Right Click, Save As? NFTs Explained!
In 2021, NFTs have moved beyond a trend to become a phenomenon. Billions of dollars in Non-Fungible Tokens have been traded this year, despite the majority of the world either not understanding them, or having never heard of them.
If you’re reading this blog, though, you’re likely more familiar than most with the concept of an NFT. You may be a Top Shot user who has recently discovered the broader NFT universe, or you may be an avid NFT collector, trying to explain to your friends and family why it makes sense to spend more than the cost of a mid-sized sedan on a picture of a digital ape. Either way, you may be looking for an explanation of this new industry in terms that even the most non-technical person can understand.
In this article, I’m going to start at the beginning and try to get the uninitiated to understand how NFTs work, and why they’re important. The analogies might not be technically perfect, but I’m hoping to at least get the big picture right. And if I haven’t, then by all means, get in touch!
Imagine you’re sitting at your kitchen table, going through your mail.
You open your bank statement, dissatisfied with the balance at the bottom.
Rather than accept this meager sum, you decide to do something about it. You cross out the number, writing a larger one more in line with what you feel you want. You take the statement to the bank, demanding that they provide you the money that you’ve indicated on your statement. Unsurprisingly, the conversation is short and unsatisfying.
Of course, we don’t get to arbitrarily tell the bank how much money we have in our accounts. We have to trust the bank to track our transactions accurately, and to tell us how much money we’re entitled to. In exchange, the bank essentially gets to profit off of our deposits, by lending them out to borrowers.
Now imagine that all of the customers at your bank decided that they don’t want the bank to make all that money keeping track of our deposits.
Instead, you and all the other customers get together and agree that you’ll work together to track all of your transactions (in this example, let’s pretend it’s a closed ecosystem i.e. only one bank exists, and everyone uses it.)
Instead, whenever someone buys something, there will be a public ledger, that everyone can see, where the group collectively agrees on who the buyer was, who the seller was, and the amount of the transaction.
The buyer’s account is debited, and the seller’s account is credited.
Since this work is all done publicly, bad actors aren’t able to manipulate the transactions, because they would be easily identified as being inconsistent with what everyone else has seen.
Naturally, at this point, many people would say, “but I don’t want everyone to know how much money I have!” No problem. We’ll take names off of account statements, so they’re anonymous. Instead, each account will have a private key and a public address.
Anyone can VIEW your anonymous account by going to your public address, but only someone with a private key (i.e. you) can TRANSACT with it.
If you’re still with me so far, then congratulations! You now understand the basics of the blockchain.
The primary benefit of the blockchain is public tracking of ownership. It can be used for cryptocurrencies (e.g. Bitcoin, Ether, etc.), or these networks can be used for transactions of other assets.
At this point, it’s important to define fungible and non-fungible assets.
fun·gi·ble
/ˈfənjəbəl/
adjective
(of goods contracted for without an individual specimen being specified) able to replace or be replaced by another identical item; mutually interchangeable.
A bitcoin, like the stock of a company, is fungible; you can trade one bitcoin for another and each is identical to the other in value. Non-fungible tokens, on the other hand, are each unique. It’s possible, for example, to store 10,000 different pictures of apes, or punks, or cats, on the blockchain, and each one is unique, meaning one may have a different value from another. These pictures can all live on the blockchain, which tracks purchases and sales. The blockchain keeps track of exactly which wallet owns which NFT, and only someone with a private key to their own wallet can buy or sell it.
Now we understand what an NFT is; the next question is, who the hell cares?
I’m not breaking new ground by saying that we are spending increasing amounts of time online. Whether you like it or not, whether it’s healthy or not, is irrelevant. Even aside from the pandemic, our lives are becoming increasingly digital.
It’s natural, then, to expect that the same priorities and interests that we have in the real world will translate, to varying degrees, to our online lives.
As Gary V has said on multiple occasions, humans need to communicate through their purchases. We have an inherent desire to use our money to, among other things, say something about ourselves and our identities.
Why would you pay $30,000 for a Rolex, when you can get a knockoff for $300? Or perhaps more importantly, why do knockoffs exist at all? Because they are status symbols.
People collect valuable items and buy valuable items because they want to say something about themselves.
Ownership of different NFT’s can accomplish that. In an analog world, we buy houses, and fancy cars, and fancy watches, to project our status. In a digital world, no one cares about your car. But your avatar can project value, by virtue of it being part of a limited edition of valuable NFT’s.
There are millions of Rolexes in the world, but there are only 10,000 Cryptopunks, 10,000 Bored Apes, and 209 Kevin Durant Top Shot Debuts. You either own one, or you don’t.
You may ask “but it’s just a picture. Can’t I just save it and use it even if I don’t own it?” Ah, but remember the blockchain! You DON’T own it. You own a copy.
So why does that matter? Think about the Rolex again. Why would anyone pay tens of thousands for it when a fake is a couple hundred? The fake also tells time. 99% of people couldn’t tell the difference by looking at it. It’s because owning the genuine article is a status symbol. And a Cryptopunk is too. YOU know you own it. And you can point someone to the public address of your wallet that says the same.
Once you understand the basic functionality of an NFT, and why someone might want to own one, you can begin to understand the bigger potential use for NFTs, even beyond that of a status symbol: as social tokens.
An NFT can act as a gateway into a level of connection with a brand or piece of IP that has never existed before.
As an example (with credit to Raoul Pal), let’s look at Disney. Disney has hundreds of millions of fans. But unless you’re at a Disney store or at a Disney park, there is no way for fans to have a direct connection to the Disney experience, or for Disney to try to create added value for those fans. Now imagine a $DISNEY token as an NFT. You can buy the token, and perhaps owning the token gives you special perks at the park.
Maybe if you own a certain amount of the token, you get discounted or exclusive merchandise. Better yet, you’re able to play Disney branded games or watch Disney content in order to EARN more $DISNEY tokens. Now the best part: if $DISNEY succeeds, the tokens increase in value.
The fans now have a direct financial interest in Disney, and $DISNEY, succeeding. How much more fanatical would a Disney fan be, knowing that being a fan and engaging with the brand brings not only social rewards (being able to show how many tokens you own), and not only fan rewards (being granted perks, access, merchandise, etc.), but also financial rewards, because they’re now directly invested in the success of the brand and the token?
As you begin to peel the onion, it’s clear how disruptive this technology will be.
Will the current crop of NFT projects succeed long term? It’s impossible to say, and most will likely fail. But will NFTs permanently disrupt the art, music, and film industries, along with every other? You can bet on it.
