NFTs, What Are They and What Are They For: A Guide for Non-tech Users Part 1
Introduction
I heard about NFTs a long time ago, I don’t remember exactly when, probably around 2017. I was reading about CryptoKitties and all the various use cases for NFTs in the entertainment industry. I have never played blockchain-based games, such as the digital CryptoKitties, or nor invested in any NFT, but that’s OK. In hindsight, it is clear to me that a lot of those things were indeed quite valuable, but they were also hard to secure, so I considered them risky investments. Now that NFTs are becoming mainstream, I decided to take a closer look at them and write a blog series on this subject.
Because this topic is extremely complex and there is a lot to be said, I decided to divide the text into several parts:
- Part 1 — in the first part I will explain what NFTs are;
- Part 2 — in the second part I will go through some interesting use cases;
- Part 3 — in the last part I will list some of the legal and technological issues NFTs have (or seem to have at the moment).
NFTs in the larger context of the blockchain technology
Have you ever wondered how this recent Cambrian explosion of blockchains is going to change the World? Many of us have probably seen press releases about this bank, or that bank using blockchain. Despite that, I am not sure if anyone has seen any improvements in the speed of wire transactions or, similarly, a decrease in the number of declined card transactions / fraud instances. Maybe it is too early, and we need a few years to see any drastic changes in the banking industry. Who knows?
Blockchain has been in the news in the last couple of months as the technology behind crypto-coins like Bitcoin and Dogecoin (Elon Musk’s favourite), but recently, the news has been slightly different.
After reading in the mainstream media about how artists and game developers are finding new ways to sell their artwork for crypto money, I must admit, I am amazed by what’s going on. It might indeed mean that blockchain is really changing the art and gaming industries. Whether that’s for better or for worse — it’s much too soon to tell. Of course, here I’m talking about how everybody and his mother seem to be minting NFTs nowadays. Maybe not quite everybody, but the list, which will be described below, seems rather long for an immature, yet-untested technology.
So, just what in the world are NFTs?
Well, obviously we are talking about an acronym for something and, as you might have seen on Google, NFT stands for:
Non-fungible tokens.
That, to me, if I think about it, doesn’t really explain what is actually happening here, so let’s get into the nitty-gritty or, should I say, let’s get into the crypto-kitty … subject.
What does the term non-fungible (or fungible) mean?
Well, think about the banknote that you have in your wallet (get one if you don’t have one, you should never rely fully on bank cards).
If one day, let’s say, you end up losing this banknote somewhere outside, you might feel a bit sad about the misfortune…
… and if, on the same day, though an incredible turn of chance, you find another banknote of the same value, dropped by mistake by someone else, you will feel like nothing happened. The same amount is back in your pocket, isn’t it?
That is because the new, found banknote functions for commerce, in exactly the same way as the one that you lost. They are mutually interchangeable.
This means that banknotes are fungible.
Now, let’s imagine that you are from the US, and instead of your 10 Dollar banknote, you find, or receive from someone, a 10 USD bill signed by no other than Keith Allen Haring, the famous pop-art artist from the 80’s, then suddenly you will be feeling like a walking-fine-art-gallery, won’t you? So, that object is no longer seen by society as a banknote anymore, but as a piece of art. Art objects are not mutually interchangeable, of course.
That means that certain objects — art objects, vintage objects, collectables, and so on — are non-fungible.
The line between fungibility and non-fungibility is quite a blurry one. Gold is generally considered fungible, but in some cases, where the gold is cast into certain collectible objects, it is considered non-fungible.
What tokens are we talking about here?
As you might have expected, the word token used here, is not supposed to refer to physical tokens like the famous brass token made by Chuck E Cheese. Token, in this context, is short for crypto tokens — the term creates a lot of confusion, like when the term coin is mixed with the term crypto coin.
As anything crypto, those tokens live on a blockchain, and as it stands today, the blockchain in question is mainly Ethereum. You’ve probably heard of people building tokens on top of Ethereum, especially if you ever came across any Initial Coin Offerings (ICOs) in the past few years. Think about it like this: instead of minting thousands / millions of tokens, now you can mint just one unique, indivisible token.
An important thing to note is that every token built on it (be it fungible or not fungible) is benefiting a lot from Ethereum’s intrinsic properties — huge security, neutrality, immutability and so on — although that comes with a price, which is its huge energy expenditure. Which percentage of that energy is renewable versus nonrenewable, we don’t really know. Bitcoin, for example, according to a recent study obtains 74% of its electricity from renewable sources, so hopefully something similar applies to Ethereum as well. More studies need to be conducted in order to reach a conclusion on this subject.
What are NFTs explained at a high-level?
Think about how some people assign value to foolish things like Pokémon trading cards, which are sold online for thousands of pounds. You might argue that those cards are just silly old pieces of paper, but for certain individuals, those pieces of paper have a special emotional value because of childhood nostalgia. The same phenomenon happens with art collectors, as they sometimes ascribe value to certain paintings for similar reasons: either because the art piece reminds them of something in their life, because the piece is part of a certain culture they are fascinated by, or because it is a valuable element of art history.
So, NFTs are like the digital version of those art pieces or game cards. Imagine a designer like Ken Sugimori, the father of Pokémon, or Banksy, the anonymous graffiti artist, issuing an NFT on the blockchain which includes the digital image of said piece. And imagine that after issuing the NFT, anyone in the world could bid and eventually buy that NFT, which means getting the exclusive digital rights (or perceived rights) for that piece. In that case, it’s very likely that we will see a market forming around those NFTs, like we’re seeing now.
The same thing could be said about an artist that creates a new painting together with an NFT, and let’s say that the canvas has a tamper-evident NFC chip embedded in it. The chip could be connected to the blockchain so that it is in sync with the NFT, meaning the artistic object goes together with the virtual one — it would be unacceptable to sell them separately.
If more and more artists sell paintings / sculptures / installations with similar technological solutions in them, then NFT physical art will become the norm. A public blockchain with millions of NFTs on it, has the potential to replace the existing provenance databases that large auction houses like Sotheby’s use currently. It is easier to view the provenance information when all the data is stored in the same blockchain.
Because blockchain is less cumbersome than traditional systems, hopefully, the activity of buying art in the future isn’t going to be so ceremonialist, cumbersome and formal, as it is today. Currently, the system uses secret databases that are hard to access by the general public, with information regarding the provenance of the artworks — and the persons in charge of these databases sometimes still act like they would have in the Victorian times?
Should I also mention that the process of researching the past buyers of an artwork is also quite elitistic, and there are a large variety of institutions, experts and middlemen charging a fortune for this information, which in fact should be deemed public information?
It goes without saying that artists should not be greedy and create too many NFTs. Like in real life, the rarer those NFTs are, and the more older and innovative the NFTs are, the more valuable they eventually become.
It goes without saying that artists should not be greedy and create too many NFTs. Like in real life, the rarer those NFTs are, and the more older and innovative the NFTs are, the more valuable they eventually become.
Hopefully not too innovative to turn the art or other industries upside down.
So, to sum-up, NFTs have the following properties:
- They can’t be interchanged
- They are all unique
- They are usually scarce
- They have a physical art linked to them, or in most of the cases, digital art / games linked
- They can be easily auctioned or transferred on the same blockchain where they live
Just one last thing: in order to make this article feel more real, I decided to tokenize the intro image that you’ve seen at the beginning of this article. The NFT for this article can be found here.
