4 min read
If it feels like you’ve been hearing about NFTs day and night for months now, you still don’t understand exactly what they are but at this point are too afraid to ask, then this post is just for you. What we want to break down is what NFTs are, how they function, what they can be used for, the market that is currently being incubated, and the potential future growth of said market. Hopefully once it’s said and done, you’ll at least know enough to hold your own in a blockchain conversation that ventures into the realm of digital art.
Let’s start off slow and steady by just dipping our toes in and testing the waters.
What does NFT stand for, and what does it mean?
But first, the blockchain. Think of the blockchain as those numbered tickets you get when you wait at the bank. Each ticket has a unique number, and you always know exactly which ticket comes before it. The blockchain is similar, but the tickets are blocks of code that can represent many things, such as cryptocurrency transactions in a digital ledger. The blockchain is also decentralized and immutable, which means it exists on thousands of independent machines and all of them must agree on the structure of the chain for it to be accepted as true, plus it’s impossible to change blocks that have already been added to the end of the chain.
NFTs are “Non-Fungible Tokens”. Non-fungible means that this token cannot now, or ever, be replaced by something else. The “token” part refers to a piece of code with a unique value that lives on the blockchain. Cryptocurrencies are also distributed in token form, but they are not non-fungible.
What else is non-fungible that I may have heard of?
Maybe it’s easier to understand what’s non-fungible by first looking at what’s fungible. A dollar is fungible. It can easily be exchanged for another dollar of equal value. A generic gold bar is also fungible. For all intents and purposes, it is the same as other generic gold bars of the same purity and weight. A Da Vinci, however, is non-fungible. It cannot be exchanged 1 for 1 for another painting, not even another Da Vinci, since they are all completely unique and different. Another non-fungible item is a plane ticket. It’s assigned to a specific person, to fly a specific route, at a specific time, and they need to sit in a specific seat. Changing it for any other airplane ticket would change at least one of its parameters, making it non-fungible.
Now, how do these Non-Fungible Tokens work?
NFTs are deployed on a specific blockchain, most commonly the Ethereum chain. An NFT is added to the ledger at the moment it is created, or “minted”, and it is stored at a precise address which corresponds to a crypto wallet. In order to deploy an NFT, a smart contract, which is basically a set of instructions written in programming code, must be written and executed. This smart contract determines the NFT’s parameters, like the address to which it will be assigned, the royalty provision and where said royalties are sent, and even a potential copyright transfer clause, if the creator so wishes.
What can become an NFT?
An NFT is a unique identifier that points to a digital or digitized work. While the NFT can sometimes be self-sufficient, housing all the relevant assets as code, it usually points to a URL or a URI of a file that is stored in the IPFS (InterPlanetary File System). An NFT can be configured to “unlock” the file or it can simply serve as proof of ownership of a file. It can hypothetically even correspond to a physical object, but this would erase a large part of the security aspect that an NFT provides to digital ownership.
Okay, I’ve bought an NFT. Now what?
There’s multiple things you can do with an NFT. You could simply hold it, waiting for it to appreciate over time. You could find creative ways to display it, such as on screens, on places online, and even in virtual reality. Depending on the NFT, you might be able to stake it, or even use it in a video game. The possibilities are endless, it’s all up to the imagination of the buyers and creators.
