What are NFTs?

A complete guide to what NFTs are and how they work.

If you’ve been keeping up with tech news over the past year, you’ve almost certainly come across the term NFT. Every piece of digital content nowadays seems to be selling via NFTs. Artwork? Check. Tweets? Check. Memes? Check. But what are NFTs? How do they work?

In this article, I intend to answer all these questions and more.

Blockchain

To understand how NFTs work, we first need to know what blockchain is.

In simple terms, blockchain is a type of database — a collection of electronically stored data or information.

Unlike regular databases, a blockchain is a series of data ‘blocks’ that are linked together. Together, this chain of blocks forms a shared digital ledger (a collection of data) that records all activity and information stored in the chain.

Each blockchain ledger is stored worldwide across thousands of different servers. This makes it possible for anyone who’s a part of a server to see and verify everyone else’s entries. This digital ledger technology, or more simply peer-to-peer technology, means that it is nearly impossible for anyone to falsify or tamper with data stored in a block. This is one of the main reasons for blockchain’s rise to prominence.

Now that we know the basics of what blockchain is, we can move on to NFTs.

What are NFTs?

NFT stands for non-fungible token. This probably doesn’t ring a bell as the words fungible and non-fungible are not widely used at present.

Simply put, non-fungible is an economic term that could be used to describe a painting, a sculpture, your phone, your laptop etc. These items can’t be interchanged for other objects because they are unique and have unique properties. For example, although a painting can be photographed or copied, these replicas will not have the same value as the original.

On the other hand, fungible assets can be interchanged as their importance lies in their value and not their unique properties. For example, money is a fungible asset because a $100 note can be exchanged for another $100 note without losing or gaining value.

In simple words, NFTs are tokens that serve as proof of ownership and let us tokenize assets ranging from art, collectables to digital files and even real estate. They can have only one official owner at a time. They are stored on a blockchain ledger-mostly Ethereum- ensuring that no one can modify the record of ownership or copy/paste a new NFT into existence.

NFTs vs Cryptocurrencies

People often mistakenly think that NFTs and cryptocurrencies are the same, but this is not the case. Although both are based on blockchain technology, the fundamental difference is that cryptocurrencies are fungible assets. One Bitcoin could be exchanged for another Bitcoin without any change in value. This is not the case with NFTs, which are tied to a particular asset and cannot be interchanged.

What value do NFTs have?

An NFT is essentially a certificate of ownership for an asset. Hence the value of an NFT is determined by its collectability and, as NFTs can be traded and sold, its potential resale value.

Some recent NFT sales which provide a great example of the value of NFTs are as follows:

• The NFT for the artwork Everydays- The First 5000 Days by the digital artist Max Winkelmann, better known as Beeple, sold for an astonishing $69.3 million through Christie’s auction house in March 2021.
• Jack Dorsey, the founder and CEO of Twitter, sold the NFT for the first tweet for $2.9 million.
• The NFT for the ‘Disaster Girl’ meme sold for around $500,000 when it sold in May 2021

Uses of NFTs

Despite NFTs as a concept being in their infancy, many potential use cases have already been identified. Some of these include:

Tickets

If a ticket is created as or assigned an NFT, it allows all transactions involving that ticket to be recorded. Because of this, there is no chance of people scalping, stealing or using counterfeit tickets as NFTs can’t be replaced.

Collectables

NFTs can act as a certificate of authenticity in the case of collectables like trading cards, comic books, stamps etc.

Fashion

Some of the most pressing issues in the fashion industry could be solved using NFTs.

Having a digital record of authenticity helps with issues like counterfeit goods. Luxury goods could be assigned an NFT which would allow the customer to make sure that the item is genuine.

An NFT could also provide information about the origin of an item, such as the materials used to make the item, where these materials were sourced from and how far the item has travelled. This could help people make more informed and ethical choices at a time when issues such as sustainability are becoming a pressing concern in the fashion industry.

Pros and Cons of NFTs

Like anything else in this world, NFTs have both pros and cons, which I have highlighted below:

Pros

Some benefits of NFTs are as follows:

• They give artists ownership of the digital assets that they create as having the NFT for an asset not only allows an artist to prove ownership of the asset but to also profit from it, thereby providing them with a valuable income stream.
• NFTs are also immutable as they are based on the blockchain platform. They can’t be replaced, tampered with or deleted. This is a valuable quality when proving the authenticity of an item.
• NFTs can also include smart contracts. Smart contracts are a feature of blockchain technology that essentially store instructions that are executed when certain conditions are met. For example, an NFT with a smart contract could give the artist a percentage of the profit earned with the NFT is sold in the future.

Cons

• The major downside to NFTs, and blockchain-based cryptocurrencies in general, is their environmental impact. The amount of computing power required to enter records onto a blockchain is massive. In fact, currently, a single Ethereum transaction consumes as much electricity as an average U.S household over a week and has a carbon footprint equivalent to 140,893 Visa credit card transactions or 10,595 hours of watching YouTube. Annually, the amount of power consumed by Ethereum transactions is comparable to that of Bangladesh and its carbon footprint is comparable to that of New Zealand. Because of this, there is a big question mark over whether the use of NFTs is sustainable.
• Another downside to NFTs at the moment is that it’s a speculative market. We do not know if there is any value in NFTs or whether they are a long-term investment or simply a passing fad.
• NFTs can be stolen as although the technology on which they are based is secure, many of the platforms and exchanges are not. Hence there have been many reports of stolen NFTs after cyber security breaches.

So, are NFTs the future?

Hopefully, you now understand what NFTs are, how they work, their potential uses and their pros and cons. But one question remains: are NFTs truly the future?

Even though there is clearly great interest in them at the moment, it is hard to say whether NFTs will revolutionize the world or go the way of the dodo. The technology is in its infancy and there are numerous challenges to overcome.

At the very least, whether they are truly the future or not, NFTs are a fascinating addition to pop culture.