What is an NFT?
An NFT, or non-fungible token, represents a digital asset that encompasses various forms such as art, music, in-game items, videos, and more. These items are traded online, often using cryptocurrency as the preferred medium of exchange, and typically utilize the same underlying software framework as many cryptocurrencies.
Although NFTs have been in existence since 2014, they are currently gaining widespread attention, particularly due to their increasing popularity as a means of buying and selling digital artwork. In 2021 alone, the NFT market witnessed a remarkable surge, reaching a staggering value of $41 billion, a figure that approaches the total valuation of the entire global fine art market.
Non-fungible tokens are characterized by their uniqueness, often being one-of-a-kind or part of an extremely limited series, each possessing a distinctive identifying code. According to Arry Yu, chair of the Washington Technology Industry Association Cascadia Blockchain Council and managing director of Yellow Umbrella Ventures, “Essentially, NFTs create digital scarcity.”
This notion sharply contrasts with the abundance typically associated with digital creations, which are frequently available in infinite supply. In theory, restricting the availability of a particular asset should elevate its value, provided there is demand for it.
In the early stages, many Non-fungible tokens have been digital renditions of existing creations, such as iconic video clips from NBA games or digitized versions of artwork already circulating on platforms like Instagram.
A prominent example is the work of renowned digital artist Mike Winklemann, widely known as “Beeple,” who meticulously compiled 5,000 daily drawings to craft the groundbreaking NFT titled “EVERYDAYS: The First 5000 Days.” This piece made history by selling at Christie’s auction house for a staggering $69.3 million.
Interestingly, all the individual images comprising Beeple’s artwork, as well as the complete collage, are freely accessible online. So, what motivates individuals to invest millions in something readily downloadable or screenshotable?
The allure lies in the ownership aspect facilitated by NFTs. When purchasing an NFT, the buyer acquires ownership of the original item, along with built-in authentication, providing irrefutable proof of ownership. Collectors highly value these “digital bragging rights,” often considering them as valuable as the item itself.
How does an NFT work?
NFTs exist on a blockchain, which is a distributed public ledger that records transactions. You’re probably most familiar with blockchain as the underlying process that makes cryptocurrencies possible.
Specifically, NFTs are typically held on the Ethereum blockchain, although other blockchains support them as well.
An NFT is created, or “minted” from digital objects that represent both tangible and intangible items, including:
- Graphic art
- GIFs
- Videos and sports highlights
- Virtual avatars and video game skins
- Designer sneakers
- Music
Indeed, even tweets can be transformed into NFTs. For instance, Twitter co-founder Jack Dorsey auctioned his inaugural tweet as an non-fungible token, fetching over $2.9 million.
In essence, NFTs function akin to physical collector’s items, albeit in digital form. Instead of acquiring a tangible painting to adorn their walls, buyers receive a digital file.
Moreover, Non-fungible token owners enjoy exclusive ownership rights. Each non-fungible token can have only one owner at any given time, and blockchain technology facilitates seamless verification of ownership and transfer of tokens between owners. Additionally, creators can embed specific information in an non-fungible tokens metadata. For example, artists can digitally sign their artwork by including their signature within the file.
How Is an NFT Different from Cryptocurrency?
NFT, or non-fungible token, is a term used to describe a unique digital asset created using similar programming as cryptocurrencies like Bitcoin or Ethereum. However, the comparison ends there.
Unlike physical money and cryptocurrencies, which are fungible and can be traded or exchanged with one another, NFTs are non-fungible. Each NFT possesses a distinct digital signature, rendering it impossible for NFTs to be interchanged or considered equal to one another. For instance, one NBA Top Shot clip cannot be equated to EVERYDAYS simply because they are both NFTs. Moreover, even within the same category, such as NBA Top Shot clips, the uniqueness of each NFT ensures that they are not necessarily equal to one another.
