NFTs — A brief overview

Introduction

Few weeks back I wrote about Bitcoin and Cyptocurrency. I have covered a few basic terms in these articles, so I suggest you to go through them first.

This article is based on another application of the blockchain technology, the Non-Fungible Tokens aka NFT. NFTs have been all the hype for a few years now and some aspects of it are a bit confusing to say the least. So I took it upon myself to learn more about this technology and this article is my attempt to coalesce all the information in a simple and coherent way.

Photo by Executium on Unsplash

So a couple of definitions first

Okay, so let’s start with a couple of definitions,

First up, what is a blockchain:

“A blockchain is a growing list of records, called blocks, that are linked together using cryptography.(src: Wikipedia)

This is the first line you will come across if you search for the Blockchain page on Wikipedia. As suggested in the above definition, the block chain is a collection of finite, immutable records of information called blocks. In crypto, blocks hold transaction records, but in general purpose blockchain, it can hold any information such as who owns a NFT!

The information is secured using one-way cryptographic hashes. Further, in order for a new block in the chain to be verified and added to the chain, it needs information from all the previous blocks, and hence the information is very hard to mutate once added to the block chain.

Now that you have a overview of what a blockchain is, lets see what exactly is the meaning “non-fungible”

Let’s understand non-fungible, by first understanding what is fungible. Any form of fiat currency, like rupee, dollar, pound, etc. is fungible, because if I want to buy goods or services worth 10 rupees, it does not matter which 10 rupee note I have, as long as I have 10 rupees in total. So I can exchange one 10 rupee note with another and still get the exact same value for it. This is the meaning of fungible.

Non-fungible by contrast means something that is unique. Here I’ll introduce a analogy that I will also refer to later, that of a original piece of painting versus it’s replicas. The original painting is non-fungible, because you cannot trade it for the similar looking replica and get the same value. So the property of the original of being only one of its kind, is what gives it the property of being non-fungible.

What exactly is a NFT

Now lets talk about NFTs. By far, the best definition I found was from an article by Jesse Walden:

“In practice, an NFT is simply a unique token representing a digital file. Each has a canonical identifier, a unique ID. Hooked to that ID is arbitrary metadata, for example, who created it, what it’s about, or its price history. When an NFT is minted by a creator, this information is immutably registered on the blockchain and becomes a sort of digital passport for the work. Moving forward, anytime that piece of media is distributed on another platform, that platform can “check its passport” and see its entire history. This means that instances of an idea can point back to the original, immutable record registered on the blockchain. An image on the internet no longer needs to be a two-dimensional box. Instead, it can take on a “Z-Axis” where all of its history and context can be discovered by third-parties, adding to its cultural and financial value.

So what this scary looking (yet incredibly cogent and insightful) paragraph means is NFT is a record of some data on the blockchain, with two properties, it is immutable as well as it is easily verifiable by third parties.

As an example (probably over-simplistic but okay for a big picture view),

Consider that you buy a NFT for a particular GIF. So under the hood, there will be a record on the blockchain, saying you are the owner of this GIF with metadata such as price you paid, timestamp, previous owner, etc. This will be secured by a one-way cryptographic hash function and stored permanently on the blockchain and as mentioned before, once this information is stored, it is almost impossible to modify it. In addition to this, other parties can verify that you are indeed the owner of this GIF by reading the latest transaction of the GIF from the chain.

So until you sell it to the next owner to make profits, you have the complete bragging rights of owning a NFT to the GIF, which in other words means that you have right to send the GIF to all your friends and brag about the ability to verify your ownership of it’s token on the blockchain.

Wait what?

Didn’t we just say all about NFT being non fungible, unique, one of a kind that makes the idea of NFTs possible? — then can I just send my GIF to anyone, wouldn’t they own it as well?

Well the short answer is yes, you can send a GIF to any number of people as you please and no, they will not own your NFT although they will be able to re-share it, view it and move it around as they please.

Here our previous analogy of the original painting versus replicas will be relevant yet again. You can think of the copies of your dearly valued GIF as the replicas, but your copy is the original. But there are some caveats here, since this is a digital version of the analogy, even if you lose your copy of the GIF, you still own the token, and can just as easily ask one of your friends to send it back to you! I know, now this concept seems absolutely crazy!

So in essence what you own is the easy-verifiability of the fact that you are currently the owner of this digital file. That is the part which is non-fungible. No matter how many people have your GIF, no one has a record stating it belongs to them, that record is unique and belongs to you.

Another way of thinking about this is, you are sending the digital asset to your friends, not the non-fungible token of that asset.

So is it just hype or something more?

Now that we have established that the NFT is in fact just a token, it invites skepticism about its actual value. I read this article by Chris Dixon, which explains why NFT might not be a hype. I highly encourage you to go through it.

The gist of the article is that for any form of art to be successful, you do not need mass acceptance of the art in the society, you just need a niche that is obsessively and aggressively loyal to the art. A small yet thriving community can also make an artform survive.

Think about it in this way, say you are passionate about digital art and you want to buy a NFT of the code used to create a particularly stunning masterpiece, the way you will value how much you pay for it depends on two things,

One, how much you want to support the artist and in effect the artform as a good sale value will encourage more people to try to produce new works.

Two, how much you think you can sell it for.

If you are purely in group two, then NFT is absolutely a perilous and a speculative game for you. If you happen to buy some NFT when the community around it growing, you make money, if you unfortunately catch a dropping wave of enthusiasm around that NFT, you lose money as simple as that.

But the real long term value people see in NFTs is when you belong to the first category, i.e. you want to own an NFT because you genuinely love the artform or the asset whose NFT you are buying. In this case you are not only boosting the ecosystem surrounding the asset, but you are also incentivizing the creator to create new pieces of the artform.

According to this blog on Etherium, one of the blockchain where the tokens are recorded, creators can set up contracts such that for each sale of the NFT of their digital art, they get a percentage. Now it is important to remember, art here means any digital data, like songs, videos or even tweets!

Because of such contracts it is possible for content creators to sell their digital art, make money and still have a wide distribution of the file. A simple use case could be for a Youtube channel like FreeCodeCamp, who deliver absolutely superb content for free, could sell NFT for their videos as a way to get funding for their non-profit. This is equivalent to the donations people make today, only in case of NFT, they will get a record on the blockchain in addition to the donation certificate. Such forms of revenue will allow small creative groups to create quality content while not relying on any central authority for income.

Hence the adage that, the value of any asset is decided by the market for it, is also true in regards to NFTs.

Conclusion

So there you have it. Now you have a overview regarding NFT, how they work and what applications they have as well as some of the dangers of getting caught in the speculative game. As always, I will be leaving all the links I used to write this post.

Let me know what you think.

Until next time!

References

Computer Science Graduate. Birds+Wildlife nerd. Passionate Photographer. ✉: prathu10@gmail.com