital content, the possibilities start to expand. In the future, it's unreasonable to think we will see entire industries form around NFTs and blockchain within virtual and augmented experiences.
Some examples could be...
NFT fashion lines for digital characters and avatars
NFT weapons for gaming or even self protection in digital worlds
Virtual marketing agencies that can sell ads and design space with blockchain transactions
You name it, we can now create it with NFTs.
As our lives become more and more "lived" within augmented reality and gaming ecosystems, the competition for digital land and digital real estate with heat up.
This will create an open market and NFTs are a quintessential part of this new futuristic world.
A Simple Example
When I think about the growth of our creator economy, I often think of its correlation with abundance.
We talk a lot about robots and AI taking over the work force, but it is my belief that as our day to day needs are met through robots and automation, the markets for creative work, digital experiences, and digital collectables will increase.
New liquid markets will emerge, and as they do, more jobs and income streams will be created.
When I close my eyes and imagine a world 30 years from now, I can visualize a scenario.
My child is living somewhere on the other side of the country. He/she and I book a date together in virtual reality. We jump into the VR world and we have a great day. We go into different stores and look at art pieces, clothing, books, and other goods.
We participate in the local virtual economy in the same way we do now.
Since the blockchain can verify all the items as being unique and verified, I can transact upon these virtual goods with trust and currency.
I am then able to store the products I bought in some kind of virtual wallet, where I can either use them, sell them, or trade them in the same way I do do now with current fiat currency.
In Conclusion
New ideas seem strange to us when we first hear them. As I've been explaining NFTs to people, a common reaction is "that sounds weird."
I am reminded of an experience I had when I was 17. In high school, I played base for a relatively successful local band in Philadelphia. We would play shows every weekend and even toured parts of the east coast.
As we were sitting around brainstorming ideas to market ourselves, our lead guitarist said that we should spend more time building our MySpace page. (Yes you remember MySpace).
My exact words were "that sounds weird."
Today, most of the music industry is created by individuals on digital music platforms like YouTube and Spotify. We will only become more and more digitized as time goes on. As these new digital worlds expand, there will obviously be an open market for digital goods.
These digital goods will have value. They will be high dollar investments. It's an absolute certainty.
Creative work is the future and NFTs are just the beginning.
What a time to be alive.