So what is an NFT? Well, I’ll tell you what the letters NFT literally stand for. But if you never heard of an NFT or the full non-acronym meaning, you still won’t know what it means.
NFT stands for “Non-Fungible Token.” Stop reading if that definition clears everything up for you. For everyone else, I’ll give you the long answer.
In simplest terms, a non-fungible ‘anything’ is any object, unit, or element that is unique. It’s one-of-a-kind. This item can’t be traded for another of its kind for equal value because another one doesn’t exist.
A perfect example of non-fungibility is this:
[Stick with me for a moment while I explain this] You can trade a dollar bill for another dollar bill. Or you can swap a dollar bill for 4 quarters. The two items are of equal value. In terms of crypto-assets, one can swap a bitcoin for another bitcoin.
In short, two similar items of equal value that are interchangeable have fungibility.
Non-fungible items have their own value (or perceived value) precisely because they are one-of-kind. Moreover, that value, if any, is not a set amount.
Non-fungible values can increase or decrease. The individual who owns and the one who creates these items also affects value. These are some of the characteristics that make an item non-fungible.
I will explain:
Imagine you somehow came into possession of the original Mona Lisa painting, and you can prove it’s the original. Now you want to trade it for an original Vincent Van Gogh painting. How would you determine what Vincent Van Gogh’s work is of equal value?
You really can’t.
One-of-a-kind items with values that can be subjective are the definition of non-fungible.
Let’s take it a step further.
Now imagine you are Vincent Van Gogh. You just painted a one-of-a-kind “Pepper in a Coffee Mug” portrait. Then someone else who is claiming to be Vincent Van Gogh paints a duplicate portrait of yours, and you both show up at the art gallery.
You can prove you are Vincent Van Gogh. He can’t. You can prove you created “Pepper in a Coffee Mug,” and he can’t.
Which “Pepper in a Coffee Mug” painting is clearly going to have more value? As you can see, who the owner/creator is, as well as many other factors play a role in the non-fungible item’s value.
As for the “token” part of the NFT, that requires a little clarification too. The token isn’t technically the file itself. The token is actually the digitized record of the file registered into a digital ledger called a blockchain.
In the case of NFTs, this registration process includes recording a public, trackable traceable record that contains all of the information about that file.
This information includes who owns and created it, when it changes ownership, how many times it’s changed ownership.
The record also includes financial histories, including how much the NFT sold for last (if it were the case).
This record or “token” input into a blockchain network is what the literal NFT is. It is not the actual file the record is pointing to.
The record of your Weiner Dog in goggles Gif on the Blockchain is the actual NFT, not the Weiner Dog in goggles file.
Recording this certificate of ownership to a blockchain affords the NFT owner the ability to prove the file is his or hers alone.
The security offered by the blockchain means that this information can’t be tampered with, altered, erased, or hacked. And every computer on the blockchain network can see the NFT record.
SIDE NOTE: A blockchain is a closed global database that is decentralized and under the management of many individuals. Since it is decentralized, you won’t find one governing body through whom transactions must be approved, monitored, or who has the right to assess fees.
As the blockchain grows, all transactions recorded on one block are duplicated and distributed throughout the entire blockchain.
If you are in your office cubicle and you write down some information on a sticky note, and then you input your sticky note into a worldwide database, every computer in the world within the network will now see the information on your sticky note.
Nobody can change or alter your sticky note info. If Bob in accounting (who doesn’t like you) tries to make changes to your sticky note, then everybody else will see what Bob tried to do. This is a simplistic view of a blockchain.
SECOND SIDE NOTE: Blockchain technology appeals to many people because it is extremely difficult to hack or otherwise alter. This is why you’ll find such strong appeal in the idea of entering your NFT crypto assets into a digital ledger of this type. Especially if the individual owns an NFT that has value.
An NFT recorded to a blockchain allows the creator of the recorded file to retain ownership, and reap any financial benefits that come with owning that file.
So, back to the original question: What is an NFT?
NFT files can be virtually anything. Some people create digital records of tangible items like real estate or cash. Others very commonly create photos, videos, and other forms of artwork digitally. These digital files are often recorded as NFTs.
Most people believe NFTs are the actual digital assets (not the records), and speak of which when NFTs are mentioned. When the focus is on value, it’s the digital NFTs that are usually the topic of conversation.
So that leads us to the bigger question:
Why NFTs?
Why go through the trouble of creating, registering, and dispersing a digital file, and why does its creator want proof of ownership?
The answer is simple: value. An NFT’s value isn’t set, and just like artwork, its value is subjective.
First, there is a very, very important distinction that needs to be made with NFTs:
Just because you create and record an NFT, this does NOT automatically make it valuable.
Most NFTs floating around cyberspace don’t have any value at all to anybody.
The hope of most entrepreneur NFT creators is that somebody on the globe will stumble across said NFT, assign some personal value to it, find a way to monetize it and find a way to make a profit from it.
What good does it do for the NFT creator if somebody else uses the file to earn money?
That’s the other intriguing characteristic about NFTs. Upon recording an NFT to a digital ledger, the NFT can include lines of code commonly known as smart contracts.
If that digital asset is involved in any financial transaction, either sold itself or as part of a larger campaign, the smart contract coding automatically initiates.
This coding in NFTs automatically collects part of the transaction profits, which are automatically transferred to the owner of the NFT.
The NFT itself can be changed, re-purposed re-colored, or whatever else the reseller desires. But the coding and the record associated with the NFT can not be changed.
As the rightful owner of the file, the creator/owner will continue to collect royalties from transactions involving the NFT. This NTF operation is why many individuals are drawn to the potential NFTs offer to creators who want to keep, protect and profit from their own works without having to submit to third parties.
Anybody can create, circulate and profit from an NFT – if it has established value. Again, just because you make it, doesn’t automatically make art valuable.
In theory, an NFT creator wants an NFT to circulate the internet as much as possible: shared commented on, bought, and sold. The more it’s shared, the more popular the NFT becomes. A rise in popularity also potentially holds a rise in value.
Unfortunately, NFT creation as a business is far from an exact science. It’s very difficult for the average Joe to convince skeptics that the “Weiner Dog in goggles Gif” is worth real or even cryptocurrency.
Some NFTs have sold for hundreds of millions of dollars (yes, people have paid millions for digital files). Despite the fact that these huge paydays are the exception, the potential that a creator might produce the next multi-million dollar NFT has a lot of creators excited.