You may have seen the eye-watering prices being thrown around on the internet for digital art, video clips, animations, and even memes. A few days ago someone bought a digital video by Beeple for $6.6 million. Why would anyone pay such large amounts for items they can view for free on the internet? The answer lies with the recent explosion in popularity of digital tokens, known as non-fungible tokens (NFTs).
NFTs may not have the same allure as Bitcoin, Ethereum, or other cryptocurrencies, but their presence and prominence is becoming increasingly recognised, and present some interesting implications for the emerging digital economy.
What is an NFT?
To understand NFTs, we first need to explain the concept of fungibility. If something is fungible, it means that it can be interchanged or replaced with another identical item. Bitcoin is fungible since it can easily be exchanged for another Bitcoin of the same value.
On the other hand, a non-fungible item is something that can’t be replaced – a unique item that once created, cannot be fairly interchanged with another item. A one-of-a-kind trading card cannot be replaced if you trade for another card in the set.
Okay, so we understand the ‘non-fungible’ aspect of an NFT, but we still need to address the ‘token’ part. Usually you’d associate a token as something you can exchange for another good, think tickets at a fair which you can exchange for rides and food. The same principle carries over for NFTs, except that the tokens are stored on a blockchain. We know, blockchain can be a scary and confusing term, but a simple way to think about it is as a digital ledger that records transactions, with records that are practically impossible to change.
Putting it all together, an NFT is a unique digital token, stored on a blockchain, which cannot be replaced by another token.
Unlike fungible cryptocurrencies like Bitcoin, NFTs shift the crypto paradigm by making each token unique and irreplaceable, and thus impossible for one NFT to be equal to another.
What gives these tokens value is that they are permanently tied to an object, for instance digital art or music, and can change hands of ownership.
Why are NFTs making waves?
NFTs have had media presence recently due to their use in representing collectibles like digital art and sports cards.
By creating an NFT, creators can sell the ownership to works which would otherwise hold little value. Sure, anyone can copy and paste a .jpg image on the internet, but NFTs are designed to give you something that no one can copy: ownership.
You could create a perfect replica of the Mona Lisa, but that is not the same as owning the original artwork. As a copy, your replica would be worth pennies in comparison to the original. Even though NFTs aren’t tangible like physical artworks, the collectors of NFTs are treating them in much the same way. The token is for all intents and purposes the artform itself; a digital representation of that work.
NFTs could also solve the proof of authenticity challenges that artworks traditionally face. Since they sit on a blockchain, it is easy to track the providence of a token dating all the way back to the first owner. This level of fraud prevention is unprecedented in the art world.
But here is where it gets even better for creatives. What if there was a way for an artist to get a royalty every time their art sold, even on the secondary market? Many NFT trading platforms allow artists to receive a commission for all future sales, meaning an artist can receive multiple cashflows for their same piece of work.
Of course, even after understanding exactly what NFTs are, you may still find yourself scratching your head as to why anyone would pay so much for them. This is the world we now live in. If an item can be securitised, if it can be tokenised, it has a value. The real question is, what value do you put on it?
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