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What Is an NFT?

A Defined Relationship Among Many

You’ve seen this title before. Countless publications and even mainstream news organizations have tried to answer this question. Unfortunately, they are providing answers to questions that may not have been asked. Yes, the technical implementation of NFTs is important in the same way that the technical implementation of your dishwasher is important. But you don’t need an article explaining that. You need a quick guide that explains how to use your dishwasher and why you shouldn’t be hand-washing your dishes.

We’re going to tackle this article from strictly a utility and best practices approach. No blockchain descriptions. Keeping it simple, an NFT is the proof that you own something. But what is that thing you own, exactly? This is the first place we should start. We need to break down the structure of an NFT into something easy to understand and visualize.

Think of an NFT as a lasagna. Sure there are individual layers in that lasagna, but those layers don’t really work alone. They work together to make a glorious meal. As with lasagna, an NFT is made up of layers that work together to form the whole of the NFT. Let’s dive into the layers that make up an NFT.

Relationship

An NFT is a defined relationship. It’s a connection between creators, buyers, and sellers. The relationship layer is sort of a wrapper around the entire NFT. By definition, a relationship means that it involves more than one party. An NFT involves at least two parties, but often, it involves many more than that. Every time that NFT is sold and transferred to another person, a new spoke on the relationship hub is created.

This is an important concept because understanding the relationship helps you understand responsibility. Who is responsible for NFT data? Well, that depends on the point in time in that NFT’s existence and the current relationship dynamic.

Let’s take a look at some of the relationships formed through the lifecycle of an NFT.

  1. Creator <> File Storage Provider
  2. Creator <> Marketplace
  3. Creator <> Buyer
  4. Buyer <> Seller
  5. Buyer <> Marketplace
  6. Owner <> Creator
  7. Owner <> File Storage Provider
  8. Etc.

A creator has to store the asset for the NFT somehow. This creates a relationship between the creator and the place where the data is stored. The creator has to either find a place to sell the NFT for her, or the creator has to sell it herself. That creates additional relationships between the creator and a direct buyer or a marketplace. So on and so forth.

There are surely many more relationships than what I’ve defined above, but hopefully this helps initiate your mindset around the actual purpose of an NFT to start thinking about the relationships the NFT defines.

So, if the wrapper around the NFT is a bunch of relationships, what makes up the layers beneath that wrapper?

Token

The token is the thing you probably think of when thinking of NFTs. NFTs are similar to the cryptocurrencies that have dominated the news cycles over the last few years. But in reality, this token is not so much a cryptocurrency but rather a set of keys.

In the same way the keys in your pocket signify ownership of your car or your home, having an NFT signifies ownership of the associated content (and subsequent layers that we’ll discuss next).

The takeaway here is that the token is important, but it is not the asset. The asset is what your token proves you own.

Metadata

When shipping companies send cargo overseas or even just across borders, the cargo containers include a manifest. The manifest is a list of everything in the cargo with explanations, associations, and (you guessed it) relationship descriptions. Just like with those cargo shipments, an NFT includes a manifest. It’s called metadata.

The metadata for an NFT is, arguably, the most important part of the NFT layers. Without the metadata, your NFT is just a token of ownership of…something. The metadata tells the world what that something is.

Like a traffic cop, metadata points people in the right direction. Looking for the asset file? No problem, go here. Want a description of the NFT? Got it right here. How about licensing rights? It’s there too.

At a very basic level, the file is the thing you are buying and selling, and that file information is included in the metadata. But what does the link to the file actually mean?

File

Because an NFT is supposed to be a permanent representation of ownership of an asset, it’s easy to assume the file layer of the NFT has to be permanent too. However, that’s not the case. The metadata within the NFT points to the file, but that file can live anywhere. It can live on a permanent storage platform (like a blockchain), but it often lives in a similar place to your Facebook photos. Pinata believe the files associated with an NFT should live on IPFS because ownership of the files should be transferable in the same way that ownership of the NFT is transferrable. Additionally, IPFS provides a built-in solution for verifying and authenticating that the file is the thing you paid for.

A file stored on IPFS has ownership properties in the form of “pinning.” Pinning a file on IPFS is similar to paying Dropbox to keep your content for you, except with IPFS you are in full control. Let’s look at this idea through the lens of a Creator <> Buyer relationship.

Creator <> Buyer

The creator of the file and thus the creator of the NFT might pin the file on IPFS. However, when the NFT is sold, the creator doesn’t have much reason to continue pinning that file. The great thing is the buyer can pick up the ball and run with it. Upon purchasing the NFT, the buyer can access and transfer responsibility of the file thanks to the manifest, and the buyer can pin the file themselves.

The transferability of the asset file is important because the responsibilities bestowed upon the buyer of the NFT may require the buyer to maintain a copy of the asset file. This leads us into the final layer of an NFT.

Licensing

When you purchase an NFT, it may have requirements associated with it. A great example of this is the recent Kings of Leon NFT. The purchase of a Kings of Leon NFT comes with restrictions and licensing rules. Those rules are enumerated in a traditional way in the case of Kings of Leon, but they could and should live within the layers of the NFT itself.

The metadata can point to a set of rules around the NFT. In many cases, an NFT will have royalties payments encoded into the blockchain in which the token was created. That’s an automated way of enforcing rules, but those rules still need to be somewhere accessible. The owner of the NFT should be able to easily reference those rules.

In fact, anyone should be able to easily reference the rules and expectations associated with the NFT. In enabling this, for example, third parties can easily discover what it would take to license the file associated with the NFT you own.

Understanding what you own, what your rights are, and what your responsibilities are is important. Metadata pointing to the licensing makes it easy to have this info at your fingertips.

Conclusion

Blockchain technology can be confusing, and often, it is unnecessarily complicated in the way it is presented. So, hopefully this guide to what an NFT is helps break down that barrier a little bit more. NFTs are not just tokens. They are not just files. They are not just entries in a blockchain. When implemented properly, they are a clearly defined relationship among many across the internet.

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The cloud wasn’t built for this. Pinata was. Storing and managing your NFT media just got easier.

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Justin Hunter

Justin Hunter

Writer. Head of Product at Pinata. Builder.

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