WTF is an NFT?

Introduction

As Crypto and NFTs continue to skyrocket, those on the outside can often be left asking questions such as ‘why’ and ‘what’, perhaps ‘when’ and even ‘how’. From the surface, the NFT world seems complex, technical, and difficult to navigate, especially for beginners. In fact, even trying to set up an account to buy and sell may seem daunting.

Consequently, it has left many feeling reluctant to enter the NFT space. However, if you take the opportunity to learn the basics, it can soon become second nature!

With the increased ease of access to the crypto world, new projects are hitting the market at a rapid pace. Understanding some basic concepts is important to make informed decisions about what products to use and where to invest.

Join us in this series of articles as we demystify the intricacies of the NFT space, and will hopefully provide you with a better understanding of the future of the internet!

Section 1 — WTF is an NFT?

You might have found yourself scratching your head thinking this after your favourite celeb turned his Twitter profile picture to a monkey. But in this article we will try to break down this term in different ways, hoping to find a definition that resonates with you. We will also try to explain some of the core values behind the tokens and how these could revolutionise how communities interact digitally. The following sentence usually follows this question; “NFTs stand for “non-fungible tokens”. This seems like a natural follow-up but trying to understand NFTs through the expansion of its abbreviation is like answering the question “What is an MP3?” with “it’s a Layer-3 standard for audio files by the Moving Picture Experts Group.”

Like yes… that is what an MP3 is, but that doesn’t answer the real meaning of the question. A better answer would be an MP3 is “a file type that completely revolutionised the music industry by innovating the way we share and consume audio.”

So yes… NFTs are “non-fungible tokens”. And sure, understanding what fungibility means is important (more on that later). But it doesn’t quite get to the root of the question.

NFTs are best understood as digital certificates minted onto the blockchain to represent a unique asset. NFTs can be used to represent virtually any type of real or intangible item today including:

• Artwork
• Virtual items within video games such as skins, virtual currency, weapons and avatars
• Music
• Community Membership
• Collectables (e.g. digital trading cards)
• Tokenized real-world assets such as; real estate, cars, racehorses or designer sneakers
• Event Ticketing
• Virtual land
• Video footage of iconic sporting moments
• Tokenized stock positions.

So instead, a better answer to our original question might be that;

“NFTs are a type of token that has the possibility to completely revolutionize entire industries by changing the way we might share and consume all types of real, virtual or intangible assets”

Section 2 — Okay fine, but what’s a token?

Let’s get technical for a second to explain how a blockchain token may be similar to technologies you’re already familiar with. The concept of tokenisation has been around in the computing industry since the 1970s, it’s simply a data security mechanism used by the financial services industry to secure sensitive information on computers.

A ‘token’ is a digital cryptographically secure version of an underlying piece of information. They’re the basic element of many security systems we use daily. We use them to store sensitive information on computers because storing data in a human-readable format is dangerous as anyone with access to the computer will be able to read the sensitive information. Instead, we use cryptographic algorithms like SHA-256 to encode the information, leaving the information unreadable, even to computers unable to solve the encryption algorithm.

This would be similar to me writing this article on a piece of paper, then mixed up the letters based on a system that only I know. Without knowing the system I used the letters won’t mean anything and the article is worthless. Current cryptographic algorithms are extremely safe, it’s estimated it would take thousands of years to solve them with current technology.

A great example of a token would be Apple Pay, your credit card information is not stored on the phone, Apple takes the data you provide and sends it to your bank, your bank then tokenises the information by passing the information through a cryptographic function and gives it back to your phone. Therefore only a tokenised version of the credit card information is saved on your phone. A secure digital representation of the underlying information. So if a hacker were to hack your phone the sensitive information is not readable, they would only be able to see the token representing the information. Tokens can represent any type of information, not just financial information, hospitals implement tokens for patient records and websites for login information.

Basically, any type of media can be minted into an NFT: art, trading cards, memes, gifs, video clips, audio clips, tweets, this article — anything. Minting effectively means creating a digital Proof of Authenticity token for a digital asset, on a particular blockchain network. We’ll explain blockchains in a separate article but effectively they are distributed immutable ledgers, global public databases used to exchange value and store information forever.

Interestingly though, anyone can mint anything onto any blockchain, regardless of their ownership of the IP or digital property. Therefore it remains a responsibility of the community and market to assign value and ownership for a particular asset because once tokenised, these assets can be bought, sold and traded using cryptocurrency. Therefore often the value of many NFTs comes not in the sensual perception of the piece but in the social perception (more on that later).

A non-fungible token is where things get really interesting though…

Section 3 — So what’s “Fungibility” and what would make a token “non-fungible”?

Thankfully fungibility is an easier concept to explain and digest than blockchains and cryptographic algorithms.

A ‘fungible’ asset simply refers to an asset that is interchangeable with another unit of that same asset. A good example of a fungible asset is the US dollar. If I exchange my $1 bill for your $1 bill, nothing really changes. While they are two different pieces of fancy paper, both bills represent the same exact value. That’s fungibility.

Conversely, a non-fungible asset refers to something of a distinct value. There are no two exactly the same. A good example of a non-fungible asset is a house or physical piece of art. Physical art is non-fungible because it’s individualised, two individual pieces of art can’t be swapped like dollar bills because they don’t have the same perceived value. If you put your $100 Million, real, authenticated, Monet onto a table with three fake Monet’, I bet you’d like the real one back, because the others won’t hold the same perceived value by the market.

The real Monet will only have value if you can authenticate that it was actually painted by Monet, anyone could paint a piece in the style of Monet but it won’t hold the same value unless you can prove it was painted by the artist himself, this line of custody is known in the art world as providence. Blockchains simplify providence, allowing it to become public yet immutable.

Section 4 — Let’s bring it back to the real world.

We’ve gone over some complex topics, so congratulations if you’ve made it this far. Let’s take some time to summarise by using a real-world example. Let’s use the Ethereum blockchain to store a piece of music inside an NFT.

Effectively when you store music on a computer it’s just information, (data and meaning). We can group this information with other relevant information such as a description of the piece, a title, even a visual representation of the piece and wrap this information up into an NFT. Now the NFT isn’t the music itself, which is often a common misconception, but a secure tokenised version of all the information inside it. The value of the token comes from being able to authenticate who “minted” (made) the piece, and everyone on the network being able to see this information.

A signed copy of an album is worth more to collectors than an unsigned copy. The album itself is the same, but the extra value comes from the authenticity of the signature. In a digital way, the value of an NFT comes from the authenticity of the digital signature. Anyone could create an NFT containing Beyoncé’s music, but unless it’s digitally signed by Beyoncé, it’s unlikely to be worth as much. Transferring the NFT does not change the information within the NFT (unless you’d like it to), the original minter and contents can never be changed after the metadata is locked, this enables layered royalties based on true ownership.

Before the invention of the printing press books were extremely valuable, this was because there was no way to copy a book. Each book had to be created by hand and would take time and effort. After the invention of the printing press, the value of individual books lost a lot of value because they were easy to replicate. What happened to books hundreds of years ago has effectively happened to art and music since the invention of the internet. Simple supply and demand economics explains that the individual value of digital media is so low due to the infinite supply if I want another copy of a digital asset I could just copy and paste the original and Voilà! I now have 2 identical pieces.

This shift in the value of music as it becomes digitised has had both negative and positive consequences, it’s incredibly powerful that anyone can now stream and listen to music anywhere in the world, music means so much to so many people and the internet allows it to be spread globally! But many of the effects for musicians have been negative, once their creation is digitised they effectively lose control over it, anyone can copy or remix the original, and streaming services hold control over the artists as they control access to a large proportion of their fanbase.

NFTs provide a major shift for IP ownership. Artists being able to collect royalties of their digital media independent of any platform will empower creators in a way we haven’t seen before.

Those inside the industry believe that NFTs can empower everyday people to discover their true destiny as an Artist. In the same sense that social media and the influencer space enabled many individuals to become personalities and experts, NFTs will open the possibilities for so many people with artistic inclinations to explore economic ventures they never thought possible. Technology should be built to enable individuals to live more fulfilling lives, and to empower them to have the possibility to take control of their virtual image and personal finances. NFTs could enable ordinary people to monetise what they love and enjoy in the pursuit of fantastic goals such as; becoming financially independent, improving your work-life balance or just being happier by being able to devote more time to what they love to do. This may lead to a shift in the way art is perceived in general. Art will start to be viewed as a practical life path and actually encouraged by sceptics and parents of creatives. I am confident that we will see many accountants, teachers, and salespeople making a transition to a happier, healthy career in this space.

Section 5 — This can’t be all sunshine and rainbows though right? Are NFTs a FAD?

It would never be a true discussion if we didn’t mention the negatives, I guarantee there will be lots of money lost in the next few years and another true crypto winter would show us who’s really here to build. Some think that using NFTs will have a devastating effect on the environment and we believe this deserves an article to itself. Despite this, we are still bullish on NFTs because we believe they represent a culture shift that will positively impact society in many other ways discussed in this article.

Many outside the space believe that NFTs are an Internet FAD and will be forgotten in the next few years. But to those in the Tech industry, NFTs represent a major cultural change, and history teaches us that with change comes mass scepticism and confusion. Many of those who have tweeted “Right-Click Save” in Twitter threads with even the slightest mention of NFTs have simply not yet understood the larger implications. As the concept of online dating in the ’90s, renting out a spare room to Strangers on AirBnB or sharing a car ride with strangers with Uber, every idea is “crazy” until it’s not. FADs do exist within NFTs though, while the market itself is a major cultural change many formats such as profile pictures may just be a phase of the overarching market cycle. But NFTs will continue to be viewed as a “fad” by those who have yet made the mindset switch to embrace digitisation. And they shall stand ideally by as passengers, as global corporations switch to a Web 3.0 future.

Conclusion

Over-supply due to ease of creation may lead to crashes in the NFT economy as new services become available, we may see this physically as short bear and bull market waves, similar to other immerging markets.

Blockchain-backed Media will present a fantastic opportunity for brands and artists to capitalise on their IP, and empower everyday people to pursue their artistic endeavours.

NFTs represent a major shift in bleeding-edge technology and culture similar to the introduction of the internet and will lead to a rapid revolution of some industries. Innovation will be front-lead by the art industry; ripples will then spread outward into the social community, gaming, music and fashion industries.