Our team here at NFTexplaned.info is a group of highly educated, long term crypto investors who are experienced within the field. We are here to provide you with the best information on NFTs and we have explained it in a basic way that is easy to understand. In this article we will tell you exactly what an NFT is, break down the word and give you an in-depth answer of what they are, explain the technology behind them, and explain additional perks/how they can be used.
NFTs or “non-fungible tokens” are unique, one of one, digital assets that are most commonly secured by the Ethereum blockchain and take the form of tangible along with (more commonly) intangible items such as digital: music files, art, and real estate. These often take the form of an JPG, MP3, or GIF. Each individual token is stored on the Ethereum blockchain, meaning a digital certification is created – this provides verifiable information as to who the owner is and allows the NFT to be stored in the database.
Our team of crypto experts understand that NFTs are a complex topic and that is why we have broken down each aspect in a simple manner that is easy for you to understand. We have also included examples to accompany our work and we can ensure that you will be a mini-expert by the end of this article.
What Does NFT Mean? An In-Depth Answer
NFTs matter. Why? NFTs have made it possible for items within the digital world, such as art, to be owned and traced back to a single person due to blockchain technology. Non-fungible tokens create a verifiable ownership to a specific piece of work as well as the list of owners who had previous possession of the work.
In order to fully understand what an NFT is we have broken down each aspect of the word for you. The ‘NF’ in NFT stands for non fungible, meaning the item is non replaceable as the item is 1 of 1 and can’t be readily substituted. Fungible means the item is replaceable and can be interchanged; this means there are numerous items that hold the same value and you would not care which fungible item you possesed as they are of equal value. The ‘T’ in NFT stands for token and ecodes the ownership of the item; think of this as a digital stamp certifying you are the owner. This digital certificate is stored on a distributed database known as the blockchain, which we will cover more in depth later in the article.
A helpful example is to think about owning the original Mona Lisa vs. owning a replica of the Mona Lisa. For the original, there is only one painting and it can be verified that the particular piece of art was created by the one and only Leonardo da Vinci and it also known that there are no other pieces of art put together in that specific way (non-fungible). This is why the cost of ownership for the original is much higher than the cost of ownership for a replica – this is due to scarcity in a marketplace that is liquid. This is one way in which NFTs have impacted the art world. People like knowing they are the one owner of a particular piece, now more than ever, with people becoming more comfortable with online ownership.
It is also possible for an NFT to have a limited number of copies for the same digital piece. For example a famous sports celebrity could sell X amount of his or her card, each one specifically numbered. While NFTs with one unique token available on the blockchain seem to be more valuable due to scarcity it is also possible for a significant number of idental cards from a particular sports celebrity to rise in price due to the limited supply and rise in demand (most likely from fans of that particular athlete). Although the NFT may be the same in appearance, the numbered card makes it unique and gives it its own verifiable record.
This new technology opens the field to collectibles in the digital realm. It also opens up so many more possibilities for artists and for a new form of fandom. If you would like to learn about the digital artist who sold an NFT for US $69 million, that can be found here. As of recently, it has become more common for sellers of NFTs to include some physical items like a signed jersey or card along with the digital certificate which is included with the purchase of an NFT.
Fungible vs. Non-Fungible (crypto) with examples
As a general rule, anything with uniqueness or originality is non-fungible as there is no replacement for it that is of equal value. Fungible or interchangeable items can be traded as there is no difference in such items. The blockchain technology has now made it possible to track a particular digital asset in which the owner is agreed upon and the item can be verified to a specific owner by all computers on the blockchain.
- Fungible Examples
- $1 USD (You and I could exchange one dollar bills or you could give me 4 quarters and nobody would care as they hold the same value)
- 1 ETH (one coin of Ethereum is of equal value to another coin of Ethereum and therefore, they can be interchanged)
- 1 ounce of gold (equal to another ounce because they are the same)
- 1 bag of unopened grade A white rice (equal to another bag of grade A, as long as the bag has not been opened)
- Non-fungible Examples
- Dogs (If I had a dog and you had a dog and we exchanged them they would not be of equal value for numerous reasons like memories made together. Neither of us would be happy.)
- Movie tickets (Not exchanged for equal value because of the perceived value of seating locations and because it’s held at a specific time.)
- Photograph from a specific event (The photograph from every angle is unique.)
- Mona Lisa Painting (A unique, original piece of art that can’t be swapped for a replica.)
The Technology behind NFTs (What is the Blockchain?)
Blockchain technology is a decentralized group of blocks containing information that records and tracks data among a secured group of systems or computers in a verifiable way.
To break this down in a manner that is easier to understand, we must look at the aspects that make the blockchain secure and trustworthy. The first is the publicly distributed ledger; this gives public access to every person on the network to see all of the content within each block and it allows users to see when something has been changed.
Each block has hash (a digital fingerprint) that links to the previous block which makes it extremely easy to notice when something has been changed. This is what makes blockchain so reliable. The only way for the system to fail would be for all computers on the blockchain to turn off which is basically impossible in a peer to peer network.
When the information within a block is tampered with or changed, a new block is created, showing the changes to all people in the system. The process is typically pretty quick (say ten minutes to create a new block and an additional ten minutes for all the following, connected blocks, to be agreed upon and verified.) This is known as proof of work.
If you are interested in learning more about the proof of work consensus algorithm, which is what makes an NFT energy intensive; that article can be found here. We breakdown additional consensus algorithms and explain how much energy a typical Ethereum based NFT consumes.
A private key is created only for the sender who is using the blockchain technology which gives confirmation that they are the origin of the exchange. A wallet functions through the use of a private key which allows you to store an NFT; if you would like to read our guide on MetaMask, the most commonly used wallet, that can be found here. A public key is also created and given to all users which gives everyone within the system the ability to precisely identify the unique user. Due to the difficulties in changing the data and the verification process among the network, blockchain is a secure and trustworthy system. If you are interested in learning more about provenance, how it works with blockchain technology, and how it affects NFTs click here
Each NFT has a specific group of blocks that have information proving ownership of the digital asset and making it possible for people to essentially own a digital receipt.
How NFTs are Used and the Implications of Them
As a whole, Non-Fungible tokens are used for proving and verifying that a digital asset belongs to you and are often auctioned off for high prices by creators or people with a following. The digital asset allows the producer to sell their work directly while also adding in features like royalties, rights to the actual work, perks, and tangible goods.
Since NFTs are considered a digital asset and numerous people want a specific token, the demand often causes the asset to rise in price. This results in the reselling and purchasing of digital goods at prices much higher than they were originally sold for. The trading of unique items has lead to the development of trading platforms or marketplaces like OpenSea, which is one of the largest digital marketplaces. If you would like to read our in-depth article about OpenSea which includes a step by step walkthrough for all features including the buying and selling of NFTs as well as a breakdown on transaction cost; that can be found here. In the remainder of the article, we will be covering how large companies, musicians, and athletes are able to add extra value to the NFTs they sell.
To give you an example of the possible implications, we decided to take a look at Taco Bell and how they went about selling NFTs. The company auctioned off 25 GIFs, one of which was tacos hitting one another in a fashion similar to a pendulum wave. The owner of each NFT received a special perk; a $500 gift card redeemable at Taco Bell. (The money went to their charity – the Taco Bell Foundation.) This is one example of an additional implication or perk than an NFT can have.
An example of another implications an NFT can have is musicians selling them and including a special perk like front row seats to every concert. Widely respected athletes have also gone about selling these digital assets and have included perks like a signed jersey by them. With a large audience, and a very limited supply of NFTs made by the athlete, you can imagine how much prices have shot up. If you would like to read our article on the top 10 most expensive NFT purchases and what made those NFTs so special; that can be found here.
When looking for another example of an NFT in which more value was added, we can look at NHL star – Jack Eichel who currently plays for the Buffalo Sabres. He was the first NHL player to sell an NFT and decided to auction off 25 limited edition NFTs. Purchasers were given the opportunity to watch him play at home games or receive signed merchandise directly from him.
An NFT that may or may not sell (most likely won’t) and could take an extremely long time to sell is one created by a person without an audience. Without the demand from numerous people, no hype is created; resulting in the NFT sitting in a marketplace without purchase – people probably won’t see any value in owning that particular digital asset.
The implications are tremendous. NFTs allow creators to directly interact with their audience. It is giving them the ability to help build their online image and allows them to display the characteristics or moments they want to display. More direct interaction also allows for the removal of a middle man which in turn helps the creator as they are able to receive 100% of profits. The implications are enormous for the music industry as artists are often paid only a small percentage of the revenue they earn from streams, CD sales, and live performances.