What Is an NFT Anyway, and Should You Care?
Cryptocurrency is making headlines, and NFTs are a big reason why. Investors spent $2.5 billion in the first half of 2021 on NFTs for digital art and other digital assets. Celebs, wealthy entrepreneurs, and financiers’ high-profile purchases are fanning the flames.
The best part is that you don’t have to be rich and famous to participate in the action. That is one reason you might want to care!
First, it’s important to know that NFTs are not the same thing as digital artwork, and they have many applications beyond creative works. I’ll explain more in this post.
Having said that, if you are an artist or you love supporting artists, NFTs are a great way to do so. People are super excited because the marketplace for art NFTS is finally upending a frustrating dynamic for creatives.
You likely know that the history of art is one of underpaid starving artists depending on patrons and dealers to make bank. Now artists can build community directly with their fans and patrons and make sales directly to them.
In this guide, I walk you through what an NFT is, starting with the basics.
Pop quiz! 😲
Q: True or false: An NFT is a piece of digital artwork.
A: False. You’ll see the difference in the NFT section below.
But first, blockchain baby!💃🏾
I’ll explain what an NFT is in the following section. First, it’s helpful to know what Blockchain is. A blockchain is an electronic way of securely recording transactions with transparency and built-in cross-checks. Because of the structure of a blockchain, it’s almost impossible to alter a previous record.
Crypto transactions are the most (in)famous use of blockchain, but just as I mentioned that NFTs don’t have to be about artwork, blockchain technology can apply to many other kinds of transactions outside of crypto. Blockchain has big implications for property ownership records, supply chain, identity files, medical records, and much much more.
We’ll use crypto as the example because most digital art collectors use cryptocurrency to purchase NFTs.
There are a lot of technical details, but we can sum it up by saying that in the context of cryptocurrency, distribution and transparency create trust between the parties and in a marketplace by verifying, recording, and storing the transactions for NFTs without a go-between like a bank.
Blockchain is essential for NFTs because it creates the transparency necessary for two parties to trust each other and for the marketplace to trust the transaction information. Anyone can see the record of the transaction at any time. It is not transparent in the sense that the buyer’s identity on the chain is tied openly to a real person. JaneDoe994, an art collector, is likely a pseudonym; her real identity may or may not be known to the community or even the artist.
Where the information is stored is different on the blockchain, too. There is no central database owned by an intermediary like a bank. The blockchain creates a distributed database by replicating transaction information on distributed nodes.
Because these multiple nodes store identical versions of the transaction distributed on the network, it is complicated, if not impossible, to alter the information after it is recorded. At the minimum, it is almost impossible to change information secretly.
The blockchain for art is revolutionary because it enables creators to sell directly to buyers without a middleman restricting access and adding to the transaction cost.
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What is an NFT?
You probably have some idea of what an NFT is, but I’ve seen people misusing the term so let’s do a refresher of the basics.
NFT stands for “non-fungible token.” It is a type of blockchain record.
One way to understand non-fungible is to look at its opposite.
What is fungible? It sounds like a type of mushroom 🍄 but it’s not.
Fungibility depends on the value of the object and its uniqueness. We’ll use gold as an example of something fungible.
Something is fungible if its value can be divided. You can divide gold, and it will hold value based on its weight. The price of all gold fluctuates based on market forces, not changes in the piece of gold itself.
Something fungible is interchangeable. You can trade one for the other for the same value. For example, you can trade one gold bullion for another without losing value. Other examples of fungible items are regular coins, crypto coins, stocks and commodities, and cartons of mushrooms.
Pop quiz trick question! Is a rare coin fungible? 🤔
A rare coin has a unique value based on its age, condition, and how rare it is. Unlike pennies in circulation, its value is not interchangeable with other similar pennies. A rare coin is a non-fungible item.
To sum it up, fungible items do not have a unique value.
Non-fungible: Unique Value is Key
Non-fungible things are unique. If you divide them, they will lose value. Let’s take the example of a rare Porsche 911. 😎 (yes please!)
Unlike a slice of a gold bar, a piece of a pristine vintage Porsche doesn’t have a fractional value based on the whole car. If a thief steals the original trim and wheels, the owner will cry because the car’s value decreases by much more than the replacement value of the stolen items.
A rare sports car is one of a kind so you also cannot assume the value will be the same if you trade one rare Porsche for another.
The table below sums up fungible vs non-fungible. It’s odd because the non-fungible items are arguably more fun, or at least more interesting unless you are a crypto millionaire or a dragon 🐉 (because, gold bars).
Can you add an example in each column, too?
The T in NFT — What Is a Non-Fungible Token?
Now that you know what non-fungible means, what is a non-fungible token?
Let's think about the Porsche 911 again. 🥳 We can go to an auto dealer and look at rare Porsches. They are tangible.
There is no used car lot for assets like digital artwork, however. They are intangible and easy to duplicate. We can’t touch digital artwork, online text, digital video, and music.
A digital asset is still someone’s creative brainchild, though. Artists and creators of unique digital assets want to claim their rights as the creator of an original work.
To solve this problem, technologists came up with the solution of tokenizing digital assets. So the T in NFT stands for token. The token’s code creates details of the date the creator made the asset and other information. The artist puts this information onto a block and adds it to the blockchain for verification and recording when the NFT is sold.
When you invest in an NFT, remember that you are investing in the asset; not the NFT itself. The NFT is simply your proof, in the form of a “Token”, that you own the asset itself. For example, the title to that black 1999 Porsche 911 is not the car itself. Make sense?
Another interesting thing about the blockchain is that it creates a verified timeline of ownership. This is called provenance in the art and collectibles world, and it’s a big deal. If I can prove that Jay Leno owned the Porsche, for example, it will probably increase its value.
If a museum or collector can prove that a popular Queen owned a painting, that painting is likely more valuable than if it had been owned by a nobody Duke without much power who lived a boring life in a drafty country house.
In a similar way, once the creator of digital art logs the NFToken, the ownership of the artwork is transparent and traceable for as long as the blockchain exists.
This provenance may add value to a piece of digital art over time. Would you pay more for a digital drawing that Queen Beyonce bought for Ivy vs. one that your cousin Fred owned? Probably.
This is great news for artists who have or are building a following. In an analogy to traditional royalty contracts, they may receive a commission on all future transactions because the blockchain tracks all sales of their work, automatically and with no dealer taking a cut. Cha-ching!🤑
Get Rich Quick. Not. The Importance of Community
In spite of the hype, becoming a digital artist and selling NFTs is not a get-rich-quick scheme. Yes, there are some artists that got-rich, and it might have looked quick. But in every case, they had a close community following them.
It turns out there are real people behind the crypto transactions. In fact, the intensity of community explains a lot of the popularity behind not just artists but certain cryptocurrencies, too. People like to rally behind founders with stories that stand out.
The success of an artist depends on their relationship with those people — aka their community. If you are an artist interested in building a presence in the NFT marketplace, post your goodness, and also be sure to interact with your followers and cultivate the kind of community that makes you feel good to show up to over and over again.
Digital and Physical NFTs
People can use NFTs to buy, exchange or document information about any digital asset. Digital artwork is in the news right now as a hot market. Enthusiasts in sports and gaming are also using NFTs to purchase assets like video clips and rewards from video games.
Can a physical object be bought or sold with NFTs? Yes, if it is non-fungible. If you aren’t sure, check and see if it qualifies to be in Column B of our table above.
Buyers can buy NFTs with regular or cryptocurrency. But that takes us into the realm of how to buy NFTs, and I cover that in another post. If you don’t see a link to that post right now, rest assured it’s coming.
Disclaimer 👉 👉 👉 I am not offering you financial advice on anything. I am not a registered broker-dealer, VC wannabe, or financial advisor of any kind. The following info is for informational purposes only. I’m a writer ✍️ and I support leveraging technology and updating regulations to expand opportunities for people who are not already #buku rich. ⚖️. Billionaires are cool, but the opportunity playing field needs leveling on a global scale. 🦸🏽♀️