What are NFTs?
An overview of NFTs, the technology powering crypto art
The term "NFT" stands for "non fungible token". To better understand non fungibility, it is important to understand the concept of fungibility. In economics, fungibility is the property of a good whose individual units are essentially interchangeable, where each of its parts are indistinguishable from another. Currencies and cryptocurrencies are a good example of fungibility: you can swap a $10 bill for another 10$ bill, or one bitcoin for another, and this will not affect their value.
On the other hand, when something is non fungible, interchangeability is impossible. It means there are unique properties within this good or asset that cannot be switched for something else, even if they both hold the same value. The best example of something non fungible would be humans. We are all unique and our DNA, caracteristics and traits of personality make us non fungible. We cannot be interchanged for another human. An other good example would be art: the Mona Lisa is one of a kind and cannot be exchanged for another work, wheter it holds the same value or not. You can take a photo of the painting, or buy a print, but there will always be only one original painting.
In the digital world, NFTs are "one-of-a-kind" assets that can be purchased, transferred and sold as tokens representing property on this asset. This digital tokens can be thought of as certificates of ownership for virtual or physical assets, like a deed to a house, a pink slip for a car or the certificate of authenticity of a work of art. However, these digital certificates of ownership are far more secure than the original certificates of ownership we know.
Traditional works of art, such as paintings, have value because of their unicity and rarity. However, with digital files, unicity has always been difficult to maintain because of how easy it is to make copies. With NFTs, artworks can be "tokenized" to create a digital certificate of ownership that can be bought and sold, making the original artwork unique and therefore, increasing its value in the eyes of the collector. Think of it like a unique ID number assigned to the artwork. As with cryptocurrencies, a record of who owns which work is stored on a shared ledger, known as the blockchain. The records cannot be forged or altered, because the ledger is maintained by thousands of computers around the world. The database is set out in a number of “blocks” of data, each leading sequentially to the next – hence the term “chain”. An NFT can also perpetrate a smart contract, allowing its creator to benefit from a royalty on any subsequent sale.
Whenever a transaction occurs – buying, selling or transferring an NFT, the data of this transaction is time stamped and then validated across the entire blockchain, which contains a history of every transaction ever made with that specific NFT. Since the database is distributed, it means there is no central location where the data can be controlled by one entity. Therefore, it's a lot harder, even almost impossible to alter the information it contains, because the majority of the computers must agree that the transaction is valid.
To put it another way, the blockchain verifies that there is always only one account or person capable of owning the NFT at a given time. If I sell Picasso.jpeg to Peter, I can’t turn around and sell the same NFT to Paul – the blockchain knows that I already transferred it to Peter, so I can’t sell it to Paul, and will mark the transaction as invalid. Peter only will be able to sell the NFT to Paul.
We will learn more about the ins and outs of crypto art in the next section: What is crypto art?
To summarize, the whole concept of NFTs is based on the idea of digital scarcity, which allows you to buy, sell, and trade digital goods as if they were physical goods, guaranteeing their value. An NFT is a special token that represents a unique ID, which is linked to a piece of crypto art that cannot be replicated and is used to verify ownership of a piece. You can attach it to anything: a JPEG, GIF, MP4, even music, but also physical items. This token proves ownership of the original file and is stored on the Blockchain, a permanent and unalterable ledger that can be accessed from any computer over the world.
For further information, you can view this curated list of readings and resources on all things NFTs.